The banking and financial services industries have a complex relationship with blockchain, the distributed ledger technology that was popularized by cryptocurrencies such as Bitcoin. On the one hand, blockchain presents numerous opportunities to transform how people exchange value. The technology provides participants in a business network with a shared, immutable history of transactions — records cannot be altered once they’ve been agreed upon through consensus and added to the ledger — so many traditional banking processes could be streamlined. On the other hand, blockchain is viewed as a threat to the established models that commerce is run on.
Change isn’t easy, especially when changing requires the overhaul of existing systems as well as collaboration among banks and financial services providers who probably never thought they’d work together on anything. However, with so many banks and startups interested in cashing in on the potential value of blockchain technology, it’s no longer a question of if blockchain will be used in banking, but when and how.
For banks and financial institutions, ensuring Know Your Customer (KYC) compliance is an important step in preventing inappropriate or criminal use of funds and services. This process involves establishing the identity of the customer using various documentation, understanding the nature of the customer’s activities to make sure the source of the customer’s funds is legitimate, and assessing whether the customer poses a risk. You might think it would be enough for a bank to do this once for each customer and then simply keep the record updated, but that usually isn’t the case. More often, a variety of systems separately manage customer identity for different types of financial services.
Banks have been researching ways to share customer information across their company in a secure manner and a blockchain-based solution is a clear contender. Cryptographic protection can help keep information secure while the ability to share a constantly updated record with many parties can simplify the administrative process by reducing unnecessary duplication of information and requests.
In a pilot project by Crédit Mutuel Arkéa and IBM, using blockchain offered a complete view of customers’ documents across the bank’s distributed network.
Payments: Speeding time to settlement
Though digital payments have become more common, sending money from one individual to another isn’t always a simple endeavor. Traditionally, it’s been hard for those involved in a transaction to trust that they will receive their payment. Intermediary financial institutions like clearing houses, regulators and other banks offer certainty, but they also slow down the process. If a payment crosses borders and exchanges in currency are involved, it could take days or weeks for clearing and settlement to occur because of inefficiencies in reconciling records on separate ledgers from intermediaries.
By design, blockchain provides certainty because participants can view the same ledger of transactions that is updated through consensus and made immutable through cryptography. In the long term, this can make it possible for individuals and corporations to transact more directly, making payments simpler, faster and more secure.
In a recent press release, IBM, KlickEx Group and Stellar.org unveiled a new blockchain payments solution that uses IBM Blockchain technology to provide both clearing and settlement of financial transactions on a single network in near real time. Read this blog post to learn more.
Trade finance: Reducing friction in global markets
Friction in global markets makes obtaining financing and completing trades a lengthy and complex process. Following traditional practices, which include various activities such as lending, issuing letters of credit, factoring and insuring the parties, it can take days up to weeks to complete a single transaction! Paper documents have to be sent back and forth to be validated and reconciled, and in the interim, capital gets tied up and business slows.
By using a shared version of the truth on blockchain, trade partners can interact with greater trust, increasing the efficiency with which companies can access funding as well as saving time and costs throughout the trade process. Watch the video below to see how blockchain helps streamline trade finance:
Five banks and IBM are developing a blockchain-based trade finance platform called Batavia. Built to be openly accessed by organizations big and small around the world, the platform is designed to help support the creation of multi-party, cross-border trading networks. Read the press release to learn more.
Reimagining banking with blockchain
Banks around the world are looking to transform their industry with blockchain. The advantages of increased transparency and efficiency along with simplified processes and decreased costs are hard to ignore. According to a report from the IBM Institute for Business Value, 91 percent of banks are investing in blockchain solutions be 2018. Will you be one of them?
What’s stopping blockchain from becoming a more pervasive technology in financial services? If you think it has something to do with the technology behind blockchain, you’re partially wrong — it’s the nature of the solution that is causing the barrier. For a blockchain-based solution to work successfully, it requires multiple entities to come together in […]
As an IBM Distinguished Engineer, I have spent the last two and a half years working on blockchain with our U.S. banking and insurance clients. More recently, I have been the IBM technical executive overseeing open Insurance Data Link (openIDL), the insurance network partnership with the American Association of Insurance Services (AAIS). It’s been very […]
Blockchain technology is, almost without argument, the topic of the year and is even more high profile for the accounting and financial services industries. Almost without exception, major conferences, journals, media publications and most conversations, are impacted by this technology. Even with all of the excitement, investment and analysis, however, most of the conversations have […]