Blockchain has rapidly evolved from a mysterious buzzword to a transformative technology with exciting new applications for the financial industry. Using Blockchain, financial organizations can achieve effective and faster automated transaction processing, greater security and sharing, simplified document maintenance and reduced operational costs.
However, despite the business and operational benefits of Blockchain distributed ledger technology, many financial organizations continue to use traditional transaction processing. This is resulting in high costs, manual processes, security and file sharing issues, as well as data maintenance, retrieval and archival challenges.
In this blog, we’ll examine the steps required to achieve the full benefits of Blockchain and how organizational transformation can be accelerated.
Challenges of traditional transaction processing
Traditional transaction processes have successfully served the banking industry for many years. But with the acceleration of digital disruption, the challenges are now overwhelming and becoming bigger than the benefits.
The operational procedures have been revamped with factors such as maintenance cost and multiple verifications through manual interventions. These factors have made the procedures cumbersome and open to errors and data security issues.
Financial institutions pay intermediary fees to third-parties which in turn increases the transaction execution cost. Transactional fees are solely dependent on the kind of relationship and product offerings made to customers by financial institutions. These institutions have different fee structures based on usages and availability of services. Some charge more and some charge less.
Know Your Customer (KYC) maintenance:
Physical record documents and collaterals are to be kept safe during the life of the transaction and following the regulatory need. This can increase the usage of space, infrastructure and maintenance cost. In addition, regulatory and country legislations have directives to verify the legitimacy of customer documents. Some countries have a single source of verified data while some have multiple data authentication procedures. This is dependent on the country population Index.
Data archival and retrieval:
In its current state, financial transaction processing is centralized with a single source of data maintenance—and archival rules are dependent on each country’s regulatory requirements which result in complex and inefficient management practices. Some countries mandate that data must be maintained in a live environment for up to five years, after which the data must reside in the archival environment for the next 10 years before it is purged. Other countries, however, require data to be maintained in a live environment for up to eight years, then archived for another five years before it is purged.
Cross-Border transaction processing:
In the current situation, financial institutions have a single channel of network (SWIFT) that is dependent on the communication of financial transactions. Banks are required to be registered with SWIFT, and need to maintain multiple accounts relationships with all other banks to facilitate cross-border transaction processing. This has led banks to maintain multiple Nostro accounts, where banks hold funds in a foreign currency in other banks, which can significantly reduce a bank’s liquidity. In today’s uncertain cyber security environment, SWIFT is the only channel that ensures secure financial information sharing for traditional transaction processing.
Blockchain: Benefits for banks
Some forward-thinking banks and financial organizations have moved away from these challenges and started taking advantage of Blockchain’s speed, efficiency, data security, sharing, maintenance, and cost benefits to move beyond.
The scalability, transparency, effectiveness and flexibility of Blockchain has enabled these firms to utilize the end-to-end transaction processing, execution, settlement, and post settlement processing to occur in near real time. These organizations are recognizing and appreciating the benefits of Blockchain including elimination of intermediary fee payments, KYC maintenance, document management, dispute management and data storing, and the archiving and retrieving of data.
With Blockchain, traditional transaction processing security and sharing challenges are virtually eliminated. That’s because the distributed ledger vastly improves data security with digital encryption, and provides a secure network to share data with all participants. Blockchain not only guarantees transaction processing, it also enables efficient digital KYC maintenance to cost-effectively ensure support and thorough version updation.
To solve data maintenance, retrieval, and archival issues, companies are using Blockchain for decentralized and distributed data maintenance as it enables homogeneous archival rules across all networks and countries. With the flexibility to maintain a single digital Nostro like account for banks across all currencies, financial organizations are now benefited from maintaining greater fund liquidity to execute cross-border transaction processing.
Organizations are also realizing that Blockchain fosters a transparent, error-free, paperless ecosystem, which in turn creates a new network of transaction processing. Distributed ledger has provided a choice between SWIFT and Blockchain — and enables 24×7 system availability. While making the shift to Blockchain requires initial infrastructure investments, banks that make the change reap greater transaction efficiency, security, transparency, disintermediation and lower operating costs. Here are some steps that can be taken to initiate transformation.
