Blockchain technology promises to transform banking, financial services, and FinTechs by enhancing the digital customer experience while lowering costs and reducing data risks in a secure environment. Service providers investing in blockchain capabilities will win in the long run. Read on to discover the future of blockchain in this blog.
Since its introduction in 2008, blockchain has established itself as a key to optimization. The banking industry is redefining itself through emerging technology that is improving products, customer services, and operational efficiencies.
In recent years, blockchain adoption has increased in banking and financial services and the emerging FinTech industry. Legacy banks and nations are now following the wave. Blockchain also is being used through Decentralized Finance (DeFi) and Decentralized Apps (DApps).
Let’s explore what blockchain is, why it’s important for this industry, and how the technology can further improve banking.
Blockchain is a distributed ledger that records transactions in an immutable, cryptographically secure way. It has been used to move money between parties without the need for third-party verification or intermediaries.
The technology works by creating a network of computers (or nodes) connected through the internet. Each node on this network stores copies of transaction data that cannot be changed or deleted. It also cannot be falsified, therefore serving as an invaluable tool for verifying authenticity and ensuring security when conducting financial transactions online.
The banking sector has been one of the first industries to realize the potential of distributed ledger technology (DLT), a protocol that enables the secure functioning of a decentralized digital database.
McKinsey estimates blockchain is expected to save around US$4 billion in cross-border payments and US$1 billion in retail bank operating costs and reduce regulatory fines by US$2-$3 billion and annual losses from fraud by US$7-$9 billion.
Blockchain technology has the potential to improve the banking industry in many important aspects as illustrated below:
|Cost reduction||Using blockchain reduces costs by allowing banks to process transactions faster while also eliminating the need for intermediaries that charge fees for their services. This can save money on transaction processing, leading to lower operating costs.|
|Energy conservation and ESG tracking||Due to the connected and transparent nature of the stored data, blockchain, in conjunction with the internet of things (IoT) technology, can accurately track carbon emissions and help firms track Environmental, Social, and Governance (ESG) mandates for clients and themselves.|
|Transparency and permissioned blockchain||Blockchain improves transparency by providing real-time records of all transactions occurring within an organization. It does this through a series of blocks chained together, with each block containing information about previous blocks and linking them together.
A permissioned blockchain is a distributed ledger whose contents are accessible only to authorized users. The user can only perform the functions they have permission for (granted by the ledger administrator) and are required to identify themselves to ratify such changes.
|User experience||User experience is critical for any banking application. The interface needs to be intuitive and easy to use so customers can conduct transactions quickly and without hassle. Since some applications are based around peer-to-peer interaction, blockchain-based-apps such as DApps will deliver a smoother user experience.|
|Fraud prevention||The distributed ledger uses cryptography to ensure data’s authenticity and integrity. The ledger is transparent and immutable, meaning that it cannot be altered or deleted once it has been recorded on the network.
This prevents any single point of failure from being able to alter records or falsify them. When using traditional banking systems without blockchain technology behind them, these intermediaries often commit acts that can lead to the risk of material misstatements because they’ve been given authority over sensitive financial information and may lack proper knowledge about them.
|Security benefits||In addition to fraud prevention, blockchain technology makes it easier for banks to keep track of who owns what assets when they move among different financial institutions (such as moving from one investment bank account to another). This enables them to better control access to those assets during transfer and helps prevent fraud by verifying that any changes made are legitimate before allowing them into the new account holder’s possession.|
Here are some examples of how blockchain is being used today:
Recording and verifying transactions are the most obvious use cases for blockchain in banking. Blockchain allows banks to automate their back-office operations and reduce manual errors, which can result in significant savings for businesses.
Blockchain can help streamline the various paperwork involved in international trade and reduce the risk of fraud. Banks are using blockchain to help manage the documents needed for completing a trade transaction, including contracts, letters of credit, bills of lading, import/export licenses, insurance certificates, and more. By digitizing this paperwork and making it available on a shared ledger, all parties can see what’s happening in real-time and know that the data is secure from tampering or fraud.
Blockchain technology has the potential to significantly simplify syndicated loans by creating standard contracts and automating all processes from loan origination to monitoring and repayment. This could be done with smart contracts – self-executing digital code that would automatically execute certain actions when conditions at met.
With blockchain technology, banks can store, access, and update data on a secure digital ledger. This makes it easier for multiple parties to view and share information, eliminating the need for manually matching data across multiple databases.
Blockchain-enabled payments across countries can be completed in minutes rather than days and at a fraction of the cost typically associated with international payments. Additionally, blockchain’s cryptography ensures an additional layer of security compared to traditional payment platforms.
Blockchain can also help automate certain processes within banks by allowing them to create smart contracts. Smart contracts are self-executing agreements between parties that use blockchains as their source code. This can eliminate the need for middlemen or third parties in business relationships, which can save money for both sides involved in the contract negotiation process.
