Editor’s note: Stacy explores the benefits of blockchain for the BFSI companies, overviews the most prominent technology use cases and the recent market trends. If you are interested in transforming your business operations with the help of blockchain, you’re welcome to check ScienceSoft’s blockchain development offering.
The BFSI (banking, financial services and insurance) industry so far remains the leading blockchain adopter, accounting for 38% of the global blockchain market value. Historically, the lion’s share of the value generated by blockchain was accumulated in the fintech and crypto space. However, in recent years blockchain has gained much traction among the traditional financial institutions. The global market of blockchain for conventional BFSI is expected to witness 10x increase and reach $22.5 billion by 2026. The fast, transparent, secure, and cost-effective transaction processing provided by blockchain is considered a key factor driving the growing popularity of the technology among the traditional financial services providers.
At first glance, the rise of the BFSI blockchain market may seem counterintuitive, considering the recent drastic decrease in cryptocurrency value and the overall crypto market volatility. But there are two important facts for the finance companies to keep in mind:
- Blockchain ≠ cryptocurrencies.
- Blockchain also gives you access to smart contracts that can be used to automate a wide scope of business operations, not just crypto transactions. Smart contracts in their turn involve crypto as a means of payment for transaction validation in the blockchain.
Thus, the growing blockchain adoption for, e.g., automated digital identity verification, document sharing, or securities tokenization consequently drives higher demand for crypto and helps the cryptocurrency market stay afloat.
Notably, many BFSI giants like JP Morgan Chase, Goldman Sachs, and Banco Santander have already adopted blockchain for a wide scope of general and industry-specific use cases. Their practices and success stories spurred the sector-wide shift from employing blockchain only for the customer experience (e.g., to accept payments in crypto) to embracing the tech’s capabilities for benefiting the internal business processes.
Let’s explore the most prominent blockchain use cases in BFSI and see how the technology can improve the efficiency of financial operations, enhance employee productivity, guarantee data security, and drive revenue growth.
Blockchain for cross-border interbank settlement
Due to eliminated intermediaries like commercial banks, clearing houses, etc. blockchain can drastically increase cross-border settlement speed and decrease its cost. The practice of the large banks that joined to implement blockchain for cross-border fund settlement shows that blockchain helps reduce the transaction processing time from days to seconds and cut the processing fees from 5–30% to 2–3%.
Note that here, rather than a basic payment currency, crypto serves as a fiat-crypto-fiat bridge to enable cross-border transaction processing in the blockchain network.
Blockchain for business process automation
Blockchain provides smart contract-based automation across financial transactions execution and recordkeeping, which helps financial services companies increase employee productivity and achieve significant operational cost savings. The more complex and document-intensive the process is, the more impressive gains blockchain-supported automation offers. For example, when implemented for insurance claim settlement, smart contracts proved to bring up to 5x cost reduction and around 3x increase in the claim processing speed.
In fact, the terms of almost any legally binding financial agreement can be formalized in smart contracts to serve as rules that drive automated enforcement of particular business actions. The emergence of proxy contracts helped effectively address the smart contract updateability problem. With proxy contracts, it’s possible to easily adjust the smart contract logic in accordance with the changing agreement terms.
Blockchain for financial document management
Financial document management is another important field where blockchain has the potential to benefit financial institutions. The technology can provide end-to-end traceability of any user activities related to financial document creation, editing, viewing, copying, and routing to third parties. It helps establish safe and transparent financial document storage and sharing, which contributes to the increased trust between the financial organizations and their clients.
Blockchain for fraud detection
The largest share of fraud risks the BFSI sector faces comes from the employees. In 2021–2022, nearly 52% of the fraud cases reported by the US financial institutions involved the internal staff. Blockchain helps timely detect and prevent malicious user behavior by offering immutable, timestamped records on all business transactions and manipulations with financial data and documents. The logic for automated fraud detection can be encoded in smart contracts to eliminate human involvement and ensure incorruptible fraud checks. If your blockchain is paired with artificial intelligence, fraud detection can be performed in a fully automated manner and with high accuracy.
Blockchain for digital identity verification
Identity theft volume increased by 5x since 2017 and resulted in $56 billion losses in 2021. It pushes financial institutions to look for a powerful method to address identity fraud and avoid financial and reputational risks. Here, blockchain is also a strong helping hand.
With the help of the blockchain technology, unique client information can be represented in the form of a decentralized identifier or NFT, encrypted, and recorded in a tamper-resistant distributed ledger. The blockchain-based storage of tokenized digital identities provides a single source of truth to verify a client’s ID while ensuring full security of sensitive personal data.
Blockchain for KYC/AML compliance
One more use case where blockchain can bring high value for financial services providers is maintaining KYC/AML compliance. Smart-contract-enabled automation of compliance checks eliminates time-consuming and error-prone manual verification of customer identity according to KYC/AML requirements. The blockchain’s tamper-resistant nature ensures trustworthiness of the data provided by an organization’s clients, which helps prevent unauthorized access to the financial services.
Blockchain for corporate decision-making
Considering the complex governance hierarchy of the large financial institutions, decision-making on strategic business transactions doesn’t always come easy. Blockchain can streamline collaborative decisioning and build trust across the organization’s stakeholders. What the blockchain technology offers is a highly secure and incorruptible e-voting model in its core. With the tokenized governance rights and algorithm-based vote verification and counting, financial services providers get credible voting and improve managers’ productivity and engagement.
Blockchain for service accessibility
With the global shift towards higher financial inclusion, traditional BFSI market players have to reach the underserved population and make their services accessible for people in the lowest income bracket.
Here’s where DeFi succeeds and conventional finance lags behind.
DeFi owes its popularity to the high accessibility of blockchain. The technology helps enable easy 24/7 access to major financial services with no restriction in terms of location or credit history. Traditional banks and financial services providers are obviously not ready to fully move to P2P rails. However, we can see a growing number of financial institutions adopting blockchain-based solutions or partnering with DeFi platforms to increase customer coverage and improve the affordability of their services.
Along with committing to the social cause, BFSI companies are also driven by pragmatic reasons: stepping into the fast-evolving DeFi market and reaching a larger customer base opens up new revenue opportunities and helps diversify risks.
To traditional financial services providers, blockchain may look like an overhyped, purely crypto-focused technology that doesn’t fit their established internal processes. The reality is, blockchain can be successfully applied in a range of BFSI-specific use cases beyond the crypto payment and crypto investment frameworks. The technology proved to bring real business value across various domains, from document management to fraud detection. Traditional BFSI businesses are gradually shifting to blockchain, and decentralized financial solutions are likely to become commonplace in the near future.
Are you planning to implement blockchain in financial services or looking for expert advice on the use of this tech? Our blockchain professionals are here to offer their knowledge and find the right solution for you.