Blockchain in Financial Service Scenarios
Blockchain is a burgeoning technology across a wide spectrum of industries. One of the most prominent industries to have experienced the immediate impacts of Blockchain is the financial services industry. This can be ascribed not only to the fact that it is considered to have emerged from the specific vantage point of cryptocurrency, but also to the fact that Blockchain is fundamentally described as an innovation in value transfer.
Blockchain is critically important for Financial Services and functions, as it provides the preservation and protection of value that is being transferred – which intersects with the individual.
The primary driver behind the application of Blockchain technology is trust, or more accurately, the lack of it. Industries and areas that can benefit the most from Blockchain are those where trust among participants is low, and the need for record security and integrity is high.
Blockchain Revenue Share by Industry, World Markets 2025
(Data adapted from Tractica’s Blockchain for Enterprise Applications report)
Overall, and throughout the next few years leading to 2025, the leading adopter of Blockchain will remain the Financial Services industry with 55% of all revenues generated by vendors and providers coming from that vertical; however any business model that has numerous parties involved to complete a transaction, those conducting a high frequency and volume of transactions, or those with low trust and a high potential for tampering, error, or fraud will start adopting Blockchain. A study by Tractica shows that by 2025 healthcare will represent 6% of the total revenue, government 6%, manufacturing 13%, while energy, insurance and media 3% each .
Why does Huawei care about Blockchain for Financial Services?
Blockchain aligns and fits directly with our core strategy of fueling digital transformation and maturity for Financial Services through “pipe-device-cloud” as an additional trusted layer accelerator for secure information distribution and presentation, transmission, processing, and immutability, and to support our mission to enable and provide “Digital Intelligent Connectivity for every individual, home, and organization”. Blockchain is “The Trust Fabric”. It is also being viewed as part of Internet 2.0 or the Internet of Value, for the improved “Accounting of the Internet”.
Blockchain as an enabler to solve Financial Services Industry challenges
The financial services industry is under immense pressure and is facing numerous challenges on a global basis. Blockchain intersects directly with our mission to provide digital connectivity, safely and securely for every individual, home and enterprise. This is of utmost importance for the consumer of financial services and the industry based on the following trends and challenges. In addition
- Infrastructure and Operational Flexibility and Agility: Financial transaction management and connectivity is impacted by global industry complexities based on overwhelmed networks and rigid, inflexible core systems architecture and infrastructure. Blockchain enables improvements to help meet these challenges augmented with software-defined networking for performance optimization when and where needed and with the flexible software-defined Open Stack Cloud that Huawei provides for our Blockchain Service (BCS).
- Security and Data Privacy: The financial services industry is still facing massive data and cybersecurity breaches through the underground or the dark Internet. Hence, Blockchain technology as a strong enabling technology aligns and intersects with our strategy for the financial services industry to help make the network and cloud more secure for the bank and its customers.
- Customer Experience: The evolving customer – I want it now, I want it anywhere, and I want it secure. The “typical” customer is changing and is expecting access to financial services on-demand anywhere, anytime and securely. Blockchain technology is an enabling technology that enhances connectivity and provides a safe, secure, seamless experience for the customer to transact through their mobile device, through the network and to the cloud.
- Shifting and Changing Business Models: Erosion and fragmentation of the financial industries customer engagement, operating and business model (and revenue and profit) to start-ups as traditional financial services providers struggle to meet evolving customer demand. The interaction between the banks, the FinTech start-ups, and the customer is a fragmented landscape, and customers are engaging with a multitude of options for financial services. Many individuals do not have access to even basic financial services in emerging markets. This has created a US$200 billion opportunity for the industry to provide access to digitalized financial services through the usage of mobile phones. Through the intersection of Blockchain technology with our “Device-Pipe (Network)-Cloud” strategy, we are able to provide safe, secure access for the individual to financial services from their device through the network and to the cloud. Blockchain Services also help to provide integration from both a technology and business model perspective, providing a path and linkage for the banks, FinTechs/Start-ups, and individual customers to work together via device-network-cloud.
Financial Services Applications and Use Cases
From a business case and Return on Investment (ROI) perspective, Blockchain technology largely centers on cost savings and new revenue from services parameters across all industries. When examining and analyzing the cost savings and potential new revenue from implementing blockchain technology, the financial services industry is positioned to receive more of these benefits than some other industry verticals, as shown below.
So, what is behind these projections? If we look at cost savings alone, from a business case perspective for Blockchain technology, on an average annual basis the global financial services industry spends US$2.6 tillion on operating costs. Financial institutions typically spend 15-20% of their total costs on IT.
Based on an analysis by McKinsey, it is estimated that Distributed (or shared) Ledger Technology could save up to US$50 to 70 billion per annum by deploying Blockchain technology in the following four use cases alone:
- The Cross Border Payments value chain is costly, inefficient, and opaque. Implementing DLT could resolve these issues, through reducing the costs of correspondent banking.
