5 Examples of Blockchain Use in Financial Services
Want to see 5 examples of blockchain use in financial services?
Since blockchain will arguably make the biggest mark in financial services, this is an important topic.
According to a study done by Markets and Markets, “The global blockchain market size is expected to grow from USD 3.0 billion in 2020 to USD 39.7 billion by 2025, at an impressive Compound Annual Growth Rate (CAGR) of 67.3% during 2020–2025.”
Here’re a few amazing case studies of companies who hired DevTeam.Space to build their blockchain products:
- Dencenture – Blockchain Mobile App and Web Application
- DDKOIN – Leading Cryptocurrency
- Cryptocurrency Exchange – Crypto Exchange And Wallet
The aim of this article is to spread awareness, hopefully within the financial community, to increase interest in this powerful new technology. It is obvious that at the present time the will and expertise is already supporting blockchain development. However, the lack of awareness by the industries that stand to benefit is ultimately delaying the development and implementation of blockchain solutions.
What is blockchain?
It is rare that the technology industry comes up with a term that describes in the simplest terms what exactly a new technology it has created actually does.
Blockchain is one such example as it is exactly what the name suggests. It is a technology that allows blocks of information to be created and stored in a chain. Each time a new block is created it is added to this chain to form what has been called a ’digital ledger‘.
The advantages of blockchain ledgers:
Blockchain technology allows the digital ledger to be distributed to many different nodes which therefore removes the need for the transaction data to be processed and stored by a sole third party. This helps to prevent the data from being hacked, as it wouldn’t be stored on one system with one security system. It also removes the controlling element of that third party over the transaction. This has the obvious benefit of helping to remove control over transactions thereby making blockchain applications in finance cheaper and more accessible.
One of the main advantages of blockchain technology is that it is incredibly secure. It uses encryption to secure the transaction ledger so that only individuals with a unique key code can gain access to the data. The fact that blockchain transactions are peer-to-peer, and are as such decentralized, means that they are far more secure. Despite its popularity, bitcoin has never been hacked because blockchain technology makes this next to impossible.
The beauty of the blockchain ledger is that blocks are unalterable once written. This has a number of enormous advantages when implemented into day-to-day business transactions. To start with, it means that these digital ledgers can be a trusted source of information.
One example of where this could be a game-changer is in the drug development industry where test results could be recorded into the ledger. Once written they would be unalterable. This means that neither the drug company nor anyone else would be able to alter the results in an attempt to represent a particular drug as performing better than it really did.
4. Distributed computer processing
While large companies have the financial resources to implement large server systems, or otherwise to pay an outsource company for the pleasure of using theirs, small to medium-sized companies often don‘t have the finances to do so. This could deter them from developing new ways to implement IT solutions into existing processes/transactions for fear of rising costs.
Blockchain technology actually distributes the processing of transactions to anyone who meets the criteria to do so. These individuals/companies are commonly known as miners. While the power needed to process a single blockchain transaction is generally higher than traditional methods (especially as the blockchains get more complex), distributed processing does mean that companies don‘t need to invest in large new server systems or in paying for processing power they may not fully need.
Blockchain in financial services: Key statistics
You are likely wondering whether to invest in the development of blockchain. Well, don’t wait too long because many of your peers in the financial services sector are certainly doing that!
A MarketWatch report states that total investment in blockchain in the banking and financial services sector amounted to $2.3 billion in 2018. The report states that this spending will likely reach $17.47 billion by the end of 2025, with a CAGR of 33.6% during the 2019-2025 period.
It is worth noting note important statistic here, and this one gives the best indication of potential ROI of early investment in blockchain. Banks and financial services institutions are investing both on blockchain platforms and services. Market experts are predicting that the services component will grow significantly. An Allied Market Research report projects a CAGR of 76.1% throughout the period of 2019-2026. This is staggering and is unmatched by nearly any other industry vertical.
How blockchain is changing finance
There are a number of key areas where companies can use blockchain in financial software and systems. While banks are reluctant to openly discuss potential uses of blockchain, a number of them have recently commissioned studies to identify exactly where they can. These include Citibank, Credit Suisse, and the World Economic Forum.
Blockchain technology could be used in both domestic and international fund transfers. While on the domestic front banks are likely to resist implementing blockchain solutions, given that they have already invested heavily in existing centralized solutions, internationally they stand to benefit enormously from such a change.
