Critical Review (1) on White Paper

White Paper: Exploring Blockchain: Opportunities and Implications for Financial Institutions
Author: Fiserv, Inc
Year: November, 2018

Introduction

In recent years, Blockchain has revolutionized business transactions among trading partners especially in investment, banking and financial services. Blockchain is “the record-keeping technology behind bitcoin” (Luke, 2019). Blockchain used in banking and financial services with or without bitcoin, is described as a decentralized ledger of a set of transaction with benefits embedded in these two key features – distributed and immutable (Justin, 2018). Blockchain is unarguably recognized as an ingenious initiatives from Satoshi Nakamoto (Blockgeeks, 2018), created in the year 2008 (The Economist, 2015).

Various technological companies have tried exploring the opportunities and challenges with Blockchain. IBM in one of their white paper stated that by 2018, 91% of banks will invest in Blockchain solutions; and highlighted challenges in banking that IBM Blockchain solutions can help solve to include trade financing, digital identities and cross-border payments (IBM, 2018).

This white paper is a way Fiserv demonstrates the potentials of Blockchain in financial service sector and how financial institutions can, based on challenges, explore the opportunities in Blockchain to solving those challenges. The paper then went further to explain how its project termed “Fiserv Pilot Project” can help financial institutions in solving loan portfolio problem.

Summary

The unique design of Blockchain has been its source of strengths in the sense that it provides a single point of entry for all parties involved to access and post transactional records real-time with the shared database being secured and digital ledger not easily altered and compromised. The benefits inherent in Blockchain for financial institutions are reduced complexity, security, transparency, efficiency and control (Fiserv, 2018).

The paper explores private vs public Blockchain dichotomy. Public Blockchain is a distributed system where each party downloads its own protocol and only joins the network to post transaction. A chain is constituted from a block of  transaction recordings with validation and authentication done by network nodes and updates channeled back to the Blockchain (Intheblack, 2018). Private Blockchain is a centralized system with access right permission and rules defined for each participant to follow. Private Blockchain is often termed as permissioned Blockchain (Demiro, 2018).

The early opportunities of Blockchain in financial service sector is in the area of Customer Identification. An example an industry wide solution tailored for financial institution is R3’s Corda® which is an operating system based on Blockchain. Customer identification can be seen in the form of protecting customer identities across bank-wide services and achieving regulatory requirements on KYC (Know Your Customer).

Opportunities of Blockchain in financial institutions can be noticed in Loan processing and management in which the white paper showcase a project “A Fiserv Pilot Project: Using Blockchain to Solve the Loan Portfolio Problem” highlighting the problems and the solutions the project offered. Others are in the area of data recording and sharing; and cross-border payments.

Like any other technology, there are challenges to adoption of Blockchain in financial institutions which centers more on infrastructure and process changes. Those barriers hindering harnessing of Blockchain potentials are Speed and Scale Requirements, Approval of Regulators, Governance and Industry Standards and Exception Handling and Errors.

In conclusion, financial institutions that want to tap into the potentials of Blockchain should start discussing with their technology service providers; identify and build business cases where Blockchain can be used to improve existing business process, product or services; and adopt some set of change management process to create awareness and prepared employee’s mind to Blockchain.

Critique

The discussion of the white paper is relevant and originality of the white paper is something I concur with. However, the paper is missing in terms of listing references implying that the author do not cite any pertinent literature upon which this paper is based.

The white paper is not very loud in announcing the fact that there is a third type of Blockchain called Consortium Blockchain. And the time in the paper where Consortia is mentioned, it was not explicitly stated that it is a form of Blockchain but it was made known to be a sort of consortia of a common underlying platform. Consortium Blockchain is one that has agreeable procedures and specific network nodes with public, private or hybrid access (Sevencoin, 2018).

The white paper only mentioned that if focuses on private and consortium Blockchain usage but couldn’t tell which is the best amongst all and reason for its focus on private and consortium Blockchain. Since “Consortium Blockchain is part public, part private” (Draglet, 2019), I expect the author to stick to one choice focus – private, public or consortium.

Unlike IBM (2018), this white paper mentioned potentials of Blockchain in solving cross-border payments problem but was silence in detailing what those cross-border payment problems are and which Blockchain solution is proposed for that. Nasdaq (2019) quoted McKinsey as saying “Cross-border payments account for about 40% of global payments transactional revenues with payment flows of more than $135 trillion during 2016”. Deloitte (2016) proposes a Blockchain-based payment rails solution for Business-to-Business and Person-to-Person cross-border payments.

There are other opportunities of Blockchain in financial services sector that are not stated in the white paper. Blockchain opportunities abound in area of smart contracts; share trading; and loyalty and rewards (Jacob, 2019). Blockchain is transforming financial services in commercial insurance, regulatory compliance, claims processing and B2B (Business-to-Business) contract processing (Microsoft, 2018).