5 Steps to achieve Blockchain transformation
If one is looking to realize the benefits of Blockchain transformation, it’s important to understand the steps that lead to successful outcomes. For example, what is the best approach to implement Blockchain? Do you need to hire a third-party IT Company to deploy the solution? How do you select a technology partner? Here’s an effective 5-step plan:
- Learn about organization’s vision for Blockchain
Start at the beginning. Identify key gaps and themes, review insights and findings through joint workshops, and determine the market opportunity. Next, prioritize key initiatives and get leadership buy-in. Then, agree on Blockchain services and solutions to be implemented as part of a pilot.
- Build a prototype to discover the pros and cons of Blockchain
Partner with an experienced Blockchain provider to build a prototype, identify pros and cons, share findings with key stakeholders, and plan go-to-market strategy.
- Deploy pilot to leverage insights gained from prototype
Work with an experienced IT partner to construct architecture and define processes for a pilot service/solution. Set up network with real assets and share with selected participants at limited scale. Use this time to refine solution.
- Launch production network
Roll out Blockchain solution and scale new product marketing. Work with Blockchain partner to leverage agile, testing, and managed services capabilities, measure results through continued diagnostics, and establish fast feedback loops for ongoing improvement.
- Expand network to additional business areas and monetize
Extend your Blockchain network to new products, scale your solution to include greater participation, add geographies, monetize by sharing data with external parties, and transform the market.
With a basic plan for guidance and the right IT partner, you can begin your Blockchain transformation. Here are some ideas on how to find an IT partner who can help you achieve a successful deployment.
Engaging key stakeholders and their roles
Like any major technology initiative, early engagement of stakeholders is necessary to ensure initial and long-term success. Below are three key stakeholders in the Blockchain deployment process, and the roles and responsibilities they play in Blockchain transformation.
|Chief Marketing Officer||Chief Technical Officer||Business Manager|
|• Creates the go-to-market strategy to achieve Blockchain transformation
• Determines market penetration model
• Supports new product offering
|• Zeroes in on best vendor to achieve Blockchain transformation goals
• Determines best IT architecture
• Ensures infrastructure meets future needs
• Commissions and decommissions system
• Revamps current systems
• Finalizes Blockchain deployment strategy
|• Identifies the market for pilot project implementation and business use case that is best suited for the organization
• Conducts comparative study analysis of current (as-is) process to future process and sets up new revenue targets based on findings
It is important to get all the key stakeholders to the table early in the process to enable effective discussions and buy-ins.
Foreseeing risks and mitigation
Deploying Blockchain offers an array of business benefits, but it also comes with its risks, some of them unseen. Regulators have not imposed many restrictions on Blockchain as it is still in its infancy. However they are bound to regulate this new technology at some point. It’s still unclear whether regulators will update, support or tamper with Blockchain innovation.
Regulators of different countries are currently experimenting with Blockchain as they test and verify the technology’s benefits, disadvantages, and complications. In my view, regulators will most likely impose new rules and regulations to govern transaction processing through peer-to-peer connectivity networks. We are yet to know the position that regulators will take.
Given that Blockchain technology is at the initial stages of acceptance, some firms are trying to understand it, while a few have started investing in research to discover its value, and others are moving forward with it aggressively. However, it may be too early to impose any standards on Blockchain as the technology is yet to gain acceptance and attain maturity.
Blockchain – You can either love it or hate it, but you can’t ignore it
Financial organizations around the world are waking up to Blockchain. We are seeing the expansion of businesses with innovative new banking offerings. We’re realizing the operational values of reduction in manual action and intervention. Blockchain promises to deliver long-term profit lifecycle. Increased profitability and efficiency have been the drivers of success for most emerging technologies.
I’d like to hear about your experiences (or concerns) with Blockchain technology. Drop me a comment.