Sam Mire Investing in new financial technology is a short-term cost for long-term efficiency. This certainly applies to blockchain, which can occupy several roles within the financial sector. From making cross-border payments faster to removing costly middlemen, it’s already impacting the international banking network.
Interbank Transactions
More goes into a wire transfer than you know. When a Chase customer pays a friend at Bank of America, those banks must coordinate a digital transfer of funds and ensure that their books are adjusted properly.
There was $590.9 billion in net interbank transactions in the United States during Q1 of 2017 alone. Banks completed $42.4 billion in domestic payments in 2016 alone by relying on transferable balances held at other banks. Each of these transactions required banks to communicate with each other.
Yet interbank transactions remain complicated. Wire services and settlement processes charge fees for banks and customers. Banks must review digital clearing systems every month for accounting. The process is tiresome.
Real-time interbank fund verification would unify banks and reduce fees. That would mean quicker wire transfers at a lower cost. Cash flow oversight is a task fit for automation, and the blockchain is a suitable candidate for the job.
These companies are using the blockchain to streamline interbank transactions.
Companies Trying to Solve This Problem
- R3 (Corda) – Blockchain Smart Contracts for B2B Payments
- Billon Group – Blockchain ledger for enterprise and B2B transactions.
- China Construction Bank – Announced partnership w/ IBM to streamline transactions on the blockchain.
Cross-Border Transactions & Remittance
Consumers send $180 trillion in cross-border payments each year. Sending money outside of the United States costs 42 dollars per transaction. A prince could retire on the annual fees from cross-border payments! And what do customers get for their 42 dollars but a three-to-five-day settlement period?
Payment processes such as SWIFT gpi have reduced transaction times to mere minutes. The blockchain could go a step further by enhancing security, transparency, and affordability.
Blockchain-powered payment services charge less than one percent in fees on cross-border payments. They take only a few hours to process, and account for billions of dollars in international transfers completed.
The following companies are making cross-border transactions quicker and more affordable with the blockchain.
Companies Trying to Solve This Problem
- R3 (Corda) – Full-service banking solutions on the blockchain.
- Santander – First UK bank to facilitate live international payments with blockchain. Esp. between Europe and South America.
- CLS – Blockchain solutions for Global forex and clearing.
- Wyre – Faster international money transfer on the blockchain.
Smart Contract Enforcement
Contracts exist to protect people, but that protection comes at a cost.
Even if you win a breach of contract suit, chances are you’ll find yourself dishing out 25–40 percent of it to your attorney. If your lawyer works on a non-contingency basis, you’ll have to pay them out of your own pocket. Did I mention the filing fee? It can run as much as of $240.
Commercial contract disputes in the US cost $306 billion each year. The global cost is $870 billion. These figures don’t account for the cost of professional relationships burned by contract mismanagement.
Smart contracts hold both parties to an agreement, enforcing that contract with a self-executing algorithm. Money stays in escrow only to be released when the conditions of the agreement are fulfilled. Smart contracts substantially reduce the element of trust. This minimizes the risk of a financial agreement and the odds of ending up in court.
These companies are developing blockchain-powered platforms for contract enforcement.
Companies Trying to Solve This Problem
- JPMorgan Chase – Quorum Division. Enterprise-ready distributed ledger and smart contract platform aimed at high-speed payments.
- Polybius – Blockchain based use case in personal finance.
Cryptocurrency Banking Services
With a market cap over $68 billion at the time of this writing, Bitcoin represents a massive demographic of new wealth that traditional banks have neglected. But financiers and hedge fund managers are discovering how the blockchain can improve their operations.
There are between 20,000 to 200,000 crypto millionaires, according to some estimates. Even mainstream finance heavyweights like the Rockefellers are in on Bitcoin.
Financial institutions have taken note, and are educating themselves on the ins and outs of cryptocurrencies. Some even offer crypto-centric financial management services. As the public understands how cryptocurrencies can diversify assets, high-value clients may urge banks to dive further into the cryptosphere. Banks who comply with regulators to pair their strong reputations with cryptocurrency offerings could have significant competitive advantage.
