The proliferation of payment options doesn’t only make things more challenging for customers. The growth in digital wallets, and the number of payment choices out there, are making things more complex for merchants too.
“The rise in Web 3.0 and metaverse adoption will expand the number of channels and the payment methods that come along with them,” said Ronak Doshi, Partner at Everest Group. “At the same time, the rise of real-time payment schemes is poised to add more competition and players in the payment ecosystem. This will simplify the payment processes but increase the number of choices for e-commerce firms and their customers.”
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.
A brief history of blockchain in banking and financial services and FintTechs
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.
What is blockchain?
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.
Benefits of blockchain technology in banking
Blockchain technology has the potential to improve the banking industry in many important aspects as illustrated below:
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 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.
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.
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.
Sevenuse cases of blockchain in banking and financial services
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.
Automating other processes
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.
Banks and financial institutions using blockchain
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’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 also utilizes R3’s blockchain capabilities to operate Digital Vault services
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:
Enterprise Ethereum Alliance (EEA)
Financial Blockchain Shenzhen Consortium (FISCO)
What are the barriers to adopting blockchain technology in the banking industry?
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.
What is the future of blockchain?
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.
Low code/no code development holds promise for banking, financial services, and insurance (BFSI) firms to gain agility and cost-effectively build innovative technology solutions – without needing professional developers who are in short supply. Learn about the market potential and provider landscape in this blog.
Digital consumption demand in the (BFSI) industry has seen a heavy uptick in the past year, driven by customer expectations for enhanced experience and the adoption of flexible work options to run businesses.
BFSI firms are under pressure to achieve profitability in an already volatile market and need to be more agile, collaborative, and responsive. These firms have to build stronger ecosystems and overcome the obstacles created by legacy systems.
This has increased demand for professional developers to manage complex technology stacks. But the fast digitization pace has caused enterprises to focus their limited development talent on workflow customization and business-as-usual activities instead of innovation and core product engineering.
Low code/no code technology has paved its way through these circumstances, easing operations and optimizing costs. This approach provides a visual modeling development tool that business teams can easily use in collaboration with the IT department, reducing the need to hire professional developers who are in short supply.
The exhibit below illustrates the drivers for low code/no code adoption.
BFSI firms are successfully using this method. Let’s look at some examples:
Marex, a tech-enabled liquidity hub for participants in global commodities and financial markets, selected Genesis to fully digitize middle office workflows for its new equities market-making business
Unqork, an enterprise software company with a transformational no-code platform for financial services and insurance organizations, secured $73 million in two investment rounds from Goldman Sachs, demonstrating the shifting industry views on building enterprise technology
Low code/no code benefits
Benefits of low code/no code technology for BFSI firms include:
Reduced internal workflow processing time due to easier integrations, leading to increased efficiency
Decreased product time-to-market brought about by the simplicity of development
Increased ease to upgrade or introduce technology without affecting normal business operations because of the microservice architecture offering
Reduced cost by having internal teams for development and maintenance
Improved solutions resulting from the business-oriented development focus that combines business knowledge and IT skills
BFSI enterprises also have enhanced customer satisfaction by using low code/no code to quickly and effectively establish digital omnichannel experiences. This has satisfied customers’ appetites for remote consumption and also enabled the ability to personalize services by easily integrating other technologies such as Artificial Intelligence (AI), Machine Learning (ML), and Internet of Things (IoT.) Self-service applications for 24/7 support can be set up with less time and cost using low code/no code.
See common use cases across the BFSI in the image below.
Evolving the low code/no code ecosystem
The low code/no code technology provider landscape is made up of many players as, illustrated below. These include:
Generalist low code/no code vendors who provide solutions that can be offered to any industry
BFSI specialist low code/no code providers who offer technology products for BFSI workloads and out-of-the-box accelerators for reusability and quick access
Big tech companies and core BFSI technology providers who are investing in low code/no code through partnerships, acquisitions, or developing the technology to provide standalone and bundled solutions to their customers
Grabbing the opportunity
Many BFSI firms who have adopted low code/no code technology are reaping the benefits, while others have experienced roadblocks such as limited options to scale the technology across the organization. To achieve success, the right procedures must be set up to avoid any pitfalls. Understanding the internal and external capabilities and challenges while moving along the path is critical.
BFSI enterprises should follow our CASE framework and have a clear vision, assess internal resources, select technology, and execute their roadmap as illustrated below:
Practice Director Ronak Doshi will speak at Blockchain Summit India (BSI) 2019 held on Februrary 22-23 in Delhi, India. Ronak will be joined by other industry experts on a key panel where they will discuss the evolution of blockchain and FinTech for a digital cashless India.
About the Session
India is passing through a wave of cashless and e-money formation. Innovation in this area by Indian FinTech startups, banks, and governments is at an all time high. The esteemed panel will discuss the formation of cashless India and what to expect in the next three years. They will specifically highlight a focus on what role cryptocurrencies and blockchain technology will play in this formation.
