COMING TO TERMS WITH THE DIGITAL BUILDING BLOCKS OF THE FINANCIAL SERVICES FUTURE

By Michael Feldwick, Head of UK and Ireland, Tinubu Square 

In the banking sector blockchain technology is powering patents and platforms at leading international banks, with new announcements being made on a daily basis.  Innovations range from blockchain systems to help asset managers create and manage legally compliant tokenised funds through to distributed ledger solutions for over-the-counter structured products. Such is the influence of blockchain, recent research amongst 1520 executives at financial services firms has found that 47% expect blockchain to improve data management, 46% to improve transparency and 40% to improve risk management.

Anyone working in banking or financial services knows that transactions of any kind come with a degree of risk, and even the slightest tip in the wrong direction can be reputationally dangerous and financially costly. However, despite the apparent benefits of blockchain in managing risk, there are some working in the sector who are sceptical about the new technology kid on the block.

Explaining blockchain

Often described as a digital ledger, blockchain first emerged as the architecture that underpins cryptocurrencies such as bitcoin. It is a distributed database without a centralised server, that adds new data in the form of blocks to a shared electronic ledger. These blocks can be added by different parties in a transaction and include contracts, payments, legal documents, etc, but what sets this ‘database’ apart is that blockchain records cannot be altered or amended easily or without detection.

There are some obvious advantages. The inexorable rise in cyberwarfare with incidents of hacking and ransomware occurring more and more frequently, are a constant threat to financial organisations. Blockchain is able to withstand malicious attacks more effectively than traditional platforms. In addition, the permanent nature of the technology means that records, transactions, policies and evidence are verifiable in the future in exactly the same condition as the day they were written. The paperwork involved in creating insurance certificates, for example, will be a thing of the past because the transaction is permanently written to the blockchain.

These benefits aside, the arrival of blockchainhas caused some disquiet. Insurance companies are questioning whether their policies provide the necessary protection for clients that maintain blockchain assets. Companies offering financial services whooperate overseas are considering how they remain within regulatory guidelines whilst benefiting from blockchain technology. Credit managers wonder if they still have a role to play if the structure of the technology provides all the security needed for credit transactions, and accountants and financial department heads are concerned about disruptions to the traditional accounting methods of invoicing, payment processing and contracts.

The banking, credit, insurance and accountancy industries do have valid questions, but they are already immersed in considerable change processes, which may be colouring their views. The credit insurance sector, for example, is looking at how it can re-shape the services it offers to customers and maximise opportunities afforded by emerging markets. Accountancy is undergoing a shift as companies move their clients and their practices onto the cloud for the ‘Making Tax Digital’ initiative.  And banks not only have to contend with massive digital developments, but also meet the rapidly changing attitudes and expectations of their customers. Given all of this, it is understandable thatthere is resistance to breaking yet more established conventions, which is why blockchain is being treated with caution.

The fact is, however, that the adoption of blockchain is likely to take on its own momentum. It is widely predicted to be the year in which it makes its mark on individuals looking to take back control of their online transactions.Financial services companies will need to put aside their fears as they will be expected not just to follow suit, but to lead the way.

In the recent Berne Union Yearbook, a report written by the International Union of Credit and Investment Insurers, blockchain technology was analysed and discussed repeatedly. Senior industry spokespeople agreed that this technology,alongside other digital developments, represents the shape of the industry to come.

The financial services sector, both at a B2B and B2C level, has to compete on a new stage, and develop strategies to engage clients more meaningfully. Industry trends indicate that greater integration, greater transparency, greater dialogue and greater outreach will be the priorities of the coming years. Bespoke or  specialised services from banks, insurance companies, accountancy practices and the like, must address individual needs in different geographical territories and industries. This means communicating more effectively and delivering real-time information about risk and opportunity.

Technology is an essential element of this. It allows finance companies to make informed decisions based on accurate information, it speeds up processes, it enhances client relationships, and it stores data securely. Even payments, which may continue for some time to be transferred in the traditional way, will eventually move onto blockchain-basedplatforms.

Whilst caution is advisable, sceptical credit managers, accountants and insurance professionals must realise that blockchain digitalisation technology is strategically vital. Of course, the biggest challenge to its rapid and widespread disemmination comes from detractors who resist collaboration with  technology leaders, but ultimately, the opportunities that blockchain affords must be realised so that the industry can benefit and not be left behind in the digital race.

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