Canadian Underwriter

Applying blockchain technology could slash US$40 billion in costs for financial services: BIS Research

July 17, 2017   by Canadian Underwriter

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Implementing blockchain technology could produce hefty cost savings in the billions of dollars annually for the financial services market, suggests a new report released Friday by Minnesota-based BIS Research.

Characterizing blockchain as a revolutionary development, its application “could lead to a per-year cost savings” of US$6 billion to US$8 billion in KYC/AML (know your customer/anti-money laundering), US$30 billion to US$40 billion in trade finance, and US$50 billion to US$60 billion in capital markets, BIS Research reports in issuing Blockchain Technology in Financial Services Market – Analysis and Forecast: 2017 to 2026.

“The blockchain technology could save the financial institutions over US$40 billion per year in infrastructure, IT, operational, third-party fee and administrative personnel costs,” Shazlie Khan, an analyst at BIS Research, says in a statement from the global market intelligence and advisory firm that focuses on emerging trends in technology that are likely to disrupt the dynamics of the market.

“By cutting the middlemen and increasing the efficiency, blockchain is anticipated to cut the transaction and infrastructure costs by over 50% for finance companies,” BIS Research contends.

Related: The Bitfury Group and Risk Cooperative partner to pioneer blockchain applications in insurance intermediation market

“Financial institutions, ranging from banks and insurance companies to investment banks and audit firms, are all exploring the potential of blockchain in eliminating the inefficiencies of the financial systems,” notes the executive summary of the report, which compiles different peripherals of the applications and use cases of blockchain in the financial services industry.

Enhanced efficiency is a key driver in the rocketing interest in blockchain technology – a distributed digital database that records and maintains a list of all transactions taking place in real time – in many industries, including the financial sector.

That interest “is being driven mainly by the increasing need to acknowledge the inefficiencies in the existing technologies and processes in the industry and increasing mistrust of the consumers in the financial services market, post-2008 economic recession,” the research shows.

Financial institutions have been front-runners with regard to the technology’s development and have already implemented a host of successful use cases, BIS Research suggests.

Consider, the report points out, that 40-plus use cases of blockchain are being explored, including optimizing KYC process, trade finance solutions, asset servicing, claim management in insurance, and post trade solutions in capital markets.

Related: AIG, IBM and Standard Chartered Bank pilot “first multinational insurance policy powered by blockchain”

Blockchain technology entered into mainstream financial services in June, with IBM building blockchain for seven of Europe’s biggest banks in the area of trade finance, notes the BIS Research statement.

“This agreement marks one of the first real-world use cases of blockchain technology in financial services, and will pave the way for further development and expansion of the blockchain technology market across the globe,” BIS Research analyst Faisal Ahmad contends.

Cost cuts, elimination of intermediaries and increased transparency and security are among the potential benefits that have impelled companies to explore the technology, the company notes.

“Financial industry, today, is heavily reliant on duplicative antiquated and paper-intensive processes, which lead to large delays and impose considerable costs,” states the report. “Moreover, their centralized nature, makes them resistant to change and susceptible to systems failures and malicious attacks,” it contends.

“Blockchain technology could not only eliminate these perils, but could also pave way for an array of new product segments and revenue streams and provide billions of people access to financial services and instruments that have traditionally been denied to them,” the report continues.

Large-scale investments are “being poured into the blockchain technology by venture capitalists, financial institutions and private equity firms,” with hundreds of start-ups having emerged in this space, the company reports.

Use cases in the global financial services industry to date include cross-border payments, supply chain management, trade finance, asset management, capital market post-trade solutions, identity authentication, insurance and lending.

Related: IBM and SecureKey Technologies to deliver blockchain-based network for Canadian consumers

Among other things, the report explores the following:

  • key uses of blockchain technology that have been identified and their associated benefits;
  • which asset classes are blockchain technology likely to disrupt and how;
  • which segment of the financial services industry will benefit the most from a gradual transition to the technology;
  • what factors are expected to impede the adoption of the technology; and
  • what is the most prominent strategy – such as mergers and acquisitions, partnerships and product launch – among financial institutions for leveraging the technology.

“Blockchain presents the potential to revolutionize the pre-existing legacy systems by eliminating third-party intermediaries, creating transparency, streamlining due processes and providing protection from malicious attacks, thereby enabling large internal and external cost savings,” the report concludes.

Still, there are hurdles to clear. “Despite the build-up regarding the transformative potential of blockchain, more than 40% financials remain skeptical about the practical implementation and viability of the technology and have adopted a ‘wait and see’ approach for the near future,” it points out.

“Movement to blockchain-based solutions will require large investments and efforts, including annihilation of current infrastructure, which might make institutions hesitate from changing from legacy systems and processes,” the report expects.

“Moreover, the information placed on ledgers is being stove-piped due to development of multiple blockchain, all with different standards within industries. This is leading to failure to harness network efficiencies and defeating the purpose of distributed ledgers,” report authors caution.