Blockchain: The Next Revolution in the Payments Industry

BBVA, Spain’s second largest bank, recently shot into the limelight for conducting 50 inter-country transactions via blockchain technology. Developed by the bank’s technology partner Ripple, the transactions hardly took any time for the bank, as peer-to-peer blockchain exchanges need almost no services from a third-party clearing house. Previously, any inter-country, inter-bank monetary transfers took up to four days to settle.

Global banks and technology firms lead the blockchain innovation

Blockchain has become the new buzzword in the financial services industry worldwide, offering a host of benefits, including cost reduction, fraud mitigation, increased transparency and real-time data updates. Experts predict by 2022, blockchain technology could reduce the financial service industry's infrastructure costs by $15-20 billion a year, eliminating central authorities and bypassing slow, expensive payment networks, among other advantages.

Several banks – J.P. Morgan and Bank of New York Mellon –  and technology firms such as Microsoft and Intel, have already advanced in this direction by forming a consortium called Enterprise Ethereum Alliance. The alliance was formed to create technology to help shave off billions of costs involved in operations such as payment transfers, invoice processing, third party approvals, and transaction reconciliation, to name a few.  

Though in the experimental stage, blockchain is also envisioned to improve real-time reconciliation of Nostro accounts (accounts held by a bank in a foreign bank, in foreign currency) by improving efficiency, transparency and traceability of cross-border payments. In trade finance, Bank of America-Merrill Lynch is devising a cloud-based blockchain solution with the help of Microsoft to eliminate the huge documentation-related costs for global suppliers, traders and banks. IBM is building blockchain technology for seven of Europe's largest banks, including Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit to facilitate international trade for small- and medium-sized enterprises.

Blockchain is expected to generate huge savings for companies in terms of reducing transaction overheads, speeding up payments to merchant banks, and improving data security and adherence to compliance requirements in transaction settlements. Every transaction conducted on the blockchain would be tracked and recorded, thereby reducing the costs of accounting reconciliation by almost 70% and compliance costs by 30-50%.

Blockchain is finding hosts of applications in financial services

Besides payments and transfers, blockchain is also making an impact in areas of loans, mortgages and bonds. The distributed ledger technology allows debt issuance, trading and payment settlement, accentuated with benefits such as increased transaction efficiency, reduction of systemic risk, and boosts in peer-to-peer loans, to name a few.

Blockchain is making financial reporting more transparent, with real-time response to changes in industry standards. Financial regulators are able to track corporate actions with greater scrutiny, with every transaction recorded. In the Insurance and Risk Management industry, blockchain enables actuaries to better estimate risk, thereby creating decentralized markets for insurance.

Blockchain’s rapid adoption across the spectrum is already outpacing archaic regulations. Leading observatory bodies such as the EU Commission have slowly started to realize the importance of this new phenomenon and recently set up a “Blockchain Observatory” to form regulations for financial transactions carried out via blockchain technology.

On the flip side, a blockchain transaction could be a tad slower than a payment transaction carried out via centralized core banking systems, due to its applied multi-layered data security mechanisms like digital signature verification. Blockchain network experts are planning to implement 450 trillion transactions per second, though they expect a resultant surge in energy and technology costs.

Blockchain impacts the procurement landscape of financial services

Sourcing managers can look to blockchain-based payments for effective elimination of long manual settlement processes, and participation in financial transactions without incurring fees from a mediating bank or third party. Blockchain also establish a platform for trust and transparency between partners.

Blockchain networks allow sourcing managers to implement smart contracts, in which contractual obligations are implemented via a computer program, and thus provide trust for new business relationships that previously required considerable audit and control processes. Contracts on blockchain will also provide features such as price negotiation and inventory monitoring, thereby automating several manual functions of the supply chain, reducing costs and maximizing profits.

For sourcing managers in the highly paper-intensive international trade finance sector, the electronic decentralized ledger provided by blockchain provides quick access to a single accurate view of information in real-time. It enables them to digitally track documentation and authenticate ownership of assets, and eliminate manual intervention, courier of paper documents across countries and verification through trade intermediaries.  Blockchain has the potential to disrupt entire industries, with the financial sector as the flag-bearer, embracing the first wave of change.