Is Blockchain a revolution for financial services?

There is a lot of hype around blockchain technology. Some of it is driven by cryptocurrency, and most notably Bitcoin (if you have not heard about it yet, you are living in a bubble). Some of the hype comes from the potential applications of the technology in several industries. However, these two things are quite different. So is blockchain a revolution for financial services?

Why the all the fuss about blockchain?

Let’s start with the problem to solve: some parts of financial services are highly inefficient. Nothing new here. Even with the advent of Fintech that brought massive gains in efficiency, we are still not there yet.

We are talking here about a lot of manual processes, stubbornly high costs and unnecessary intermediaries, which are very common. Most of the major banks’ cost-to-income ratios, the relationship between a bank’s revenue and how much costs it takes it to run, are incredibly high.

The advent of smartphones and automation have helped with the digitization of the financial services industry, but there is still a lot to do. Take buying a house for example. The process involves numerous parties that do not trust each other. What if the buyer and the seller do not have to trust each other? What if the process is entirely transparent for the bank, so the mortgage application process takes hours or even minutes instead of weeks? The main reason why financial services is quite inefficient is that money is at the centre. By default, you do not trust someone else to pay you. Maybe family and friends but generally speaking, you do not trust strangers when it comes to money. This is where blockchain comes into play.

Why use blockchain in financial services then?

Thanks to its distributed nature, blockchain technology can solve some of these inefficiencies. In the case of permissioned blockchain technology, the ledger or record is for all the authorized parties to see, and therefore you do not need a middleman to tell you that the other side is not lying. You can implement rules so that money flows happen in certain conditions. The banks’ back office teams do not have to spend time on reconciliation of transactions as you have the same records. Auditors do not have to worry about the worthiness of the documents.

Potential use cases

There are a few use cases that are being worked through either directly by banks or by companies developing blockchain solutions for enterprise:

  • Real estate, as stated above. From the vanilla retail customer who wants to buy a house to the tokenisation of large real estate investments
  • Invoice finance, lots of intermediaries and clunky processes for the most part at the moment. In dire need of a shake up
  • Export and import finance, one of the most obvious use cases since it involves numerous third parties and is incredibly costly for businesses
  • Derivatives trading, the processes are cumbersome and still reliant on human labour as well as lengthy back office verification
  • Anything that involves a useless middleman, that is that does not add value to the process (e.g. clearing) other than being here because the parties do no trust each other. That’s most of the financial transactions, therefore there is plenty to do for blockchain…

Perfect match made in fintech heaven?

It all sounds like a dream come true, a match in heaven… So why are we not seeing blockchain adoption at scale? Is blockchain a revolution for financial services yet? It has been more than 10 years now since Satoshi Nakamoto dropped the Bitcoin white paper (it’s a good read by the way), the genesis of blockchain. Well, it seems that the technology is not mature yet. Not mature for business consumption, not from a technical standpoint. A lack of standards has hampered the adoption of blockchain. Combined with the fact that banks are generally big beasts that are super slow to change, and you understand why it is not everywhere yet.

The slow adoption has actually been a good thing for the industry, because the blockchain companies that are still around have more robust business models. They now focus much more on the business value for existing financial infrastructure and much less on “we will change and displace everything”. Is it a revolution then? No it’s not. An evolution? It could be. Time will tell.

Watch this space, we will see more robust use cases going into production at major institutions in the next few months and years…