Smart contracts can be used for multiple purposes, such as automated rebates, payments for services rendered or goods delivered, and licensing of intellectual property (IP) rights/non-fungible token (NFT) minting.
In addition to recording transactions, blockchain also can be used to track assets such as gold or real estate through an automated system that verifies ownership rights on a decentralized network of computers rather than through traditional means like paper documents or banks.
Blockchain can be used to provide authentication services on documents such as contracts, loans, etc., by checking their authenticity before considering them valid.
|Goldman Sachs||Goldman Sachs is backing the initiative of payment firm Circle to become a blockchain-enabled issuer of USDC (a form of stable digital currency)|
|JP Morgan||JP Morgan’s Liink enables institutions to exchange payment-related information quickly and securely|
|Al Rajhi Bank||Al Rajhi Bank facilitates its cross-border payments services on the foundation of Ripple’s blockchain capabilities|
|Swedish Central Bank (SCB)||SCB is experimenting with the possibility of launching e-krona in collaboration with R3|
|HSBC||HSBC also utilizes R3’s blockchain capabilities to operate Digital Vault services|
|UBS||UBS launched the first digital bond to be publicly traded and settled on blockchain-based and traditional exchanges|
With support for blockchain adoption and investment from banks, more than 20 countries, including India, Australia, Brazil, etc., have taken further steps to pilot central bank digital currency (CBDC), which often utilizes blockchain. These investments have given rise to many groups and consortiums, as shown below:
|Hyperledger||Enterprise Ethereum Alliance (EEA)||BankChain||B3i||Marco Polo|
|ChinaLedger||Financial Blockchain Shenzhen Consortium (FISCO)||TradeLens||Contour||we.trade|
Lack of understanding and mistrust in blockchain technology and uncertainty about regulations, cost savings, and security are among the main barriers to adoption that will require time for banks to overcome before they can begin implementation.
Another obstacle is the impact blockchain may have on existing systems and processes. Integrating blockchain technology may not be seamless due to a lack of expertise and compatibility issues.
Scalability also is a concern. While the technology has the potential to handle many transactions, banks need to be certain it can scale up to meet their needs. A blockchain platform will not be useful if it cannot handle the traffic.
The need for standardization is another key challenge. Because blockchain technology is still in its early stages, no one-size-fits-all solution exists. Each bank will need to develop its own system, which can be time-consuming and expensive.
To stay competitive, banks need to implement process automation and deliver a superior digital experience to their customers. Blockchain offers potential as a transformative technology for banks to implement to improve services and customer experience.
Additionally, blockchain can help banks save money on transaction costs and reduce risk by keeping records updated across multiple systems. The technology also provides a secure environment that reduces the possibility of fraud or data loss due to cyberattacks.
We believe the future of blockchain offers promising opportunities for banks and service providers alike. Service providers will partner with banks and other financial institutions to bridge the gap by providing trust and knowledge, technology infrastructure support, and the right services to innovate and move forward together.
Making the right investment at the right time to take advantage of the growing adoption of blockchain will be the key to riding this growing tide.
To discuss the future of blockchain or banking and financial services trends, please reach out to [email protected], [email protected], and [email protected], and stay updated by accessing our latest research on banking business processes.
The next-generation exponential technology of Web 3.0 holds promising opportunities for brand, technology, marketing, and business strategy providers to partner with enterprises in five key service areas. To learn more about the opportunities in this emerging market, read on.
Multiple consumer and business brands have taken the first steps in experimenting with Web 3.0 business by building non-fungible tokens (NFTs), purchasing virtual lands in metaverse platforms, organizing virtual events, and creating enabling platforms.
But building a Web 3.0 business goes beyond just creating NFTs for a company and requires embracing the concepts of Web 3.0 business, the creator economy, decentralization, social commerce, immersive experience, trust, and sustainability.
As enterprises like Ferrari, Starbucks, JP Morgan, McDonald’s, Samsung, NBA, Walmart, Disney, Google, Nike, Oracle, EY, and Stripe begin to see traction in this space, they will seek to partner with brand, technology, marketing, and business strategy providers who understand this ecosystem to scale initiatives and drive newer ones.
Let’s explore the following five key demand areas where providers can offer their expertise.
Business strategy services: Web 3.0 business needs to be conceptualized and aligned with the enterprise strategy. Beyond that, service partners should also be bold enough to push clients to adopt Web 3.0 business models that may not be entirely related to their existing businesses. This has already started to happen and has blurred the boundaries between industries and company classifications.
Normally enterprises start with building NFT offerings for their brand to engage consumers. NFT design and implementation can create short-term demand and may eventually become a small part of overall Web 3.0 initiatives. Many enterprises use celebrities, while others use crowd contributions, technology, and various other models to build NFTs. Professional service partners need to understand this complex landscape and advise clients accordingly. With an estimated 15,000 Web 3.0 start-ups, making the correct selection is important.
