What started as a trickle has now become a flood. While the trend is still at a nascent stage, Indian firms have quickly started adopting blockchain technologies. The adoption started with ICICI Bank, announcing in October last year that it had successfully executed transactions in international trade finance and remittance using blockchain technology in partnership with Emirates NBD, a leading banking group in the Middle East. This was followed by YES Bank, which announced in January this year that it had implemented a multi-nodal Blockchain transaction to fully digitize vendor financing for Bajaj Electricals. Axis Bank became the third bank when it recently announced that the bank will be using Blockchain for cross-border remittances.
More recently, the Reserve Bank of India’s subsidiary, IDRBT, released a whitepaper on ‘Applications of Blockchain technology to the Banking and Financial Sector in India’. IDRBT also attempted a Proof-of-Concept (PoC) on the applicability of Blockchain to a trade finance application with active participation of NPCI, banks and a solutions provider.
As one can see, the momentum around Blockchain is rising quickly – particularly in the banking sector. The reasons are obvious – a report from Santander InnoVentures claims that banks can slash infrastructure costs by $15-20 billion by 2022, by eliminating redundant activities. While the benefits are huge, there are not many use cases, which has made banks evaluate the possibilities of using Blockchain, by undertaking a series of pilots.
Says Nitin Chugh, Head, Digital Banking, HDFC Bank, “We are evaluating different types of use cases on Blockchain such as trade finance and KYC. These are early days for Blockchain, and we have not come across too many mature models in India, where you can go and implement certain use cases right away. We are also interested in the whole network Blockchain where multiple banks come together on the Blockchain technology.”
While there are few established use cases, some banks like the SBI have huge ambitions with respect to Blockchain. India’s largest bank, the State Bank of India (SBI) wants to build a SBI Blockchain platform for payments remittance and trade finance, as the first use cases.
Says Sudin Baraokar, Head- Innovation, State Bank of India, “We want to be the biggest Blockchain player in the long term. In banking, we can use it for payment remittances, trade finance, asset inventory audit, AML (Anti Money Laundering), smart contracts and land record validation.”
‘Remittances’ is a key function that is being looked at as a possible area of application for Blockchain by almost every bank. This is because ‘remittances’ is a volume business, and any cost reduced can have a significant impact. Explains Amit Sethi, CIO, Axis Bank, “Remittances touches both the retail and corporate banking environment. So, the impact is bigger compared to doing it for a closed user group in a corporate network or using it for only trade. So a larger base of customers and transactions can be targeted at a single stroke. Even globally, banks are choosing remittances as the first transaction type to be done using Blockchain.”
Not surprisingly, industry leaders are expecting Blockchain technology to play a vital role in the future. Says Anup Purohit, CIO, YES Bank, “We believe that Blockchain technology will have an important role in each organization in the future which will be almost equivalent to the Internet revolution. We forecast that this technology will bring smart contract digitization or electronic contracts in business which will cater to various needs as per regulatory compliance and reconciliation challenges faced by various systems.”
The business case for Blockchain
If one looks at the number of hacking incidents that have affected firms in the BFSI sector, then it is clear that these firms need to significantly improve their security posture. In sectors like healthcare or even government, stakeholders need to ensure that records are not tampered. Implementation of Blockchain technologies can help organizations address these challenges.
Explains Rohas Nagpal, Chief Blockchain Architect, Primechain Technologies, “The number one advantage or the feature that the people are keen is the ‘provable immutability’ i.e. Blockchain can be used to prove in the court of law that a particular document hasn’t been tampered with. There is no other technology that really comes close. Security is the second draw for Blockchain. Cost effectiveness is the third advantage. The system does not fail because there are multiple nodes that do backups. So resilience is the fourth benefit.”
In the case of documents like land records or insurance policies, it is extremely essential to prove that no record has been tampered with. Rohas Nagpal gives the example of an insurance policy to explain his point. Says he, “Let us take the example of a twenty year old who takes an insurance policy for his life. Fifty years later, the policy has to be admitted in a court of law, in case there is a dispute. How do you prove fifty years from now, whether that document hasn’t been tampered with? So, when it is stored in a database there is no way to prove it, which is why so many hacking incidents take place. In a Blockchain, every time information is added to a block, that block is cryptographically hashed and connected to the next block. So, if someone wants to hack into it, he would have to hack millions of blocks, not just one block and something that has to be done within a short period of time, before the next block gets mined. So, the primary difference between storage on a regular database, in which it is being done today vis-a-vis storing it on a Blockchain is its provable immutability.”
Trade finance is also a big candidate for Blockchain usage. Blockchain can be used for everything from order placing to invoicing to making payments to ensuring that the relevant custom documents are in place.
“Blockchain can be used to remove a huge amount of paperwork, which goes into any kind of trade finance or shipment. The condition here is that the shipping, customs and regulatory should be on a single digital platform. It can also be used for invoice financing or bill discounting. Nobody can use the same document again. The collaterals that are given to banks can be put on a Blockchain,” opines Amit Sethi.
Amit Sethi also cites the example of remittances, where Blockchain usage can make a huge impact. “Today, there are a lot of pain points as far as remittances are done today. They can take upto five days to take a credit. The final rate decided by the bank to be given to the receiver depends on the spot rate on the day the money is to be received. There is uncertainty regarding this. Also there are a lot of arrangements like Rupee Drawing arrangements (RDA), Vostro accounts that the banks have to make between themselves for remittance delivery. This leads to pain points in making international remittances. If you were to look at all these three issues and try to come out with a solution, the current setup of remittances will not give you that solution, You will have to come out with something which can enable these things and what better thing than a technology enabled solution and that is where Blockchain comes in.”