In addition to potentials from Blockchain highlighted in the white paper, (Steve, 2018) mentioned Efficient payments, Improved compliance processes, Smarter reconciliation, Reduced counterparty risks, Improve capital optimisation, Improving supply chain inefficiencies and Giving power back to the consumer using smart contracts as the impacts of Blockchain on the financial services sector.

Challenges to Blockchain technology are beyond those mentioned in the white paper. David (2018) sees Looming Competition and Long Way to Maturity as challenges hindering the adoption of Blockchain in financial service sector. According to Yash (2018), Cost of Initiation, Implementation, and Maintenance; Modifications of Data; Literacy Requirements; Duration of Blockchain; Blockchain Regulations; and Dependability on Computers and Power are obstacles to Blockchain technology in financial service sector.

Conclusion

The white paper provides information about Blockchain technology and the opportunities and challenges in relations to financial institutions. A lot of potentials exist in Blockchain for financial institutions and these are highlighted. The author encourages financial institutions to adopt Blockchain technology and streamline it to their existing processes and products. The pilot project demonstrated practically solving the problem of portfolio loan processing and management using Blockchain technology. Finally, recommendation and next line of actions for financial institutions to follow on adopting Blockchain technology for line of business and change management should be thoroughly considered by financial institutions who want to tamp into the full potentials of Blockchain technology.

References

  1. Blockgeeks (2018). What is Blockchain Technology? A Step-by-Step Guide for Beginners. Retrieved 16 February, 2019, https://blockgeeks.com/guides/what-is-blockchain-technology/
  2. David, D. (2018). The Big Challenge Facing BlockChain Adoption in the Finance Sector. Retrieved 16 February, 2019, https://irishtechnews.ie/the-big-challenge-facing-blockchain-adoption-in-the-finance-sector/
  3. Deloitte (2016). Cross-border Payments on Blockchain. Retrieved 16 February, 2019, https://www2.deloitte.com/content/dam/Deloitte/global/Documents/grid/cross-border-payments.pdf
  4. Demiro, M. (2018). Public Vs Private Blockchain in a Nutshell. Retrieved 16 February, 2019, https://medium.com/coinmonks/public-vs-private-blockchain-in-a-nutshell-c9fe284fa39f  
  5. Draglet (2019). Public, Private and Consortium Blockchains: What’s Right For You?. Retrieved 16 February, 2019, https://www.draglet.com/blockchain-services/blockchain-technology/private-or-public-blockchain/  
  6. Fiserv (2018). Exploring Blockchain: Opportunities and Implications for Financial Institutions. Retrieved 16 February, 2019, https://www.fiserv.com/resources/exploring-blockchain-opportunities-implications-financial-institutions-white-paper.pdf
  7. IBM (2018). Build customer trust and enhance the banking experience with IBM Blockchain. Retrieved 16 February, 2019, https://public.dhe.ibm.com/common/ssi/ecm/92/en/92014192usen/ibm-blockchain-for-banking.pdf
  8. Intheblack (2018). What’s the difference between a private and public blockchain?. Retrieved 16 February, 2019, https://www.intheblack.com/articles/2018/09/05/difference-between-private-public-blockchain
  9. Jacob, B. (2019). 5 Blockchain technology use cases in financial services. Retrieved 16 February, 2019, https://www2.deloitte.com/nl/nl/pages/financial-services/articles/blockchain-technology-use-cases-in-financial-services.html
  10. Justin, P. (2018). How Blockchain Is Changing Banking and Financial Services. Retrieved 16 February, 2019, https://www.thebalance.com/how-blockchain-is-changing-banking-and-financial-services-4174354
  11. Luke, F. (2019). Blockchain, Explained. Retrieved 16 February, 2019, https://www.investopedia.com/terms/b/blockchain.asp
  12. Microsoft (2018). 5 ways Blockchain is transforming Financial Services. Retrieved 16 February, 2019, https://azurecomcdn.azureedge.net/cvt-a473e99cc64aaa28a8b16ba7a28266dc028cf208b0764bd4f1ed40fbb0d8bf1c/mediahandler/files/resourcefiles/five-ways-blockchain-is-transforming-financial-services/five-ways-blockchain-is-transforming-financial-services.pdf
  13. Sevencoin (2018). Types of Blockchain — Public, Private, and Consortium Blockchain. Retrieved 16 February, 2019, https://medium.com/7sevencoin/types-of-blockchain-public-private-and-consortium-blockchain-e190604df820
  14. Steve (2018). The Impact of Blockchain on the Financial Services Sector. Retrieved 16 February, 2019, http://www.mondaq.com/x/691750/Financial+Services/The+Impact+Of+Blockchain+On+The+Financial+Services+Sector
  15. The Economist (2015). Who is Satoshi Nakamoto?. Retrieved 16 February, 2019, https://www.economist.com/the-economist-explains/2015/11/02/who-is-satoshi-nakamoto
  16. Yash, C. (2018). Blockchain Technology: Challenges in the Finance Sector. Retrieved 16 February, 2019, https://www.techfunnel.com/fintech/blockchain-technology-challenges-in-the-finance-sector/

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