What is blockchain?
The clearest explanation of blockchain is one I recently read on the University of Pennsylvania’s website, which describes it as…
“A distributed database of computers that maintains records and manages transactions. Rather than having a central authority (such as a bank), blockchain uses the network to approve “blocks,” or transactions, which are then added to the “chain” of computer code.”
This description of blockchain, without even scraping the surface of specifics, should set alarm bells off for those at the top of financial service firms. But, with inefficiencies in the sector that are almost unbelievable in this day and age, most would say blockchain is a well needed kick up the backside.
Blockchain is the previously face-less tech competitor that financial services firms have been warned about. And it will trump on nearly every level. Its processes will be more cost-effective, transparent, instantaneous, trustworthy, enforceable and overall efficient than similar processes financial services customers have become accustomed to.
However, it’s not all doom and gloom. And it, of course, doesn’t mean the end of the financial services industry. Firms in the sector will instead need to adapt and reconsider their current ways of working.
Read on to find out how your firm can achieve this.
What will the biggest affects on the financial services industry be?
1. Giving power back to the consumer using Smart Contracts
Smart Contracts are expected to be the biggest contributor to the appeal and success of blockchain. This new way of contracting goods and services will be managed by self-operating computer programmes that mimic the ‘real-life’ legal and financial contracts we use today.
Unlike traditional contracts, which rely on 3rd party organisations – such as brokers – to execute and enforce, Smart Contracts will be between the supplier and consumer. These contracts will be executed and enforced using blockchain which means automatic guarantee for parties at either end.
What does this mean?
- More trust: Information will be transparently shared in a digital database in the cloud, accessible to all parties involved in the contract.
- Cutting out the middle men (and middle companies): With blockchain, every centralised process has the ability to become decentralised – taking the power from the middle guy and giving it back to the buyer and consumer.
2. Improving supply chain inefficiencies
As it stands, any business reliant on a supply chain understands that their inefficiencies are many. They are usually complex, slow, distributed and involve many parties across the world.
Each part of the supply chain is usually sceptical of the other which results in third parties acting as gatekeepers.
Using Smart Contracts on the blockchain to transfer legal documents such as Titles To Goods and funds removes the need for documents such as Letters of Credit. As a result, the costs typically incurred by eliciting the middle men, are considerably reduced.
Reducing the number of components in the supply chain is expected to increase trust which will be further supported by the blockchain’s fundamentals of contract transparency.
How can financial services firms adapt?
Start filling the gaps in the market
Blockchain, just like other computer-based processes, will need regulation.
It will likely fall to financial services firms to offer assurance over the algorithms, code and Smart Contracts that underpin blockchain technologies.
Financial firms will also need to diversify their service offerings to accommodate these new technologies. Additional revenue sources, which will improve financial service firms’ ‘top lines’, can be facilitated through blockchain.
The demand for those individuals and companies able to understand, implement and utilise blockchain will spike. There is already a distinct and growing gap between those embracing new tech and those not which is expected to become more pronounced with the increased use of blockchain.
As the gap grows, there will be an increased demand for specialists in areas of blockchain such as Cryptocurrencies and Smart Contracts.
However, a lot of what blockchain aims to solve can benefit financial services firms.
For example, as the ability to track the origin and ownership of goods (such as cars, homes and other assets) improves as a result of blockchain integration, financial firms will be able to improve how they model risk.
Get ahead of competitors
At Propero Partners, we’ve got educated and onboard with the development of blockchain. We understand how financial service firms need to diversify in the future and are using this knowledge to build business strategies which will enable them to attract the new business enquiries for the services of the future.
Want to find out what that looks like? Send an email to firstname.lastname@example.org to set up a conversation with one of our experts.