The cost advantage
As Blockchain removes a huge number of intermediaries, the benefits from a cost point of view, will be significant. SBI, for example, estimates an approximate reduction of 7% due to Blockchain. Says Sudin Baraokar, “We see approximately 20% savings in supplanting existing payment networks or gateways with Blockchain technologies. We also see another 15% cost reduction savings in compute, network and storage, due to Blockchain.”
Blockchain also reduces a lot of operational costs for banks. For example, once a particular transaction is processed, which is coming from remittance, one has to sign those transactions in SWIFT messages, then go to the customer and ask for what is the use of this particular transaction, how can one settle it and where does one put the money. It’s a very complex and cumbersome operation today. Amit Sethi of Axis Bank, explains how Blockchain can be of tremendous advantage in such a case. “WIth Blockchain, the whole transaction becomes instantaneous. It’s almost like a STP transaction, which is where it will help in reducing the overall cost of transaction, for the banks and for the customers. It’s difficult to gauge the amount of cost reduction but once it becomes mainstream, it will become a volume game.” Amit Sethi believes that as the remittance numbers increase on Blockchain, banks can even start dismantling the operational costs.
The advantage of speed
As the number of intermediaries get reduced, the advantages are tremendous. Hence, any transaction that involves lot of intermediaries is a good use case for Blockchain. Rohas Nagpal cites the example of an IPO process, where there are many intermediaries involved. “Blockchain could actually remove all the intermediaries and finish the process in say, 15 minutes. In the same way, the voting for the entire country could happen on Blockchain in 15 minutes,” says he.
Rohas Nagpal cites the case of supply chain mapping where the product is manufactured in one country and then it hops to various destinations before reaching the shelves. In this case, every step of the way can be mapped on a Blockchain.
Real time processing of payments– specifically international remittances can be done in almost real time at lower cost. Adds Deepak Sharma, Chief Digital Officer, Kotak Mahindra Bank, “Further, it allows quicker on-boarding of customers from a single source. This makes for easier compliance to Know Your Customer (KYC) and Anti Money Laundering (AML) norms. Blockchain also, through smart contracts, reduces processing time from contracts exchange to completion between buyer, seller, lender and solicitor. Financial information stored on ledger provides immutable, real-time updates and facilities automated review, whereas invoice financing enables lenders, suppliers, and customers to maintain records for faster loan processing. Blockchain also offers the possibility of T+0 settlement in trading and settlements.” This can lead to faster processing of payment transactions, security, automated compliance, faster trade settlements and automated approvals.
Blockchain gives an instantaneous settlement compared to the traditional channels like SWIFT or any other channel that people may use, where it can take upto 5 days or so for settling a transaction. The money reaches in seconds to the receiver. The best part, as Amit Sethi, explains is the fact that the technology ensures better customer experience, as one gets the confirmation of the conversion rate, which one can receive in the country of acceptance or delivery of that particular amount. There is no need to wait for 5 days to figure out the final amount. The final amount is known at that very point in time. Amit Sethi even believes that in the future, it may remove the need for having correspondent banking arrangement between banks.
Says he, “If you join a network like the Ripple network that we have joined, it automatically makes you a part of the network. It does not require a formal arrangement. That may be futuristic as of now. But it will happen once the Blockchain network becomes popular and that would be a paradigm shift in the way the banking relationships happen. It’s a leapfrog change in the way international remittances happen currently. That is the way remittances will happen in the future. They will happen on the Blockchain route because of the huge advantage over the current mechanism.”
The need of a complete ecosystem
While the adoption is currently at a nascent stage, analysts believe that as soon as some initial pilots succeed, the fence sitters will start embracing this technology. Predicts Sudin Baraokar from SBI, “Blockchain will eventually move from PoC to production. Banks will start embedding Blockchain solutions in their entire application ecosystem. It will gain maturity levels and become mainstream in the next couple of years.”
As the Blockchain concept requires a complete ecosystem to work, the evolution will take time, as banks are currently involved in creating proof of concept projects. “We expect that the ecosystem and the regulatory framework shall evolve in due course. Once these challenges are sorted, we anticipate faster adoption of Blockchain,” says Deepak Sharma of Kotak Mahindra Bank. Kotak Mahindra Bank is taking a phased approach for adoption of Blockchain, wherein the bank will initially look at using Blockchain in supply chain finance and in making custody and settlement systems more robust.
As with any technology, adoption of this technology will require more awareness – specifically among the members of the top management. Rohas Nagpal also suggests that enterprises must start first with low hanging fruits, which can lead to quick wins. “One must look at projects or functions that can be implemented with the least expense, in the shortest time and give the maximum results – what can be called as a quick win. Once that is identified, then one can build a PoC on it. If the project is successful, one can go ahead with a commercial launch or a production launch for that one single use case. So, although Blockchain is a big thing and everybody wants to do a lot of things, it has to start with one step. So, I would believe that every organization understands and then has an internal brainstorming to decide on that one best use case. I expect a lot of that to start happening in 2017.” There is also an immediate need for communities or consortiums as they can drive collective use cases, and share challenges together.
While these are certainly early days for Blockchain, the enthusiastic embracement of this technology, by a number of huge corporations, points out to a momentum that is driven by user companies. When seen in the context of a larger vision of Digital India and the existing Government’s inherent push for digitization, the Blockchain momentum in India may continue to pick pace rapidly.