Updated: Jun 18
The System of Trust
Over the years, we have seen the drastic progress of blockchain technology transforming into greater state of pragmatic deployment in various industry. Today, though the world is struck by a global pandemic, that does not stop the advancement of further breakthroughs in the distributed ledger technology (DLT).
“Blockchain adoption is reaching a turning point; Momentum had begun shifting from blockchain exploration toward the building of practical business applications. Financial services and, more specifically the financial technology (fintech) sector were leading in blockchain development, while other industries were more cautious in their search for use cases to provide a return on investment to justify the cost and effort for implementing blockchain solutions.” - Deloitte’s 2019 global blockchain survey.
As it is only practical to see the tangible impact of a new technology on business profitability before pouring funds to invest on a technological revolution, let us put on our focus lenses into why is it important for businesses to understand and consider blockchain adoption as part of the business strategy or rather, it is inevitable that businesses should integrate with blockchain.
Shift from Centralisation to Decentralistion
A new governance of trust
Till today, the operations of trade and businesses including SMEs (Small & Medium Enterprise) are encircled with risks. Hence these parties need an intermediary or a third party to be involved in a business contract as independent party primarily because both business parties are not fully comfortable trusting each other in fulfilling contractual obligations. Here are some examples:
1. (a) Current Trade Process - Import & Export Trade Business
From the perspective of import export trade, financial institutions come between a buyer and a seller inflicting unnecessary fees. Reason is the buyer is unable to trust the seller will deliver the legitimate product and the seller is uncertain if the buyer will meet the payment terms.
So in this situation, both the buyer and the seller will assign their respective banks to deal with the opposite party.
In this trade process, there are as well illegitimate trade documentations that poses risks between banks.
1. (b) With Blockchain Smart Contract - Import & Export Trade Business
With blockchain smart contract, the contractual terms and financial obligations are pre-determined and built into the blockchain used between the buyer & the seller without any intermediaries and the contract terms are transparent to everyone participating in the blockchain network. If part of the smart contract deal is not met, the contract will not be executed thus protecting both parties from fraud.
This method saves cost for both parties without the need to pay fees to an intermediary and still have a secure business deal even with unknown parties.
2. (a) Current Claims System - Insurance and Travel
Current process is very manual, terms of compensations are vague and subject to many unprecedented conditions. Consumers usually do not fully understand all the conditions to realize a claim could be made whenever there is a flight delay and unless they call in to report and manually submit the claim, no compensation or refunds are given automatically.
2. (b) With Blockchain Smart Contract - Insurance & Travel
Insurance contracts are monitored based on real-time data and compensations are processed automatically and instantaneously based on the terms agreed between insurance companies & airlines, which are build into the smart contract. Consumers no longer need to manually report.
3. (a) Current Process - Account opening at Banks
In the current situation, every customer needs to provide the same information and go through the same process when they need to open an account or apply for loans with any other banks.
Every banks have their independent yet similar process to perform verification and approval procedures respectively, though these banks are serving the same client.
There are many redundancies and duplication of work just to verify the same client, because currently the banks do not connect with each other to share even client’s basic information.
This existing situation incurs huge amount of investments on manpower, tools, various fraud and pattern recognition systems across all banks.
3. (b) With Private Blockchain - Account opening at Banks
With banks implementing a private blockchain, banks could agree on specific client information to be shared across the blockchain platform. This will dramatically reduce duplication of work. On the other hand, different banks will be able to align on customer’s credibility and enhance the effectiveness of mitigating various type of risks (credit risks, liquidity risks, operational risks.etc), including fraud incidences.
In short, with the implementation of blockchain, a customer no longer needs to repeat the same process when visiting different banks for the same purpose, given that these banks have implemented and participated in a blockchain network. The diagram below indicates the different experience (highlighted in green) of customer A opening a bank account with the next bank.
With such dynamics in a technology, obviously it could also be applied to an integrated industry. Though blockchain has the ability to transform how industries will operate, currently this technology is still gaining maturity and it has many challenges to resolve before this technology could scale and stabilize.
These Need to Happen First, But Don’t Wait For It
For blockchain to become mainstream, users shouldn’t have to worry about picking the right platform, the right smart contract language, the right system interfaces, and the right consensus algorithms. They also shouldn’t have to concern themselves over how they will inter operate with partners that use different blockchain platforms for their projects. - Gartner report 2019
In summary, the blockchain back end shouldn’t matter to users or consumers. Leave these technical transformation to the developers. But for business owners and corporations, be prepared for the change that could impact your businesses.
Experienced fintech & corporate innovation advisor and a lead researcher in AI, Machine Learning and Blockchain, with a passion to be the bridge between traditional banking and digital transformation. 16+ years track record of transforming business operations, enhancing processes via technologies, re-defining policies and frameworks in the risk & compliance environment and launching new ventures partnering with solution providers.