Sirish Kumar, CEO & Co-founder of Telr, asserts that blockchain technology is a driver of financial innovation.
If blockchain didn’t already exist, we’d probably need to invent it. It’s difficult to think of any other application that is so completely of the moment: its security, accessibility and ability to treat real-world items as digital ones could make blockchain the glue that binds together our future digital ecosystem. The opportunities in a digital ecosystem lie in being able to join the dots, to provide the linkage between one set of data and another. This is more evolution than revolution, but that’s not necessarily a bad thing—and blockchain provides a platform to supercharge its impact. That’s not to say that blockchain comes without its own challenges: in particular, its computing power requirements and its cost per transaction are current barriers to it being able to operate at scale.
Nonetheless, blockchain has vast scope, making it highly likely that market forces will provide the stimulus to overcome today’s power and cost challenges. With that in mind, here’s a few specific areas where blockchain stands to make a genuinely significant impact on the way that financial services are provided and accessed.
Governments—and the UN—are now exploring how to use blockchain to provide digital IDs to the segment of the population that’s financially excluded. This segment is massive (a recent study showed that it represents 19 per cent of the population of India alone, and a billion people globally). Historically, they have often lacked the essential identity documents required to access financial services, but this is being addressed at a governmental level, with these individuals being provided with a digital ID on blockchain.
This under-served segment of society gains a presence in official records and through this, access to public services—and thereby an entry point into financial services. And that’s just the beginning. The presence of a digital ID and historical data facilitates a quicker credit process, and faster loan disbursement. Overlay individual data and transactional behaviour with machine-learning, and there is the capacity to create an early-warning system for fraud detection. These mechanisms—rapid evaluation and disbursement, and predictive antifraud—stand to improve the availability of credit, as financial institutions are able to lend with more confidence, with a shortened application cycle. This offers a boost to domestic economies, but also creates a whole new marketplace for the innovative provision of credit.
Disintermediation in one form or another has been a threat to traditional financial services institutions for the best part of this century. Well, blockchain is nuclear-strength disintermediation. Blockchain takes data—whether relating to a person, asset or transaction— out of the control of isolated owners and makes it commonly available to all actors. Financial agreements can be validated at speed. Payment values can be computed in real-time. And all within a highly secure environment. Traditional financial services firms have just ceded their ownership of data, security and payment channel. Take insurance as an example.
span style="font-size: small;">Blockchain-led smart contracts remove the need for laborious manual processes, in both the establishment of an insurance contract, and the investigation and pay-out of claims. An insurance company in India is now using blockchain to settle claims for overseas flight delays—the distributed ledger provides the data and transparency; the insurance company benefits from a reduction in administrative overheads and fake claims, and the customer benefits from ease of use and rapid pay out.
Blockchain’s greatest disruptive potential is in the payments space. As we’ve seen, blockchain is already enabling the world’s unbanked to access financial services. This creates a new segment of individuals that previously would’ve been entirely cash-focused, but that now are able to access digital payments. Inevitably, old habits of reaching for a banknote will take time to supplant, but the speed and security of blockchain could well bring a significant positive push to the behavioural change.
Also meaningful to this segment is the impact that blockchain will have on international money transfers. As recipients of remittances from family overseas, they will be able to receive funds directly rather than rely on exchange houses and receive their payments rapidly. Whereas overseas payments currently take days, with blockchain this transfer time turns to seconds—and of course this speed of transfer will apply equally to businesses, whose cashflow will benefit from a vastly improved collection period from overseas customers.
This speed, and blockchain’s security, will make it the channel of choice where immediacy matters. And blockchain works as well for micropayments as it does for sizeable overseas transactions, and this becomes particularly interesting when we start joining the dots between individual behaviour and public/private services in smart cities. Imagine, for instance, dynamic, real-time pricing for public transport to decrease congestion, with the charge automatically levied as the service is used. This whole process, from calculating the price, to monitoring individual use, to applying usage fees, hinges on blockchain.
Customers will expect more
So why is all this a particular driver of innovation? Each of the aspects I’ve focused on creates opportunities for innovation in that particular field. But more than that, blockchain as a whole drives an innovative environment. It allows firms to join the dots between live data sets that would previously have been out of reach—and provides a pressure to innovate from the raised expectations of consumers that increasingly benefit from the intelligence that blockchain brings to their digital activities.
A prime example of this is in the use of blockchain in smart cities: blockchain is likely to be an essential component of many smart city initiatives. This not only habituates consumers to the smart application of blockchain technology, but also stimulates participants in the smart city ecosystem—in which financial services institutions will be vital actors— to think themselves about how else blockchain could be applied to their own services and processes.
Ultimately, it’s win-win for financial services consumers and businesses alike, at least for those businesses that have the agility and foresight to be able to take advantage of the opportunities that blockchain offers.