Thought Leadership
August 13, 2018
Bringing Blockchain to Financial Services: From Aspiration to Implementation
Agnelo Marques

Industry watchers have underlined how blockchain technology has entered the strategic thinking of most management boards with its promise of transforming businesses and commercial activity, especially with the growing hype around bitcoin. At the same time, CIOs are still evaluating the kind of spends they could purposefully make on blockchain while balancing business expectations. While it has a lot of potential, blockchain technology is still evolving. Especially in financial services, enterprises have started investing in building proofs of concept (POCs) for several use cases to understand how blockchain technology can benefit their business. 

To a large extent, however, the implementation of blockchain technology currently remains in the pilot stage as businesses struggle to determine the ROI of large-scale projects and weigh the potential risks and benefits.

 

Identifying business benefits and roadblocks  

Besides the fact that there are decentralized applications that could be built using it, the most significant advantage that blockchain technology can provide financial services organizations is improved efficiency and productivity. Today, it takes 25 to 30 days for disbursement to take place after multiple processes and several sets of documents have been exchanged between different entities. 

By using a blockchain solution, one can create a common network of all the entities; an individual could upload his or her documents in one place, and all the entities could access it throughout the various processes. Such a solution could eliminate a lot of parallel effort, which would help save time and money.

The other key benefit is immutability. Since blockchain is a distributed ledger platform, it offers complete transparency and irrevocability of transactions, and the accurate availability of data at all times, which is a boon for financial organizations. Its immutability also addresses compliance-related data challenges because the data that is consistently generated and used is safeguarded.

However, to capitalize on these opportunities, enterprises first need to find answers to important questions around implementation. 

The biggest roadblock is that blockchain technology is still at a nascent stage. As its standards and mechanisms evolve, changes take place almost every month, making it difficult to design architecture to localize the changes and plan. The present technology still needs to improve to adapt to the requirements of the financial services industry. 

The second barrier is the network effect that would influence any blockchain solution that is developed, since a valuable solution ought to facilitate collaboration with all the partners in a value chain. Coming back to the mortgage example, all the entities should use a common system. But an enterprise POC typically tends to focus on internal use cases; inviting external partners to be a part of the platform would mean additional overheads in partner network management. It is difficult to estimate the costs involved in infrastructure or operational efficiency. 

The third challenge that financial organizations need to prepare for is the matter of regulatory compliance. Regulators in several jurisdictions have not been very supportive of blockchain technology — mostly because of its open access mechanism. Since blockchain technology is still immature, it is yet to address all the potential legal and regulatory guidelines for financial organizations.

 

Possible breakthroughs: Building a business case

While proofs of concept (POCs) could leverage the potential of blockchain technology, it is crucial to be able to advance further by establishing a sound business case. This would provide answers to the three big concerns of the costs, benefits, and risks involved. So what are the steps needed to move beyond a POC?

Explore: Since most people are unfamiliar with how blockchain works and how it can be used, the first step would be to delve into the technology and discuss its benefits with business and technology teams. Through these discussions, the team can understand the business pain points and come up with use cases to solve them.

Analyze: Here, the team needs to devise certain criteria to evaluate and filter the list of use cases. It is important to analyze what benefit the use case draws from blockchain or the pain point that it can eliminate, by asking pertinent questions of the current solution. At this stage, you also need to decide whether or not your organization should join an industry consortium or if it should invite partners.

Define: When the use cases are selected, organizations can focus on defining the technology to be used and identifying the systems that need to be integrated with it. Blockchains are of multiple types; the hardware and software infrastructure needs for your enterprise and its use case(s) need to be defined. Enterprises would need to decide between a private and public chain, and further, a permissioned or permission less private chain. Simultaneously, the costs involved need to be calculated to progress toward integration. 

Build: This is when a working POC starts to take shape. It involves putting together a small team, training its members, and undertaking development and testing activities within an approximate time frame. It is important to follow design and development best practices. As the technology is nascent, following best practices would safeguard against potential changes.

Validate: Having developed and tested the technology, taking it forward requires validation from key stakeholders in the business. For this, an application in near-production mode can be run as a pilot. If your application requires a partner, then this is the stage to bring them onboard. The application can be opened to a small group of users/partners who will mimic a production run in an isolated environment to test the transactions in a real-world scenario and gauge the benefits derived.

Publish: All the learning and feedback from the previous stages go into finalizing the business case. The business case will include details of the cost elements, the associated short-term and long-term benefits of the use case, and the potential risks and how they can be mitigated. The business case can be published to the executive team for consideration, for it has all the necessary input to make an informed decision on whether to go ahead with the POC.

A sound business case can be progressively built by steering through this step-by-step approach over approximately 10 to 12 weeks. This would equip an enterprise to advance with the imminent changes.

 

Disruption is here

Blockchain has the potential to disrupt processes and businesses in the near to long-term, and this applies to financial organizations since it can alter their core delivery models. The key is to look at ways to capitalize on this disruptive technology. Financial institutions ought to focus on the gains in efficiency and productivity through blockchain. For financial institutions to take advantage of blockchain, they need to start thinking of radically new business models. In the quest to start using blockchain technology, having a sound business case holds vital answers for the enterprise and is an essential step to move forward into uncharted territory.

This point of view article originally published on Businessworld.in has been shared by Agnelo Marques, Vice President and Head of Blockchain Centre of Excellence, Mphasis. Businessworld publishes the latest business news and analysis of Indian economy by industry experts.

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