Blockchain: 3 Reasons It’s Good for Financial Services

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Wall Street is all abuzz about blockchain- especially for banking and financial services.  Some consider it a threat while others see it as an opportunity to digitize the industry.  Still, lots of people are talking about it but many don’t even know what it is- let alone why it could be good for financial services.

So let’s start with the definition.  According to Investopedia.com, blockchain is a “public ledger of all cryptocurrency transactions.  Developed for Bitcoin, its uses are spreading to all sorts of commercial applications.”

An even more detailed definition by Fortune Magazine describes blockchain as “a way to structure data and the foundation of cryptocurrencies like Bitcoin.  This coding technology involving concatenated blocks of transactions – allows competitors to share a digital ledger across a network of computers without need for central authority.”

Essentially, blockchain’s peer to peer technology eliminates the need for third party clearinghouses or transaction authorities.

Reason 1:  Settlement Time

Now that we understand that it is a new technology involving digital ledgers, what’s in it for traditional financial services?  Well, one of the biggest frustrations for investors is considered to be settlement time.  Settlement time is the time it takes to settle a transaction, especially an international transaction.  The time between making the agreement to sell or buy stock and when it actually changes hands can take up to several days.  According to a recent report by Oliver Wyman detailed in an article by TechCrunch.com, this transaction time is costing the financial services industry upwards of $65 billion a year.

Reason 2:  Transaction Security

Cybersecurity is a growing concern for the banking and finance industry, and blockchain could be a way of making transactions safer.  Cybercriminals often target central data hubs, and the smaller ‘blocks’ of data used in blockchain are timestamped making it impractical to manipulate data.  Business Insider reports that according to Dan Boylan of The Washington Times “the key to blockchain’s security is that any changes made to the data base are immediately sent to all users to create a secure, established record.”  Certainly shorter transaction times and having fewer clearinghouses involved will remove some of the risk, but there is a long way to go in this area.

Reason 3:  Cost Reduction

Many global banks believe the technology will help them reduce back office and transaction costs.  In an early interview with TechWorld by IDG, Santander’s Head of Innovation, Julio Flaura said “We believe that [distributed ledgers are] a fundamental innovation which can help run finance ledgers and certify transactions in a much more efficient, faster, and more transparent way. That should lead to great opportunities in terms of cost cutting and also simpler and less invasive regulation and supervision.”

Blockchain is gaining traction as global banks convene testing of the digital technology.

One thing is certain, blockchain is reaching new heights as many major banks, including JP Morgan, Citi, Credit Suisse, Barclays and others have reported that they are testing blockchain technology as part of their digitization efforts.   What this means for a bank’s data center physical infrastructure remains to be seen.   A potential conclusion is that the technology will continue to push data to the network edge requiring more and more compute power to enable the ever-increasing volumes of transactions. IT infrastructure technology will become more critical to address painpoints such as bandwidth, latency, and data regulations.  Schneider Electric supports our financial services clients with a host of edge computing solutions to support financial services operations including a portfolio of physical infrastructure solutions as well as remote monitoring solutions for distributed IT environments.

With benefits like shorter settlement times, better transaction security and lower back office costs, we believe the industry will see blockchain become mainstream with traditional financial institutions soon, and when it does, Schneider Electric service experts will be there to help our clients digitize.

For more information about Schneider Electric’s banking solutions, visit our banking and finance solutions web page.

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