By Marc West
Blockchain is among the fastest-evolving areas of technology. While it may be tempting to dismiss as an overhyped phenomenon, the fact is that blockchain can provide tangible benefits and be utilized in a number of practical ways that can positively impact financial services.
Blockchain is an excellent example of how engaging in innovation can spur business results, with the potential to fuel growth for financial institutions of all sizes through transparency, auditability, security, and speed.
There are three fundamental characteristics of blockchain that make it a valuable tool for financial services.
- It’s a basic protocol.
Blockchain is a basic protocol—not a complicated new product, database, or core system—allowing for anything of value to be transparently transferred, tracked, and verified.
Practically, a blockchain is a network that lets participants transfer ownership of digital assets. It then records those transactions on a ledger in real, or near-real, time. A blockchain can be public or private—the latter type is only accessible to known participants. In either case, the blockchain acts as a single channel for all transactions, with each involved party able to access the activity, making it a single source of truth for all transactions.
A good analogy is to think of a blockchain as a “digital safe deposit box” to which all parties involved in the movement of an asset have a verified key. A purpose-built distributed ledger tracks:
- What is in the virtual “box”
- Who can access the box
- Where the box is located
- And what instructions—which are in the form of a smart contract—users must follow to interact with the box
This tracking cannot be circumvented, which makes a blockchain a highly secure way to interact.
- The practical applications are clear.
Blockchain can play a role in any service involving the movement of assets: person-to-person payments, person-to-business money transfers, securities exchanges, and even movement of non-monetary assets such as loyalty points.
The distributed ledger design inherent to blockchain enables multiple points of real-time verification and validation, meaning transactions are one hundred percent auditable. Transaction delivery is instant, leading to faster, more accurate reconciliation than with traditional books and records. Blockchain can also enhance the security of business transactions by ensuring all parties are known and all transactions are cryptographically verifiable.
Blockchain digitizes the ability to process numerous high-value payments, positively impacting efficiency. There are also potential cost benefits in areas such as exchanges, as the real-time functionality may lead to shorter, and less costly, settlement cycles on trade day.
- There is growth potential.
Blockchain can also open up new opportunities for financial institution growth.
The characteristics of blockchain lend themselves to a multitude of use cases to serve as a building block that can help financial institutions expand current business opportunities or enter markets where they don’t have a presence.
Because blockchain can create additional value beyond traditional database functionality, financial institutions can expand trusted relationships with lower complexity and costs while improving speed and transparency. Recording transactions in real-time and enabling all the parties involved to control asset movement by interacting directly with the ledger imparts an additional level of trust and control to multi-party transactions. This may enable financial institutions to make partnerships happen faster—in a safer environment.
Looking beyond the hype.
The strategic and targeted use of blockchain functionality can drive real business results because of its potential to transform some of the most foundational aspects of financial services—the trusted transfer of assets and information.
Marc West is chief technology officer at Fiserv, a global leader in financial services technology solutions.