These companies are developing cryptocurrency banking services.
Companies Trying to Solve This Problem
- Hypothekarkbank Lenzburg (Hypi) – Announced opening business accounts for crypto companies.
- Falcon Private Bank – Private Swiss bank. Blockchain asset management service, accepts crypto-derived wealth.
- Bermuda Government – Signed MOU with Shyft Network. Did the same with Binance Group for blockchain projects.
- Goldman Sachs – Owns Circle, which launched Circle USD Coin. Opened “Bitcoin trading desk”.
Record Sharing and Storage
Blockchain adoption in finance could save the industry $8 billion – $12 billion per year. That’s 30 percent of the infrastructure costs of the world’s eight global banks.
Paper-based storage methods drive up the recordkeeping costs for financial institutions. Estimates show that between 60–70 percent of retail banks’ records management costs can be eliminated by going paperless. This would cut operating expenses for processing divisions by as much as 25 percent.
Banks hold massive stores of records because they have so many customers. Those records are very valuable to bad actors. The blockchain is digital, and thus less expensive to maintain. It also stores records in a decentralized fashion, providing top-flight security and easy accessibility. This system also eliminates the risk of complete record loss that comes with paper-based recordkeeping.
The following companies are making it easier to share records with blockchain technology.
Companies Trying to Solve This Problem
- Bank of America – More blockchain patents filed than anyone. Includes one aimed at improved records storage/transmission.
- InterPlanetary File System – Blockchain based storage protocol and system.
- Oyster Proto col – New approach to file storage on the blockchain.
Clearing and Settlement
Slow payment clearing processes cause banks to leave billions of dollars on the table each year. The Boston Consulting Group estimates that large institutional broker-dealers could invest $15 million to $20 million per bank and cut settlement time down to a day. Such an investment would provide $175 million in operational savings, according to the BCG.
Imagine the savings that would arise from immediate settlement.This is the vision that some hold for blockchain in the clearing and settlement process. Employing blockchain technology as an alternative to central counterparty clearing houses could make the vision come true.
These companies are exploring blockchain technology for clearing and settlement.
Companies Trying to Solve This Problem
- Equibit Group – Blockchain based clearing and settlement use case.
- Australian Securities Exchange – Testing blockchain driven platforms.
Loan Syndication
Loan syndication markets shattered records in 2017 by clearing more than $2.41 trillion in loans before the year’s end. But a record-breaking market can still have problems.
A borrower-friendly mortgage market and a tax-friendly corporate environment are driving the rise in syndicated loans. Many of the largest lenders are already establishing a blockchain-powered framework to meet rising demand.
The primary issue with syndicated loans is a lack of transparency from underwriters. Unified records systems could create clarity to drive efficiency. The blockchain allows remote access by credentialed parties without sacrificing security. It could be the solution to inefficiency in loan syndication.
The following companies are creating the loan syndication platforms of tomorrow.
Companies Trying to Solve This Problem
- Fusion LenderComm – Reducing the cost and burden of agent-to-lender administration with blockchain solutions.
RegTech for Cryptoassets
A Vietnamese company called Modern Tech launched an initial coin offerings (ICO) for Pincoin earlier this year, raising a whopping $660 million from 32,000 people. Management promptly disappeared like thieves in the night. This is the risk crypto investors face by investing in ICOs, but these nightmares may be over.
In April 2017, authorities arrested 18 executives of the now-infamous OneCoin and seized $2 million in investor funds. OneCoin faced allegations of being a Ponzi scheme, and it turns out it was exactly that. OneCoin was holding $350 million in investor money at the time of the arrests.
Suckers will fall for these schemes time and again if left to their own devices. But using blockchain-powered algorithms to monitor potential criminality in crypto markets could save suckers from themselves. Decentralized platforms are more open to oversight than traditional banking methods, and a blockchain ledger is nearly impossible to manipulate.
