Harnessing "Block chain technology" to build a transparent and cost efficient bank

By: Darshana Pai, Senior Vice President and Head – Delivery, VirtusaPolaris Corporation

The financial services industry has been witnessing the biggest wave of disruption in the last few years, which is now gaining momentum. Fintech players have developed new propositions which are impacting top line revenue for the banks and, in some cases loss of customer base as well. Apart from the Fintech threat, banks are also suffering from the deficit in customer trust, due to various recurring regulatory breaches and are facing big financial penalties.

One clear theme which emerges out is that banks are expected to demonstrate accountability and transparency their operations. There are various regulatory measures that are established in this direction, which banks are expected to comply to or else face the regulatory heat. Banks have now started expecting these risks and are setting aside funds to deal with these issues. chain technology is seen as a “divine intervention” to address the transparency issue that is plaguing the banking industry.

What is Block chain technology?

Block chain technology decentralises the control and enables banks to manage transactions in a more real time and in a transparent fashion. Regulators are able to react and monitor financial institutions in real time and can spot any anomalies early on than reacting to them at a later date. chain technology comes in both ‘UnPermissioned’ and ‘Permissioned ’networks (e.g Distributed ledger or replicated shared ledger). Banks nowadays are exploring their use cases more in permissioned block chain space. We can try and understand Block chain technology with the help of the picture given below:

The picture above illustrates a typical bank structure, bank robberies were quite common in the mid-19th century especially in the US. These incidents were at its peak and authorities were looking for some kind of solution to the problem. One innovative solution was to construct the ‘Glass Bank’, which will enable bank workers to see what was happening outside and also enable passers-by to see what is going inside the bank, and be able to alert the security services in case of an incident.
Block Chain works in a similar fashion. Block chain offers a decentralised register of ownership by recording every transaction in the system, be it creation of a block or any number of transfers being made. Every computer which is tapped into the system stores a copy of the block chain, and before a transaction can be made the system checks that their version of the block chain is in sync with all other versions in the network. With the use of block chain, all the users can have the knowledge about who owns every block, at any given time. The potential for a decentralised register this powerful goes beyond use only in the digital currencies. It has the potential to revolutionise the security of ownership for an enormous range of high value transactions.

The most disruptive part of the Block chain technology is SmartContracts, which facilitates large cost reductions, efficiency improvements and risk reduction and brings transparency at the core. SmartContracts self-execute the legal clauses / transactions when defined conditions are met. There are key fundamental principles which make Block chain a unique technology, like Cryptography, Consensus, Irrevocability, and trusted timestamp. Regulators be the biggest beneficiaries of Block chain adoption, and they will gain proactive insights into the financial services industry enabling them to forecast and prevent issues.

Important areas where Block chain is being piloted:

There are a lot of experiments which are being conducted with the help of Block chain across the industry. Banks are now reimagining quite a few business capabilities across their business lines via Block chain. Some of them are:

· Payments: Cross Border Payments, Money transfers
· Clearing and Settlement: This has been the promising use case which provides clear opportunity for banks to be able to enable almost real time clearing and settlements. Ripple labs is leading the industry through their distributed ledger which is promising to less than 5 secs settlement time, which banks in current situation takes more than 2 days.
· Core Banking: Core Banking Systems control the deposits and withdrawals. ATM, balance inquiry and other processes that are currently on ledger systems which are centrally controlled by the banks.
· KYC (Know your customer) & AML (Anti money laundering)

Customer experience can reimagined with the use of Block chain which is still fragmented. Block chain technology can open up new possibilities where customers can remain at centre of the bank’s offerings. More and more use cases across the banking business will be explored in the coming years, and it’s not far when we will see banks running their end-to-end services and operations on Block chain infrastructure.

Challenges:
Since its inception there has been a lot of debate around the Block chain technology and its application, especially since it has been seen in conjunction with Bitcoins. BitCoins have seen turbulent times and has slowly gained acceptance in the industry. With the Bitcoin journey, Block chain has come out as a clear winner, however some of the challenges / issues that are yet to be addressed are:
1- Cross Geo , Industry wide collaboration
2- Standards baselining
3- Security & Control

Road ahead:
The future seems promising and it is evident that the Block chain technology will become the underlying rail for any new proposition across the industry. It is forecasted that by 2025, Block chain would have gained significant adoption and would be the mainstream technology. In the near future, platforms and devices are going to cross-collaborate to the maximum which will drive the need for security and transparency. Block chain as a technology has all the right ingredients to facilitate this revolution.