The Rising Significance Of Blockchain In The Banking Sector

The rising significance of blockchain in the banking sector

By Vishal Anand Kanvaty, Senior Vice President – Innovation & Product, NPCI
Blockchain, the technology underpinning the cryptocurrency could revolutionise the world economy. Blockchain is basically a distributed ledger. It can store facts like, who owns a particular piece of land or say a bond. The technology can be used to keep an immutable record of ownership and enable transaction of the asset amongst distrusting parties.

Significance of the technology
  • Disintermediation: Blockchain provides transaction immutability and a distributed ledger architecture, which are key requirements for eliminating the need for an enforcer of trust in the ecosystem. Tamper-proof distributed data enables an environment in which trust is not an issue and allows counterparties to operate with the knowledge that they all have the same version of the truth at all times and its history cannot be altered.
  • Transparency: Blockchain technology will significantly increase transparency between market participants. Blockchain implementations promote the creation of a public record of activity in the ecosystem to which all market participants have access in real time.
  • Provenance: Blockchain maintains an immutable record of transactions and therefore asset ownership since the time the asset first appears in a transaction on the blockchain. This significantly reduces risk and the need for associated mitigating operations for multiple asset types. This capability will enable the reduction of the occurrence of theft, fraud and misselling of high value assets and intellectual properties. It will also help for assets where its provenance determines value by creating a digital footprint on the blockchain.
True essence of blockchain
An immutable, unhackable distributed ledger of digital assets is a platform for truth and trust. The implications are staggering not just for the financial services industry but also right across virtually every aspect of the society.

Financial Industry has been trying to experiment with blockchain by replicating existing asset transactions on the blockchain. While this allows some scope for efficiency implication of a blockchain solution, what gets missed out is the ecosystem implications of a blockchain solution. In infrastructure terms the blockchain is an open source software that is built to support the transfer of digital assets amongst market participants in real time. Using any preferred blockchain’s APIs one can showcase a dramatic reduction in asset transfer costs and timelines. Most bank implementations are focused on this aspect. But while scaling proof of concept into a real world scenario, financial institutions end up implementing the same application layer that exists currently with all the current checks and balances.

But Distributed Ledger Technologies (DLT) are fundamentally an open network designed for peer to peer censor free interaction. The peer can be an enterprise or an individual. A technology that is built for network enablement, needs the financial institution to think about the entire ecosystem and the value chain. Most financial institutions end up conceptualising on the basis of what is in it for the bank. They need to think about all the stakeholders of the ecosystem.

The driverless car phenomenon gives a good analogy for comparing bank understanding of the blockchain capability and the transformational impact of the technology. If you compare the cost of transporting one person in a driverless car versus the cost of transporting the person in a taxi, you will completely miss out on the implications of a driverless car revolution. A driverless car isn’t just about the efficiency of moving a passenger from point A to point B and what the passenger can do while not driving. It is about an open, on-demand transportation solution that will impact urban planning in the future. And if that sounds like a distant reality, in the immediate future we are going to see business models driven by utilisation and not ownership. While some look at the driverless car as freeing up the driver’s time and stress, innovators look at it as a revolution that impacts car ownership, transportation companies, car manufacturers and city planners.

A DLT solution is really about its impact on the ecosystem and the value chain rather than the impact on the efficiency of transferring the ownership of an asset.

Suggested approach

The recommended approach for financial institutions would be to craft their strategic responses. While financial institutions can tactically sponsor attempts which can be termed as “Get Comfortable” approaches suggested approach is as below:

The core of this recommendation lies in getting the right level of sponsorship and team within the bank to create scenarios on how DLT capability can fundamentally reimagine the customer needs that can be serviced. The possibilities that emerge from this scenario planning exercise can help the financial services industry to develop both shaping as well as mitigating strategies.

Blockchain provides an opportunity to redraw processes and call into question orthodoxies that exist in today’s business model. Blockchain will significantly increase transparency between the market players leveling the playing field. It questions the existing competitive advantage models that leverage existing risk models and information asymmetries. 

Post Minimum Viable Proposition (MVP) unknowns may remain

An MVP that includes the ecosystem participants will manifest the future options for the bank and then enable the stage of answering questions that will help the bank determine a formal business approach. This could take the shape of a formal business plan or alternatively a lean startup approach depending on the nature of unknowns in the go – forward scenario.

Way forward

Financial institution need to focus on collaboration with the ecosystem before they launch any of the use cases. The operational effort to get the ecosystem to accept the new system would be huge and acceptance could be difficult. Hence, financial institutions need to spend effort to convince the ecosystem for a decentralised solution. The real benefits of blockchain would be when financial institutions are able to work with other ecosystem players to redefine the business model. Financial institutions should focus on use cases that are difficult to do in today’s world what we call wicked problems and leave some of the trivial use cases for the get comfortable stage of their internal maturity. Blockchain could be a costly solution for problems that either never existed or could get solved easily using existing solutions. Financial institution are encouraged to adopt a disruption mindset for adoption of blockchain and focus on creating new business models in favour of the customer.

Disclaimer: The views and opinions expressed in this article are those of the author’s and not of NPCI.