Blockchain Transforming Fintech & Financial Services
This write-up talks about an emerging technology, Blockchain, which is at the heart of many popular virtual currencies in use today.
The Blockchain has various aspects that can be discussed at length; however, in this short write-up, I will try to keep the focus mainly on the impact and usability of Blockchain in Fintech and financial services sector.
While there is a contention on whether the Blockchain technology is emerging as disruptive or foundational, the fact remains that it has an enormous potential to give powerful tool so that we as a society can keep up with the economy’s digital transformations.
Blockchain has a potential of disrupting several industries like Real Estate, Supply Chain Management, Music streaming, and financial services industry to name a few. In coming decades, it can have enormous impact and potential to create new foundations for economic and social systems that we have.
So what exactly is Blockchain? It is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.
Before we move-on, it’s worth mentioning about how Blockchain works without diving deep into its technicalities. There are few basic principles underlying the Blockchain technology:
- It is a distributed database, wherein each party has access to the entire database and no single party controls the data. Each party can verify the records of its transaction partners directly without an intermediary.
- It is more secure given the distributed nature of the Blockchain ledger, distributed across thousands of computers thereby improving security for banks and reducing server maintenance requirement.
- It has a peer-to-peer transmission, wherein communication happens directly between the peers and each node stores and forwards information to all other nodes without any central node.
- It is transparent wherein each transaction and its associated values are visible to anyone with access to the system. Each node on Blockchain has a unique alphanumeric address as its identification. Transactions happen between these addresses and users can choose to either provide proof of their identity or remain anonymous.
- Once the transaction is entered in the database and the accounts are updated, the records cannot be distorted or reversed because they are linked to the preceding record in a chronological order. Various algorithms and approaches are deployed to ensure that recording on database in permanent and available to all other nodes on the network.
- The Blockchain transactions can be tied to computational logic due to the digital nature of the ledger. Hence users can setup up algorithms and rules that automatically can trigger transactions between the nodes.
Usability of Blockchain in Fintech and financial services sector
Decision makers, strategists and planner are investigating the usage of Blockchain technology to avoid disruptive surprises or missed opportunities.
For major banks that are struggling to update and modernize their outdated IT infrastructure in face of increased pressure from regulators, hackers and cyber criminals, block chain can provide a great opportunity to rethink and redesign their business processes.
Around 80% of banks, including many major players like HSBC, JP Morgan, Citi Bank, Barclays Bank are innovating and developing their own Blockchain technology to see how they can speed up settlements, reduce costs and provide improved product offerings and so on.
According to few recent Fintech reports, while Citibank is primarily focusing on payments using “Citicoin” though it is still in pre-prod, Barclays Bank PLC carried out the world’s first trade transaction using Blockchain, in September 2016. They claim to reduce the processing time that normally takes 7 to 10 days to less than four hours. The transaction was carried out by the means of a Letter of Credit, wherein, both parties were able to transfer the shipping, insurance and other original documents that had been cryptographically sealed via the Blockchain.
JP Morgan is trying to implement a private block chain where in only a specified number of participants can exchange information.
It’s worth mentioning here that IBM is working with the Dubai government to develop smart contracts to facilitate all the trade ($344 billion worth) that passes through its port in 2016. By 2020, Dubai government is planning to shift all transactions to Blockchain.
The benefits of Blockchain applications are enormous. As per a recent report, it is estimated that this technology could cut banks infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15bn-$20bn a year from 2022.
FLEXCUBE and Blockchain
Oracle FLEXCUBE has released its Blockchain Adapter that can work with any version of FLEXCUBE with minimal changes. It will enable FLEXCUBE to be interfaced with Blockchain systems.
It will also enable transformation of information between FLEXCUBE and Blockchain datasets and hence Blockchain transactions can be viewed from the FLEXCUBE.
There may be attempts to make Blockchain and its most widely used application crypto currencies like Bitcoin, Ripple, Ether etc. commercially viable consumer products however it may gain dominance in vital behind-the-scenes applications hidden from the common consumer’s eyes.
We need to continue track the adoption of Blockchain technology by major banks and innovative start-ups in order to be up to date with the innovations that can emerge for the businesses in order to ride the near future Fintech wave.