The following companies are protecting crypto assets with help from the blockchain.
Companies Trying to Solve This Problem
- Codify – RegTech incubator for RegTech platforms serving emerging tech like blockchain.
- CoinFirm – Transactional compliance verification through cryptography.
Know Your Customer (KYC)
Do you ever ask yourself how well you know the person on the other side of the counter? Financial compliance departments have to ask themselves this question repeatedly as they try to avoid fines and even criminal charges.
Financial institutions face astronomical Know Your Customer (KYC) requirements. The average customer onboarding time for financial institutions is as long as 26 days. The average annual cost of KYC processes per individual financial institution is $48 million, with banks averaging $70 million to investment managers’ $23 million. KYC costs were $150 million in 2017 for institutions with $10 billion or more in revenue. Analysts expect the upward trend in KYC expenses to continue, at least until automation takes hold.
The blockchain could be the anchor for automation in KYC practices. As a shareable but secure financial ledger, the blockchain may help store and share KYC-related data. Banks spend time and money verifying where customer money came from, their financial history, their business interests, and the like. The industry needs an automatically updating database for KYC-related customer information. If there is a legally permissible solution for sharing such data between banks and loan officers, blockchain should be its basis.
These companies are improving KYC processes using blockchain technology.
Companies Trying to Solve This Problem
- Deloitte – KYC as a service, managed KYC offering leveraging blockchain.
- KYC Chain – KYC platform on the blockchain.
Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF)
International banking giant HSBC paid $1.9 billion in fines in 2012 after laundering $881 million for the Mexican Sinaloa cartel and the Colombian Norte del Valle cartel. In 2017, the Deutsche Bank was fined over $630 million for its role in laundering $10 billion for Russian criminals. The Commonwealth Bank of Australia incurred $534 million in fines for failing to observe laws against money laundering and terrorism financing. And Danske Bank is investigating its Estonian branch to clarify whether $150 billion in laundered Russian funds passed through its coffers. Seeing a pattern here?
Anti-money laundering and counter-terrorism financing practices clearly need some strengthening. The answer is to share.
Industry-wide adoption of blockchain-powered ledgers would make compliance easier for honest banks. They could share client information to ensure no suspicious customer is overlooked. Investigations would become far quicker and cheaper. Because data logged on the blockchain is distributed across hundreds or even thousands of nodes, altering the entire decentralized record is effectively impossible. This creates a more trustworthy source of evidence for determining the extent of any criminal activity.
The following companies are rooting out money launderers and terrorists with help from blockchain technology.
Companies Trying to Solve This Problem
- CoinFirm – AML through blockchain based transaction verification.
- Chainalysis – Tracking relationships between crypto addresses.
- Elliptic – Real-time AML tracking for cryptocurrencies.
Regulatory Reporting
Nearly 40 percent of financial firms spend at least $40 million on their global regulatory reporting processes. Nobody said it was cheap to follow the rules, but what if blockchain technology enabled a more convenient way to report?
61 percent of firms spend between $5 million and $30 million on reporting processes. The Great Recession cost the US more than 7.5 million jobs, erased $16 trillion in net worth, and doubled unemployment. The result: heavy-handed regulatory requirements. 61 percent of compliance offices expected an increase rise in compliance costs last year. But good compliance doesn’t necessarily have to be expensive.
Blockchain ledgers can store verified, immutable data, so they’re perfect for sharing files between regulators and compliance departments. This self-executing technology will likely cause compliance departments to downsize. That’s a bummer for employees, but automation could replace this costly error-prone reporting framework.
These companies are improving the state of regulatory reporting with blockchain technology.
Companies Trying to Solve This Problem
- AIIS – Partnering with IBM to streamline regulatory reporting for insurance.
- iComplyICO – Platform for maintaining regulatory reporting in the ICO sector.
Trade Finance
The World Trade Organization estimates that 80–90 percent of world trade relies upon trade finance. Creating faster, more reliable payment structures with blockchain technology is imperative for bankers and their customers.
