Financial institutions have clearly appeared as the biggest beneficiaries of
77% of senior financial services executives anticipate adopting blockchain in their production systems or processes by 2020.
Our analysis team at
Value Analysis Framework – Blockchain in Banking – P1
- What are the regulatory and compliance issues that require data handling?
- What are the serious problems that arise due to data tampering? Which entities face the aforementioned issues?
- What are the usual cross-bank communication issues that banks face?
- What are the issues related to maintaining user records?
- Which three processes, according to you, are the most time-consuming in banking (e-banking or otherwise)?
- What are the data provenance issues that banks face?
- Which elements of the banking ecosystem require an increase in transparency?
- What are the issues related to the existing system for data reconciliation? Are the costs of data reconciliation and verification high?
- Does the intermediary exist due to lack of trust, and is it taking a high fee?
- Is the same information being stored in multiple locations by multiple participants?
- Which entities in the banking ecosystem involve data visible exclusively to a certain group of people (authorities), and strict confidentiality of record?
The total viable use-cases identified using the complete VAF were eight. We’re publishing four of them in this article.To know more about how blockchain could help your financial services firm: Drop your email address here
Suggested reading: Blockchain meets supply chain finance
Blockchain Use-Cases for Banking
1. Vendor Financing
Vendor financing programs provide credit facilities such as letter of credit, bill discounting and financing against purchase orders and invoices. Banks also offers structured financing services against confirmed purchased from their customers.
Firstly, due to manual processing of the transaction and lack of automation at any point, it takes minimum 4-5 days for the vendor to collect funds from the bank against the relevant documents. As the funds remain blocked as long as the processing takes place, the working capital situation of vendors is affected.
Lack of a mechanism to track the status of invoice throughout the process
Secondly, in the current system, all the participants (banks, client and vendors) cannot simultaneously track transactions in real-time. The status of the invoice is known to the participants only through emails.
Potential of fraud
As an invoice changes multiple hands throughout the lifecycle of a transaction, there are high possibilities for frauds in the form of tampering of documents, causing a delay in the release of funds, and funds being disbursed to the wrong entity. In addition, once such a transaction happens, it is difficult to keep a track of such fraudulent practices.
1. Clients can transfer invoices to blockchain. Once they are on-chain, smart contracts could help in the automating verification and disbursement of funds to the vendor within minutes. It could also help in triggering automatic debit to customer account on the due date
2. With the transaction being up on blockchain, all the relevant parties can view and verify the processes. There is only one source of truth and transactions cannot be processed further unless all the relevant parties agree and authenticate it.
2. KYC and Cross Banking Communication
KYC norms mandate every customer of the bank to submit several identity-based documents. The process constitutes of collecting, tracking and storing huge amounts of user data and this data is reported to regulatory agencies.
Regulation rules are changed often – therefore adding more compliance burden on the banks.
Disparity in specifications
Every bank has their own specifications they adhere to. Due to this lack of standardization, complying to each request in a customized way is time-consuming.
Customer relationship issues
A customer has to provide the same information to different banking entities, sometimes in the same jurisdiction. This is quite tedious. Moreover, banks may even have more follow-ups periodically for KYC.
1. Smart-contracts can automate verification of the document.
2. Whenever new data is needs to be appended, the ledger could enable encrypted updates to the ledger. These updates can be accessed by other authorized entities in real time.
3. As a trust sign for future transactions, a digital identity of the on-boarded customer can then be used. The most important use of digital identity is cross-bank communication, where it is required between banks to share data for various purposes.
4. For cross-bank communication, a better way could be to maintain a distributed ledger between banks. The concept of channels in DLT could facilitate sharing data between banks, thereby maintaining the dichotomy between privacy and transparency.
3. Contract processing
Banks provide services to businesses by acting as an intermediary between two contracting parties, securely storing contract documentation, holding money in an escrow, or guaranteeing a loan.
Firstly, the process is time-consuming for all parties as it often requires multiple, in-person visits to the bank to go over paperwork.
Duplication of effort
Secondly, if there are any changes in the terms of the agreement, the whole verification process has to be repeated for all the parties. Moreover, the process of verification is very time consuming and redundant.
Maintaining physical records of documents
Thirdly, this process involves a lot of paperwork and is labour intensive. So, heavy dependence on the physical copies of the documents increases the risk and makes the process more open to error and fraud.
Banks can use blockchain technology to build secure digital lockers that store sensitive documents. By creating and maintaining them in a digital locker, banks can enable all parties to easily and securely collaborate on documents. Benefits include:
- Better customer experience, as customers no longer have to make multiple bank visits
- Faster and easier document verification and approval
- Increased security and ease of access for documents
Instead of meeting in-person to create and update bank guarantees, the borrower, lender, and bank can all collaborate in real-time on documents stored in a secure digital locker. Therefore, it makes the system more efficient.
4. Syndicated Loans
Corporations undertake multiple large projects such as the development of roads, train systems, airports, factories, new business centers, etc. which require large-scale financing. Also, institutions come together to form syndicates to procure large funds and diversify the financial risk among their members.
Selection of members based on financial soundness and industry expertise, evaluation of borrower’s financial background, and finally, negotiation of terms and conditions is a tedious and time-consuming process for the lead arranger.
Agents appointed for managing and administering the process take high fees, therefore it makes the overall process very costly.
The procedures of syndicate banking is manual and paper intensive – so, it makes the whole system inefficient in terms of time and cost.
Duplication of efforts
The lack of technology for due diligence and underwriting causes referencing for different applications and sources during the process. The document also leads to the risk of fraud.
Delayed settlement cycles
Involvement of intermediaries and use of obsolete technology leads to delayed settlement cycles for payments. Therefore, this leads to increased default risk and locking up of capital.
1. Automated selection criteria for syndicate formation in programmable smart contracts – therefore faster syndicate formation.
2. Agreements, contracts, terms and condition documents etc. can be digitized on the blockchain, and validation and checks are automated.
3. Automated due diligence and information for loan underwriting through blockchain, thereby reducing the turnaround time.
4. Blockchain can facilitate near real-time funding and payment settlements with activities executed via smart contracts.
Post crypto crash, blockchain technology has stepped up to have strong, genuine use-cases for financial services – with banking leading with a lot of viable use-cases. It’s 2019, and it will definitely take time for the industries to adopt blockchain as a whole – but it’s clear that a long term investment in the technology will yield results.
To understand how blockchain could fit in your business processes, drop your email address here and get a free consultation.