About the Event
Blockchain Summit India 2019 is the first edition in a series of Vision Blockchain 2030 events. Then Indian Government, various ministries, the country’s premium academic institutes, and the country’s most influential people are participating to support the initiative. Learn more about Blockchain Summit India.
Since the early part of this decade, when technology-backed disruptions started knocking on businesses’ doors, FinTech – or financial technology – transformation has been one of biggest opportunities for BFSI companies. But while they’ve consistently accelerated their transformation journeys, BFSI firms and the FinTech providers themselves have been impeded by multiple complex challenges. These include stringent regulatory requirements, exposure to cyberattacks, lack of customer trust, limited government support, and, most importantly, limited opportunities to refine and train their analytics engines in real environment.
The good news, however, is that now, even government bodies are starting to take up agendas to facilitate and foster FinTech innovation. Over the past two years, multiple countries, including Denmark and the Netherlands, have come up with their own versions of regulatory sandboxes to promote activity in the FinTech space. In addition to attracting a multitude of players looking to innovate and deliver FinTech services, these sandboxes have also contributed significantly to the overall business growth in the countries in which they’re located.
Lithuania’s FinTech Sandbox
Against this backdrop, let’s take a look at Lithuania’s newly-established FinTech sandbox through multiple lenses: what it means for the participants, how it will impact the country’s global services industry, and factors that BFSI and FinTech firms need to focus on to leverage innovation opportunities from these types of initiatives.
On October 15, 2018, Bank of Lithuania kickstarted a regulatory sandbox for FinTech start-ups and BFSI firms. The goal is to enable the companies to test their new products/solutions in a live environment with real customers, while Bank of Lithuania provides consultations, simplified regulations, and relaxations on supervisory requirements. After successfully testing their new products, the companies can implement them in a standard operating environment.
Key Highlights of the Lithuania FinTech Sandbox
Impact on Lithuania’s Service Delivery Market
While the Lithuanian FinTech market experienced 35 percent CAGR growth between 2015 and 2017, we expect it to grow by an additional 35-45 percent in 2019-2020. The FinTech sandbox will contribute significantly to this growth. Other drivers will include:
A large, tech-savvy, and growing workforce with relevant skills and educational qualifications (e.g., advanced degrees in science, mathematics, and computing)
Unified license providing access to a large EU market across 28 countries
Favorable regulatory policies, including expeditious licensing procedures and regulatory sanctions exemptions (e.g., remote KYC allows firms based outside Lithuania to open an account in the country without having a physical presence there)
Proactive government policies, including creation of funding sources (e.g., MITA), and streamlining laws and tax relief programs for start-ups
A state-of-the-art product testing environment for blockchain, through the country’s LBChain sandbox, which is set to open in 2019
Here are several aspects of Lithuania’s service delivery growth story that we expect to see in the next couple of years.
Delivery region: While service delivery demand will continue to be strongest from Lithuania and the Nordic countries, we expect strong growth in delivery to other European and SEPA (Single Euro Payments Area) markets. This will be driven by players looking to hedge their post-Brexit risks of buying/delivering services from only London
Segments/use cases: Most of the growth will come from lending and payments platforms, with relatively lower growth in capital markets and insurance
Business model: While B2B will remain the dominant model, we expect a significant uptick in in “B2C & B2B,” due to increasing demand for a better customer/institutional experience
Collaboration between startups and financial institutions (FI): Startups will continue to leverage FIs as distribution partners, but we expect significant growth in models where FIs partner with start-ups as customers or sources of funding
How Should BFSI and FinTech Players Strengthen their Own Growth Stories?
As BFSI and FinTech continue to walk the transformation tightrope in the everchanging regulatory space (e.g., PSD2 and GDPR), they need to focus on the following factors to successfully grow:
Understand the need: Look across your existing and aspirational ecosystem of FinTech delivery, and zero in on key priorities (e.g., solutions, target markets, need for regulatory sandboxes) if any, to enable a future-ready delivery portfolio
Establish your approach: Tune your delivery strategy to progressive principles such as availability of talent and innovation potential, not just operating cost. This includes prioritizing geographies with high innovation potential and next generation skills (e.g., Denmark, Israel, and Lithuania) over low cost but low innovation potential alternatives
Brainstorm your scope: Build relationships with leading BFSI players and start-ups to share/learn best practices around efficient operating models and promising use-cases. This specifically includes liasing with incumbents operating in sandboxes to prioritize select use cases with transformative potential before testing in a real environment
Get ready: Selectively rehash your technology model to simplify legacy systems, become more intelligent about consumer needs, and reduce exposure to cyberthreats
Keep an eye out: Look for opportunities (e.g., sources of funding, sandboxes, and partnerships) to help you innovate, develop, test, or successfully implement solutions
The good news is that the push (or pull) towards FinTech transformation is in same direction for all leading stakeholder groups – service providers, buyers, collaborators, customers, and government bodies. But, because the least informed is often the most vulnerable, BFSI, FinTech firms, and companies seeking their services must stay informed and keep looking for opportunities and solutions.