Distributed ledger technology (DLT), commonly known as blockchain, is a technology that could transform the very infrastructure of financial services. According to a recent Deloitte report based on a study conducted with the World Economic Forum, DLT challenges many of the assumptions underlying today’s business models.
For the financial services industry, DLT offers a chance for it to reimagine itself and rebuild financial processes into something simpler, more efficient, and often, altogether new. It also brings into question processes such as internal/external reconciliation, liquidity management and regulatory compliance. But despite all its promise, DLT is no panacea: it is but one of many tools that will collectively shape the foundation of tomorrow’s financial services infrastructure.
“Though technological innovation has been fundamental to industry transformation, there are other steps that will play a role in this disruption as well,” says Bob Contri, Deloitte’s Global Financial Services Industry leader.
“Before full adoption is possible, there are factors that need to be addressed, including an uncertain regulatory environment, lack of standardisation efforts, and the need for a formal legal framework.”
The report notes that blockchain is not the only solution. Instead, it should be viewed as one of many technologies that will form the foundation of next generation financial services infrastructure. Applications of blockchain will differ by use case, each leveraging the technology in different ways for a diverse range of benefits.
Platforms such as Digital Identity and Digital Fiat will amplify benefits and broaden the application of distributed ledger technology to new industries. The most impactful blockchain applications will require deep collaboration between incumbents, innovators and regulators, adding complexity and delaying the implementation horizon.
The report also notes that new financial services infrastructure built on distributed ledger technology will re-draw processes and call into question the practices that are foundational to today’s business models.
“DLT is a technology that allows parties to transfer assets to one another in a way they can trust, through a computer network, without relying on intermediaries,” comments Ho Kok Yong, Deloitte Southeast.
“The implications of this for financial services are significant. International money transfers and global payments will offer lower fees, real-time settlement and newer models of regulatory oversight.
“Blockchain-automated claims processing will reduce fraud and improve assessment. Smart contracts that automate regulator reporting can minimize point-in-time stress tests, reduce market volatility and improve investor confidence in contingent convertible bonds.”
Today, customer information is duplicated, disconnected and often insecure, while verification processes can be highly manual, inefficient and expensive. Much of this pain comes from a common source: it stems from a system designed to support face-to-face transactions. Until this is solved, a purely digital FinTech offering will remain in the future.