At the beginning of a Web 3.0 journey, clients will seek services tailored to their specific industry, such as an automotive company creating a virtual showroom in metaverse; an apparel company using NFTs to trade for physical goods; a bank building a Web 3.0-enabled payment system; or an energy company incentivizing customers to sustainably consume power with crypto assets. In addition, many clients may want finance, procurement, and Human Resources to leverage Web 3.0 principles. Service providers who support such enterprise functions need to be at the forefront to serve this demand or risk near-term losses.
Architecture and platform services: Recently, leading cloud vendors such as Google and AWS launched blockchain node services. In addition, start-ups are focusing on Web 3.0 infrastructure services to enable out-of-the-box offerings. Start-ups such as InfStones, ChainSafe, and Alchemy collectively raised US$300 million to enhance their blockchain infrastructure offerings.
Service providers need to work with these vendors to build enabling infrastructure for clients’ Web 3.0 journey. Even for seemingly simpler initiatives such as building NFTs, clients have multiple platform decisions to make, such as NFT marketplaces, wallets, and underlying blockchain. Not only do service providers need to understand these complex technologies and work with an extended ecosystem, but these firms also need to be thought partners to guide clients in the right direction and drive initiatives.
In addition, the core offerings for edge, network, and pervasive computing must be delivered. Unlike cloud-based workloads, the Web 3.0 ecosystem will heavily rely on edge processing. Materially high network bandwidth and resiliency will be required. Therefore, ongoing hyper-automated technology operations services will need to be amplified using next-gen observability, resiliency, and predictive maintenance. Service partners will have to focus on the right messaging infrastructure, decide between off/on-chain computing, build digital simulations, and create the underlying Web 3.0 core for their clients, much like they did for cloud services.
Brand and experience services: At the core of Web 3.0 businesses is the experience it can create for end consumers. Branding and experience service providers such as Dentsu and Publicis are already investing in the Web 3.0 ecosystem. Moreover, technology providers such as Adobe and Salesforce have also launched offerings to address this client need. Although “user centricity” has gained pace in recent years, Web 3.0 businesses need to take this even further. Brands such as Adidas have already experimented with token-gated communities and provide exclusive access to assets.
The enabling technologies, platforms, and environments now available to build such experience offerings are powerful but complex. Socially distributed networks, creator platforms, crypto payments, generative Artificial Intelligence (AI), enhanced reality, and various other solutions have the power to create previously unimagined customer experiences. Chief Marketing Officers (CMOs) have to become extremely tech-savvy to explore the potential Web 3.0 business has for their brand strategies.
Software and integration services: Web 3.0 business requires thousands of software to work together. Enterprises will build many of these internally to drive differentiation. However, many back-end software will be SaaS-based and bought through vendors that will need integration. In addition, numerous Application Programming Interfaces (APIs) will be built and purchased that will need to work in unison.
This will not just be the software we see today but will have AI/Machine Learning (ML) and other advanced data technologies as their core. These context-aware software will need to leverage advanced auto-development, auto-tuning, and auto-management concepts to be more efficient and sustainable. Rather than being cloud-first, these software will have to be edge-first and compatible across various hardware, unlike browser-based systems. Building lightweight yet rich workloads will be a complex engineering problem to solve for.
Governance, risk, and cyber security services: The legalities of Web 3.0 businesses are unknown, and clients need significant help from service partners to navigate this complex new pioneer. Enterprises will need assistance deciphering contractual obligations, data privacy, personal identity, cyber security, and interpreting platform terms and conditions.
The recent collapse of crypto exchange FTX is a good example. Some law firms have found the terms and conditions of popular Metaverse platforms extremely one-sided. If these platforms shut down their business, the consumer would lose all their virtual assets. Service partners need to work with clients to help them understand the risks and build recovery solutions. Providers also will need to deliver cyber security, content moderation, trust, and related security and risk services so clients feel secure that customers will trust their Web 3.0 business initiatives.
In addition, given Web 3.0 enabling technologies are under scrutiny for their environmental impact, clients will look for service partners who have sustainability as a primary offering. Environmental sustainability will take near-term priority for such initiatives.
Moreover, massive opportunities will emerge to build technology workloads by adopting Web 3.0 concepts. In the same way clients adopted Web 2.0 social media and digital commerce to enhance their businesses, they will want to adopt business-contextualized Web 3.0 technologies. The key difference is that Web 3.0 will propel enterprises to engage with stakeholders in previously unknown ways, learn about newer architectures and monetization models, and embrace the creator economy – all pushing them beyond what they are now and realizing the art of the possible.