The reason international transfers stand to gain is the huge disparity between rules and regulations as well as IT systems between the banks from country to country. While domestic payments take only a matter of minutes to hours, cross-border payments normally take several days at least to complete.
This is because the banks need to make sure they comply with all the necessary regulations. Also, many developing countries actually lack the IT infrastructure to process the transaction any faster. These slow speeds are frequently a frustration to customers since the receiver is often unaware of when or even if a transaction will be completed successfully.
Inadequate infrastructure also presents a security concern for many transfers since these systems are more open to cyber-attacks. These attacks could disrupt transfers and even redirect the funds to a third-party account.
The figures relating to how much of certain developing countries‘ entire GDP is down to remittances are quite an eye-opener. Haiti has one of the world‘s highest remittance vs. GDP rates, some 29% of its entire GDP.
In the Philippines, it is at just over 10% while in Mexico it is 2.7%. When put into perspective, remittances account for 0.7% of the entire world‘s GBP each year. This is an enormous amount of money that is somewhere in the region of $1 trillion.
Traditionally, the remittance market has been dominated by MTO-model companies such as Western Union. Though banks do actually offer this service, the inherent problems of cross-border remittances, such as creating safe and secure partners where receivers can collect their money, has made many banks wary of the market.
There are already a number of companies that are operating blockchain-based international transfer services. These include Abra, BitPesa, and Circle. While their models are slightly different, Circle, for example, focuses on social payments, while BitPesa (Africa Focused) on B2B payments, they allow money to be wired from one individual‘s bank account, internationally, to another individual‘s account. Because the transactions are peer-to-peer based and encrypted they are secure and cannot be interfered with.
The potential for banks to make vast sums of money handling both small scale and large scale remittances is huge. Since not just individuals but companies also rely on these transactions, even leveraging a small transaction fee of just a few percent could result in a huge revenue stream.
A recent successful ICO by startup Mycelium brought attention to how blockchain could be used to facilitate next-generation payment systems. The company‘s goal is to “bring merchants and consumers together with a blockchain card and mobile wallet.”
While the concept of the cryptocurrency existed long before Mycelium, the company‘s decision to use digital tokens as a way to facilitate the transfer of wealth, as well as to incorporate a payment gateway facility, generated huge interest in its ICO.
Part of the “FinTech revolution”, Mycelium‘s business model makes the need for traditional bank payment processing redundant. Since users can use the Mycelium card to pay for goods and services anywhere and at anytime, using decentralized blockchain technology, transactions are also safer and more secure.
Whether they like it or not, technology such as this will force the banks to undertake a major shift from traditional computer systems to blockchain-based payment gateways. Since traditional payment systems are also less secure, banks will need to make the switch in the near future.
Hire expert developers for your next project
1,200 top developers
us over the last 3 years
The automation of transactions essential to trade finance will help the financial services industry make huge savings after blockchain solutions are introduced. The use of smart contracts to automate approval workflows and clearing calculations will help reduce processing times and enable banks to massively reduce the number of employees needed for this task too. While this is not good news for their staff, it will also benefit the banks by helping to reduce the number of errors resulting from human mistakes.
Improving record keeping
The global finance industry holds trillions of bank records that relate to everything from personal account data to stock market transaction ledgers that record stock purchases. A huge majority of these transactions could be recorded using blockchain digital ledgers which would be unalterable and so prevent fraud.
Not only that, the decentralized nature of the transactions would give banks better security over the records. Since the other parties involved in the transaction also receive a record, disputes over such things as missing or incorrect transactions would be a thing of the past.
Investment banks’ process of dealing with clearance and settlement is a great example of where blockchain technology could really help improve existing systems. Since banks have to record details of all the loans and securities on their books, a huge amount of transactions need to be recorded quickly and securely.
Already the Australian Securities Exchange has retained the services of Digital Asset Holdings to develop a blockchain-based system to handle its post-trade clearing and settlements. And they are not alone. Here in the U.S other companies are racing to implement blockchain to improve their slow and often outdated systems.
Blockchain could help banks finally overcome a problem that has been troubling them for years. Banks are responsible for verifying their customer‘s identities. These rules exist in nearly every country in the world and aim to help prevent fraud and money laundering.
The cryptographic protection offered by blockchain, which requires a secure key to access, would ensure that all parties involved in a transaction would be clearly known to the ledger. Since identification is required by law, this feature is essential to all financial transactions.
A number of companies are already working tirelessly to try to develop blockchain technologies that will help banks and other financial institutions with the problem of establishing identity. These companies include Cambridge Blockchain and R3.