Financial institutions act as the guarantor of payment between seller and buyer. They issue a preemptive letter of credit to the seller that’s valid once the buyer receives the product.
These traditional letters of credit require several intermediaries — banks, financiers, insurers, and export credit agencies — that must all be paid. These moving parts create unmet trade demands estimated to cost as much as $2.6 trillion.
Blockchain technology could help decrease recordkeeping costs and eliminate some intermediaries while simultaneously weaning trade financiers off of paper-based systems that cost time and money.
These companies are using blockchain technology to streamline trade finance.
Companies Trying to Solve This Problem
- IBM’s Batavia Platform – Open Source ecosystem for cross-border trade.
- Marco Polo Network – Trade and working capital finance network with blockchain technology.
- We.Trade – European trade finance network testing blockchain.
Data security
One study suggests the cost of a financial data breach is roughly $7 million. With that much bread on the line, why not implement the most modern security practices?
The Heartland Payment Systems breach of 2008 is one of the most notorious hacks in the financial sector’s history. Hackers stole at least 100 million debit and credit card numbers from the payment processor’s database. Heartland issued $145 million in fraudulent payments as a result of the breach.
Hackers disproportionately target financial institutions. Finance hacks accounted for 8.5 percent of data breaches in 2017, and financial businesses are 300 times more likely to fall victim to a cyber attack. The need for greater security in the banking industry is self-evident.
The blockchain’s decentralized security detects backdoor hacks more easily than its alternatives. Blockchain tech secures and privatizes data through encryption and cryptographically protected passkeys. This is ideally suited to the banking industry, where both security and privacy are critical.
The following companies are securing financial data with help from blockchain technology.
Companies Trying to Solve This Problem
- Edge –Decentralized, blockchain driven edge-security for login.
- Bank of America – Security token patent.
- JP Morgan – Leveraging ZCash solutions for privacy.
Increasing Transparency
Lack of clarity in the financial sector has caused full-blown catastrophe. Wells Fargo is the most prominent example from recent history, systematically opening 2 million fake accounts in paying customers’ names. The bank incurred exorbitant fees and damaged some customer credit scores so that salespeople could hit bonus-inducing sales goals. Not cool.
But no bank is surrounded by a shroud of mystery quite like the now-defunct Lehman Brothers, which reported revenues of $19.3 billion and a record net income of $4.2 billion in 2007. Regulators exposed Lehman in 2008 for its high-risk practices. The firm eventually filed for bankruptcy and left its 25,000 employees out of work.
A technology allowing banks to share their compliance efforts with their customers could instill (or re-instill) consumer confidence and reputation. The more information banks share, the more trust they’ll inspire.
The blockchain allows unparalleled data aggregation, fund tracking, and transparency. This will expose and reduce risky practices while rewarding responsible bankers.
These companies are promoting transparency in the financial sector with blockchain technology.
Companies Trying to Solve This Problem
- Ripple – Providing transparent solutions for banking.
- Finterra –Building more transparent money services platforms.
Serving the Unbanked
One of every 13 households in the United States gets by without a checking or savings account. While many of the most concentrated areas of unbanked individuals are rural, Miami leads the pack with 20.1% of its population unbanked and another 21.4% underbanked. Banks obviously aren’t catering to the underserved, so it’s time for an alternative.
The number of unbanked Americans sits at 15.6 million, while 51.1 million US adults are underbanked. The global picture is even more bleak, with 2 billion adults living without any banking services at all.
Without access to traditional banking or knowledge of how to use it, the poor are often forced to turn to hostile lenders with predatory interest rates and fees. Several startups are extending systems of credit and lending to underserved populations to remedy these. In many cases, they’re using technology to do so.
Blockchain-powered banking platforms provide inherent security and the ability to create a decentralized lending network. Blockchain and cryptocurrency-based solutions could completely replace predatory businesses like check cashing and payday advances with fairer, transparent systems.
These companies are using blockchain to serve the underbanked.
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