5 blockchain use cases in finance that show value

The financial industry continues to lead in blockchain adoption by making significant investments in the technology as well as expanding its use of it.

Deloitte’s March 2020 report on top blockchain trends found that 38% of financial services firms expect to invest $5 million or more in blockchain technology during the upcoming year, up from 33% during the prior 12 months.

That money follows up on large-scale investments made by the industry throughout the past decade, back when blockchain first gained worldwide attention with the arrival of the cryptocurrency Bitcoin in 2009.

Now, more than 40 central banks are researching and experimenting with the distributed ledger technology that allows data to be stored on servers in a decentralized fashion.

With blockchain, the financial industry is improving security, lowering risk and saving costs by bringing visibility and lowering friction along the long list of transactions that accompany most financial interactions, according to financial industry authorities and blockchain experts. Those blockchain benefits in turn lower costs for financial firms.

McKinsey & Company estimated that blockchain technologies used in cross-border payments could save about $4 billion annually. Earlier studies such as the one from consulting and services firm Capgemini and another from Santander Bank estimated that blockchain could bring $16 billion to $20 billion in annual savings.

Early successes and such figures are now prompting the industry to expand its use of blockchain in numerous directions. Here’s a look at five blockchain use cases in the enterprise that already show promise.

1. Perform conventional tasks faster and cheaper

Financial institutions traditionally work as intermediaries moving payments between different entities, which involves complex and time-consuming processes that add friction into transactions.

Blockchain can streamline these processes — notably reconciliation as well as clearing and settlement — by removing the friction, thereby reducing the time and cost that financial institutions incur.

For example, in April 2020 European financial technology company SIA launched a blockchain infrastructure to enable the Spunta Banca DLT, a private permissioned distributed ledger technology-based project for interbank reconciliation that is promoted by Italian Banking Association (ABI) and coordinated and implemented by ABI Lab, a banking research and innovation center.

“The reconciliation process for interbank transactions in Italy — formerly governed by the spunta process — has been notoriously complex,” said Charley Cooper, managing director at R3, an enterprise blockchain technology company.

“With multiple parties involved, the task of identifying and addressing inconsistencies has historically been hampered by a lack of standardization, the use of piecemeal and fragmented communication methods and no single version of the truth,” he added. “As a result, resolving mismatches in transactions has been a labor-intensive and time-consuming process. These issues made the spunta process an ideal candidate for automation through blockchain technology.”

Similarly, the financial industry can use blockchain to eliminate the manual processes required to collect and share the documents often required for transactions, whether those documents are custom forms, insurance policies or other myriad types collected by banks and financial services firms.

2. Support a shared software network between entities

Because blockchain establishes trust between multiple parties, the financial industry can use the technology to build network resource planners (NRPs).

The consulting and research firm Everest Group described NRPs as a “blockchain-based software system that helps manage data and processes across multiple stakeholders in a business network.” It enables organizations to deliver a more cohesive customer experience by allowing each organization access to the system.

“We’re seeing that there is a way for enterprises to come together to solve customer issues and create a better customer experience,” said Ronak Doshi, vice president at Everest Group. “But the only way to bring them all together is with a foundational infrastructure — blockchain fits beautifully in this.”

3. Facilitate and track data flow within the financial institution itself

Although blockchain is often championed for enabling trust between different organizations, financial institutions are beginning to use it to create trust among internal departments.

“What we’re seeing is more use of blockchain for internal use cases,” said Richard Walker, a principal with Deloitte Consulting and the firm’s blockchain leader for financial services. “It’s really offering great enterprise value for intracompany data movement, protecting customer data and complying with regulatory requirements.”

For example, he cited the use of blockchain at some organizations to facilitate intracompany payments where financial information flows from one ledger to the next. “It’s a connected information chain across those general ledgers,” he said, adding that these blockchain use cases are creating transparency on capital and liquidity.

According to Walker, some entities are also considering blockchain for know-your-customer activities to ensure customer data is consistent and current throughout the organization, which is particularly critical for financial institutions deciding what risk to assume based on customer data.

Large banks, for instance, often have multiple systems for customer records — two dozen or more in some cases. Having customer information spread among multiple systems increases the chances of unintentional data discrepancies and intentional misrepresentations, both of which could negatively impact business between the customer and the institution.

Blockchain can counter such issues by ensuring updated data is current throughout the systems and creating an audit trail of changes made to customer data.

Similarly, financial institutions can use blockchain for data lineage to ensure for themselves and for regulators that there’s an auditable trail from the data’s point of origin to its end state.

4. Hold digital assets

In July 2020, the federal Office of the Comptroller of the Currency (OCC) issued a statement affirming national banks’ and federal savings associations’ authority to provide cryptocurrency custody services for customers. As such, financial institutions will be able to hold cryptocurrency keys and digital assets.

“Many banks have custodial services for different assets — blockchain allows for the creation of custodial services for digital assets like Bitcoin and tokens,” said Saket Sinha, global vice president of blockchain solutions at IBM.

5. Replace paper currency

If the world wants to move away from physical currency — paper bills and metal coins — and the problems and inefficiencies associated with it, it will need a distributed network like blockchain to make that happen.

“The ability to drive more digital payments and more real-time payments depends on having a distributed ledger,” Doshi said.

According to experts, there’s already a high degree of interest in this blockchain use case, adding that financial leaders believe such a move will further reduce friction and create more transparency, which will then speed transactions, generate greater cost savings, increase security and reduce financial crimes.

They noted that the work already happening with blockchain in the financial industry is moving the global economy in that direction. While it’s unknown when the world will abandon physical currency for digital assets, many leaders believe it isn’t far off.

According to Deloitte’s 2020 Global Blockchain Survey, 83% of the 1,488 survey respondents said they “strongly or somewhat believe [digital assets] will serve as an alternative to, or outright replacement of, fiat currency in the next five to 10 years.”