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As with any new, exciting technology blockchain investment is on the rise. According to Greenwich Associates, global financial institutions and technology providers will spend more than $1 billion in 2016 on capital markets blockchain applications. Blockchain has reached what Gartner’s “hype cycle” calls the “peak of inflated expectations” with searches reaching an all-time high in June 2016 and excitement for the technology at a fever pitch.
With the growing investment and enthusiasm has come a frantic need to be one of the herd, leading firms to act quickly or risk being left on the sidelines. This fear of missing out on blockchain (Blockchain FOMO) is understandable – the stakes are high and the technology is moving quickly, but frankly, many financial institutions don’t know where and how to start.
Identifying the business challenge
While the blockchain possibilities are virtually endless, a focused business analysis will help financial institutions determine where blockchain can add true value. There is a need to prioritize relevant use cases from the ever-growing list of popular use cases. Mortgage servicing, trade finance, margin calls, know your customer (KYC), payments and insurance are found to be having the most relevance because these businesses have decentralized operations and involve payments and paper contracts – and therefore benefit most from digital currencies, digital ledgers and smart contracts.
For example, where existing KYC utilities have struggled to achieve critical mass, reduce operational cost and standardize industry policy, a KYC blockchain would easily centralize information, timestamp transactions and generate smart payments. This could introduce a new encrypted data revenue source for banks, enhance KYC compliance and decrease fraud with stronger anomalous transaction detection. The same benefits can be realized across other decentralized markets like mortgage servicing where fragmentation makes ‘price discovery’ difficult and transaction times are typically 40 days.
Once the right problem is identified, perhaps the bigger challenge is how to implement a solution. Financial institutions must learn from industry frameworks, toolkits and innovation working groups so their first blockchain step is a proven step.
Private consortiums may seem like a good idea, and the spirt of collaboration is right, however, very large initiatives, like R3 and others, get bogged down in theory, hype, widely varying business needs and inaction. While good for early-education and later-stage scalability, for banks looking to move theory into practice, these working groups can be a nonstarter. Actionable blockchain plans need to be customized to unique business needs. Instead of looking outward immediately, firms should look inward - identifying operational gaps and assessing blockchain solutions.
Re-imagine the world
When implementing a blockchain solution, according to Tabb Group, businesses must re-engineer processes. That means re-imagining the world. Fragmented environments will need to be re-thought as decentralized, paper contracts as smart and so on. This is where pre-existing frameworks, toolkits, software-developer kits (SDKs) and consultants can be particularly helpful.
Through process engineering, companies can re-think reality to reap considerable savings. How considerable? A recent Goldman Sachs reportfound that streamlined clearing and settlement of cash securities alone would save $2 billion in the US and $6 billion globally – annually. The same report projects a $700 million global savings in more general IT systems improvements. Looking back to the anti-money laundering (AML) and KYC example from earlier, savings are estimated to be $3 – 5 billion. With the stakes so high, financial institutions need to generate a realistic plan of attack and to start breaking operational and technology implementation into more manageable phases.
Don’t miss out
Blockchain FOMO recognizes that the world will change around those firms that operate in blockchain-enabling markets, and the real risk of missing out is being left behind. First movers have a chance to enhance security, minimize fraud, generate new revenue streams, improve customer experiences and completely reshape the markets of the future.
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