For more on Everest Group’s research in this area, see our reports on the following topics: NFTs, Decentralized Finance, Metaverse, crypto assets, Blockchain, and trust. If you are a brand management, technology, or strategy consulting provider, please reach out to [email protected] to share your experience in building Web 3.0 business for clients.
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Interest in blockchain platforms has been growing significantly as a way to streamline supply chains, improve traceability, simplify trade, and improve financial transactions. A lot of this interest started with the speculative frenzy surrounding Bitcoin, which is based on an older blockchain platform that faces challenges with energy consumption and speed.
Modern blockchain platforms have been developed to help overcome these limitations and provide practical value for other business uses and applications. “We are seeing multiple enterprises adopt blockchain platforms for some of their application needs,” said Suseel Menon, Senior Analyst at Everest Group.
Digital assets have come a long way from only being Bitcoin to a complete array of increasingly used financial assets. Coinbase’s striking rise has demonstrated a growing acceptance for cryptocurrency that could stick with traditional investors. Is the future for digital currency real, and what obstacles do banks and financial institutions face to compete in this growing crypto market? Read on to learn more of our insights on the next-generation currency movement.
When Coinbase became the first major cryptocurrency start-up to go public on a U.S. stock market this April, the world started giving crypto more legitimacy and the company’s astronomical valuation has garnered great attention.
Along with the skyrocketing value of cryptocurrencies such as Bitcoins and Ethereum, Coinbase – the preferred platform for U.S. investors to purchase these assets – has grown ninefold over the past year. The investment trend over the past five years suggests that cryptocurrency valuation will cross US$24 trillion by 2027.
This rocketing rise can be attributed to increased interest by retail and institutional investors that started investing in Bitcoins and Altcoins as another option to falling interest rates across the world. Other crypto assets such as Non-Fungible Tokens (NFT) traded nine times in the first half of 2021.
Crypto assets have experienced great growth since their early days. Some of the new types (described below in Exhibit 1 and 2) have unique use cases and designs.
Improved technology and better financial services have fueled a remarkable demand in digital assets, especially by institutional investors, over the past 18 months. Investor groups are getting involved in the market for various reasons, including:
As investor interest grows, several FinTechs and BigTechs are investing in technology and infrastructure to support digital assets. Google has partnered with exchange platforms Paxful and Coinbase to add crypto-based transactions on Google Pay. This also allows users to buy Bitcoins and pay using them. Similarly, leading banking software firms such as Temenos recently partnered with specialist digital asset and blockchain infrastructure player Taurus to help banks bridge the gap between traditional and digital assets.
Early access to data will give FinTechs and BigTechs an edge to better understand investor profiles, investment willingness, and funding goals of a large pool of clients. These larger investor groups are also nimble enough to partner with smaller FinTechs and InsurTechs to provide specialty services through a common digital platform.
Since banks would need to cut through bureaucracy, change management challenges, and garner huge financial resources, it is not likely they will develop these technologies quickly enough for the market’s fast pace. However, we believe that increased participation from traditional financial institutions in managing digital assets will pave the way for digital assets in mainstream banking and payments systems as regulations improve.
Large financial institutions such as BNY Mellon recently invested in building a team of technology and business professionals to develop products and platforms that will allow customers to manage cryptocurrency alongside all their other assets. The custodian also received permission from regulatory bodies to offer crypto custodian services in February 2021.
Similarly, Singapore’s DBS Bank received approval earlier this year from the Monetary Authority of Singapore (MAS) to launch the DBS Digital Exchange for tokenized assets. Global banks such as Deutsche Bank are also building services such as institutional-grade hot and cold storage with insured protection for custody services. Huge potential exists to tap into business segments such as wealth management, estate services, financial planning, and asset services in crypto markets since the current penetration is very low.
To stay ahead of the curve, banks should follow this three-pronged strategy to build, partner, and acquire digital assets skillsets in the market:
While its potential is promising, banks still face many challenges around regulations, disaster management, private key recovery, insurance-backed custody, and systems for fraud prevention. The biggest roadblock for BFS firms is the lack of clarity of a regulatory framework around digital assets. The process of building a regulatory framework for digital assets will take several years and be iterative. In the interim, policies that are uncertain and not applicable to digital assets should be brought to the notice of regulators and industry bodies as they continuously evaluate policies and provide clarifications.
Banks and financial institutions also will need to make enormous investments in data and technology systems to manage the Risk and Compliance (R&C) around digital assets. Financial institutions will have to adopt a compliance-by-design approach to build platforms to manage the digital assets transactions and the associated mid- and back-office operations. This will require building new data and technology systems for R&C initiatives as no commercially off-the-shelf software in the market has matured enough to manage scaled compliance workflows and operations for digital assets.
For more insights on digital assets adoption, please read our detailed perspective in the report, Deconstructing the Digital Assets Revolution – What Financial Institutions Can Learn from the Meteoric Rise of Coinbase.