Regulatory landscape: The impact Of MASS adoption of blockchain in financial services
While blockchain has many potentially transformative use cases in the financial services sector, governments and regulators need to adopt a pragmatic approach to give it a chance to realize its potential. Given the decentralized nature of blockchain, it poses a challenge to central banks and governments. No government can control Bitcoin, for example, which is something that threatens their authority. Read more about this in “Blockchain and associated legal issues for emerging markets”.
At the time of writing, countries around the world are trying to work out a pragmatic regulatory framework for blockchain and associated businesses. In the US, for example, this framework is evolving rapidly. Regulators in the US are increasingly providing clarity though regulatory frameworks regarding the use cryptocurrencies, whereas they are much further behind when it comes to frameworks for blockchain.
On the other hand, several smaller countries including Malta, Belarus, and Gibraltar have already come up with a regulatory frameworks for blockchain-based businesses. Read “Blockchain and the law: Regulations around the world” for more information.
It is important to remember that you need to study the blockchain-related regulations in the country of jurisdiction of your business so that you can comply with them.
Failure to do so could result in prosecution.
Plan well when you build blockchain financial services applications
How can you successfully build and implement blockchain financial services applications?
Answer: You need to plan thoroughly. Take the following steps:
- Choose between a public and private blockchain. You will only want to allow only trusted parties to join your network, moreover, you will need to implement access control to protect sensitive data. You also need to implement scalability and the best performance, therefore, public blockchains might not work for you. As we outlined in “Public vs private (permissioned) blockchain comparison”, you will likely need to use an enterprise blockchain.
- Use an enterprise blockchain framework that meets your requirements. We recommend that you use Hyperledger Fabric since its highly matured. Read our guide “Pros and cons of Hyperledger Fabric for blockchain networks” for more insights.
- Find an appropriate hosting provider for your blockchain network. Our guide “Best blockchain network hosts 2020 – Ethereum – Amazon etc.” can help.
- Given the tamper-proof nature of blockchain smart contracts, plan to test and review them thoroughly before you deploy them. Check out our guide “Undertaking a blockchain code audit and its importance” for more insights.
Need help to plan your blockchain project? We have just the right guide for you! Read “What to plan for when undertaking blockchain software development?”.
My Final Thought
While blockchain for banks might not currently feature high on their list of priorities, if any bank believes that their operations will not at least be partly underlined by this technology 10 years from now, they are very much mistaken.
So monumental could the decision not to hastily begin implementing blockchain technology be, that in the worst-case scenario, it could see banks losing their core business, namely the facilitation of monetary transactions. It is my contention that we are at a crossroads where the dreams of those people who oppose the domination of the banks could come true.
Should banks lose control of payment transactions then it also stands to reason that they will lose control of our money savings too. If this, they will no longer be able to fund the huge mortgage and loan portions of their portfolios, as they are required to retain at least 10% of the total monetary value of loans in hard cash.
Without question the banks need to retain control over the systems we use to transfer our money or they risk having to dramatically alter their business model or go out of business.
The key to avoiding this is in challenging those companies that are already combining innovation with the potential of blockchain technology early and to develop their own alternative systems that allow them to get ahead in the game, because failure to do so will cost them very heavily indeed.
Frequently Asked Questions
What are top 5 examples of blockchain uses in financial services?
The top 5 examples of blockchain uses in financial services are as follows:
- Payments: Banks and financial services institutions can expedite payment transactions using blockchain.
- Remittances: Blockchain can expedite international fund transfers, and companies like Abra and BitPesa are already using it.
- Payment gateway: Blockchain can help banks and financial services institutions to implement a payment gateway facility easily.
- Trade finance: Blockchain smart contracts can streamline workflows and expedite trade financing processes.
- Record keeping: The immutable and distributed ledger of blockchain improves record keeping processes, which can transform clearance and settlement processes in financial services institutions.
Which banks and financial services institutions are using/exploring blockchain?
The following are examples of banks and financial services institutions that are using/exploring blockchain:
- Banco Santander;
- UBS, the Swiss investment bank;
- Deutsche Bank;
- Commonwealth Bank of Australia;
- DBS Bank.
Which enterprise blockchain frameworks are popular in the banking and financial services sector?
The following enterprise blockchain frameworks are popular in the banking and financial services sector:
- Hyperledger Fabric;
- R3 Corda;
- Quorum from JP Morgan.