The financial world is based upon the concept of a middle-man someone who will either guard your money, invest your money or manage your money, move your money, etc. The big claim most experts are making is that if implemented correctly blockchain or distributed ledger coupled with smart contracts can potentially replace the middle man.
A] What Is Blockchain?
This is an example of a public blockchain where anyone can send value anywhere in the world where the blockchain file can be accessed. However, there are private blockchains that can be restricted to a particular network and mining can be regulated. Most financial companies are interested in implementing private blockchain. In fact, there is a sort of consortium of financial companies developing a private blockchain standard called CORDA.
Core Banking
Most banks run on something called as a core banking software, now core banking today is built on a centralized database concept. Core banking is like the heart of a bank – any change to it is really tough to manage and if the system is experiencing problems it impacts almost everyone. Blockchain is the opposite of what today's core banking systems are. I am sure someone is out there in the open-source world developing a version of core banking that uses a distributed ledger. Once a proof of concept is executed we will understand a bit more on how soon everyone needs to change their core banking. But if the answer is yes then this change will be bigger than the Y2K change.
Consumer Lending
One of the most important parts of lending is Know your Customer or KYC as it is called in the IT circles. It is estimated that banks and lending companies spend anywhere between 300 to 600 Million dollars per year on their KYC software. Now KYC is really necessary especially in today’s world to prevent or reduce money laundering and terrorist activities. Blockchain inherently has a mechanism of independent verification of transactions – with some tweaking this could easily be molded into a framework that will allow the independent verification of clients by banks to be done in a shared manner like mining. Spoiler this will not result in cost savings but IT teams can rejoice for this will surely spice up KYC budgets for the coming years. Are you interested in learning more about other financial sectors that might adopt blockchain technology? Let’s discuss, you can easily get in touch to schedule a consultation.
B] How Can Smart Contracts Help Banks and Financial Companies?
Collections and Payments
The Payments world is very complex. It gets even more complex when talking of moving money across countries. I have worked extensively in SWIFT payments for some really large banks – and I actually don’t see how blockchain will impact international funds transfer. But I do hear a lot talk that Blockchain will potentially disrupt the payments world. Let’s wait and see.
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