- KYC/AML Processes are costly, manual and inefficient. DLT could minimize duplication through shared KYC data and reduce false positives and the associated operational overhead in AML monitoring.
- Repo Transactions suffer a lack of transparency and no real-time capability. DLT would enable more effective netting and visibility, with clearing on ledger enabling wider netting and reduced counterparty risk.
- OTC Derivatives is fragmented and manual and rarely standardized. DLT could lower counterparty risk and operational costs via simplified, streamlined processes and better collateral management.
Financial Services & Mobile Money
Services involving the exchange of money are now being performed on a Blockchain platform, the best example of which are cryptocurrencies, these services include money transfers, remittances and payments. This is disrupting related services provided today in two major industries, namely Financial Services and Telecommunications, as both provide money transfer, remittances and bill payment services. Blockchain is already being used to provide payment remittance and transfer services, although it is not yet widely accepted as a payment method
The Future of Mobile Money with Blockchain
Although today, transfers, bill payments and other financial services based on Mobile Money solutions are widely accepted and used, especially in emerging markets with large numbers of unbanked and underserved users, intra-MNO transactions remain inefficient and/or costly. Today, transfers are usually made either based on a periodical settlement process that by definition is inefficient, results in delays, and has non-standardized issue resolution processes, or through a trusted 3rd party hub that by the nature of its existence brings additional transaction costs.
Introducing a Blockchain platform (as seen in the illustration above) as a substitute to the intermediary, periodical process or 3rd party hub, in a trust-less peer-to-peer network utilizing consensus mechanisms will ensure data accuracy and consistency, while illuminating the 3rd party costs and delivering an efficient settlement of transactions utilizing the smart contract feature of Blockchain
Huawei’s Charity Management Utilising Blockchain Use Case
The illustration above depicts one of these use cases relating to the management, control, and monitoring of charity donations in China, assuring that funds are being requested by legitimate foundations, and the donors knows that their donations are going towards the cause they want.
KYC (Know Your Customer)
As seen in the illustration below, another example is Huawei’s KYC sharing for Type II bank account applications; China has three distinct types of individual RMB bank accounts with different functions and account opening requirements, the Type II account can be opened over the counter, via self-help teller machines, or via e-channels, must be linked to Type I bank account, and has limited functions including a daily consumption and payment limit of up to 10,000 yuan (US$1,575) with no cash withdrawals possible or associated physical media (debit card).
Huawei’s KYC Sharing for Type II Bank Accounts Use Case
Next Steps – Strategic Direction
In terms of strategic direction and next steps, Huawei will be developing service integration and product roadmaps with our alliance partners and the Blockchain consortiums we are working with – Hyperledger, R3 and Ethereum.
As an example, the table below provides a summary of five R3 Corda thematic roadmaps (1), we will be further exploring to develop BCS enabled applications and services to enable and support use cases:
|Digital Identity||Identity Management covers the identification, creation, maintenance, and revocation of digital identities for all natural and legal persons who will interact with a system. This includes insiders to an organization, such as employees, and outsiders, such as customers and counterparties. The roadmap vision includes a shared identity ledger, and smart contracts for identity management.|
|Digital Cash||Money is an asset of value with similar attributes to other financial assets, from a ledger modeling perspective, but because of its role as money (that is, the counter-asset to much of the financial trading, it finds itself used in far more trading scenarios). This would involve digital currency issued by a central bank. In addition, many financial instruments, including money, can be modeled as agreements between two parties for one party to redeem to the other a specified amount of another asset (usually another issuer’s money) under specified conditions. Bank deposits and loans could be modeled this way, for example. Functions would include Clearing, Settlement, FX, and Loans and Deposits.|
|Digital Assets||Financial Assets are disparate and have complex lifecycles – characteristics that make them suitable for treatment with shared ledgers and smart contracts. This roadmap is initially focused on two specific asset types – bonds and FX, which are good proxies as a starting point for much of the behavior of other asset types. The roadmap is focused on developing smart contracts for Bond/FX Management and a shared ledger for definitive trade and asset agreement management and ownership.|
|Trade Finance||This roadmap focuses on solving the issues, challenges and pain points in the Trade Finance workflow (Negotiation – Trade Initiation, Procurement – ePresentation “Network of Networks”, Invoicing – Line of Credit and Accounts Receivable, Legal & Risk Assessment – Product Processors, Credit Analytics, AML, Financing – Marketplace), and the roadmap results in development of a Trade Finance Dashboard solution.|
|Insurance||This insurance roadmap is based upon the ACORD Business Process Framework (ALPHA Release 2016). Each process in yellow is an ACORD process, which in turn is a flow diagram of multiple ACORD messages, actions, and decisions, often of considerable complexity.
R3 Corda flows can be constructed per:
§ ACORD process
§ Series of processes
§ Complete lifecycle flowchart
Projects consist of multiple connected Corda flows from the roadmap flowcharts, and may include an industry dimension/business line (for example, life, P&C, reinsurance.)
Disclaimer: Any views and/or opinions expressed in this post by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Huawei Technologies.