Special Report: Fintech
As banks rush to find areas where the blockchain can save them time and money while creating opportunities, it’s hard to see exactly how this might shape future banking processes.

Author: Gilly Wright

It’s easy to see why banks are so keen on the blockchain, with its promise to address fundamental banking issues, including costs, customer experience and the growing regulatory burden. No surprise that so many of them are currently testing the technology, its interoperability and whether it scales up easily.

To help make sense of the myriad of pilots and proofs of concept (POC) currently using blockchains, we’ve chosen four case studies that show approaches taken by different entities: a technology consultancy, an investment banking division, a bank as part of a consortium and a technology enabler.

Everyone involved with the blockchain realizes its potential to be really disruptive.

—Nick Weisfeld, GFT UK

Full Value Chain Benefits

GFT, an IT solutions supplier for the finance industry, is looking at how the blockchain can work as a business process that seeks out value along the supply chain. The technology consultancy recently launched an innovation incubator, called Creative GFT, covering wider innovation investment prototyping, which includes Project Jupiter to look at blockchain solutions. Nick Weisfeld, co-head of data practice at GFT UK, says that in conjunction with SME clients in the commodities industry GFT saw an opportunity for implementing blockchain: “We were looking at the industry through the full value chain from asset creation, through to asset financing, asset sales and eventually turning that asset into something else—as applying blockchain throughout that full value chain is where you derive the full benefit of a distributed ledger.”

While there has been a lot of hype around blockchain, Weisfeld believes we may be over the peak of the hype curve—and what follows traditionally after the hype curve (it did with the Internet, Big Data and mobile) is that true investment and real business value use cases start to emerge. “I think we are nearing that period,” he says, “and investments going in now are being targeted in a way to derive better value from that. Everyone involved with the blockchain realizes its potential to be really disruptive, and I think it’s natural, when you consider that, to start looking at various different user cases.” He also believes the truly disruptive characteristics of the blockchain will be derived from full value chain solutions in financial services, so that rather than just looking at, say, bond collateral or cash processing, it’s better to map out the process flow from bond issuance through to bond settlement.

Tiede, Bank of America Merrill Lynch: A blockchain agenda can’t sit in a vacuum; it needs to be tied directly to company strategy.

Client Needs And Strategic Drivers

Bank of America Merrill Lynch is focusing upon how client needs can be met by the blockchain. “The key is to align your innovation agenda with the overall achievement strategy of your business, whether it’s growth, acquiring new customers, de-risking or driving efficiency,” says Jason Tiede, head of innovation for global transaction services (GTS), Bank of America Merrill Lynch insists that any innovation undertaken should be focused upon meeting either a distinct client need or gap in the market. “A blockchain agenda can’t sit in a vacuum; it needs to be tied directly to company strategy.”

Wanting to help its GTS customers become more efficient led Bank of America to establish a distributed ledger trade finance pilot. Tiede believes trade finance could see considerable benefits from a distributed ledger solution.

The letter-of-credit process for both the issuer and buyer, for example, is an ancient instrument developed to help facilitate trade between counterparties, often from different countries, to create a sense of trust through a paper contract. A distributed ledger creates a new era of trust through code and technology in an automated rather than manual way.

 The immutable record that blockchain provides and that is shared across entities in a particular asset class is, according to Tiede, what makes it valuable, and it wasn’t difficult to convince the fintech community that this could be fertile ground to test blockchain technology in a prototype or POC model “to prove out if the model works and makes sense financially.”

Bank of America Merrill Lynch is one of the 42 banks to join the R3 consortium, which, Tiede says, is an excellent sounding board for key blockchain topics that will help drive standardization. “Ultimately, to build the next set of layers that are going to be addressed, we really do need a common script,” he says.

“I think the way banks connect and communicate which each other across borders is what is going to change,” he continues, “and I think that multiple new technologies and companies will impact that evolution. But ultimately, it will be driven by client needs. The overall message in a highly digitized, globalized economy is that how banks communicate with each other for trade, payments and receivables is where the evolution will happen.”

Weisfeld, GFT: The first thing to do is to redesign the business process and get consensus around that business process.

Collective Commercialization

DBS Bank is prioritizing collaboration in its development of blockchain technology and, together with Standard Chartered and the Infocomm Development Authority of Singapore (IDA), has been working on a trade finance POC.  “Collectively, we have narrowed down the scope of the POC to address the issue of duplicate financing of invoices,” reveals Lum Yin Fong, global head of client implementation, global transaction services, DBS Bank. She says IDA played an important role in bringing together industry players to collaborate and explore new ideas to a build solution that would benefit the industry as a whole.

As there is no common platform for banks to screen transactions financed by other banks because of confidentiality concerns, there is a possibility, Lum says, that customers may capitalize on this information-sharing gap to obtain financing from multiple banks using the same invoice. “Distributed ledger technology can be used to address this concern and provide an avenue for screening transactions across banks and yet maintain the confidentiality of the transactions,” Lum says. “The POC also seeks to test the possibility of … third-party validation to ascertain authenticity of the underlying trade that the bank financed, as well as digitizing the trade-supporting documents.”  

The POC was created to test the applicability of the distributed ledger technology in the following areas:

•  Infusion and management of unique digital assets on the distributed ledger, ensuring no duplicate transactions

•  Irrevocable transactions securely and publicly recorded

•  Independent third-party validation of related trade documents

•  Update of financing status of the digital assets

Lum, DBS: Exploratory projects require working with the right partners who are willing to commit time and resources.

 For maximum benefit, according to Lum, such a process needs an open ecosystem with mass adoption by all market players. DBS will continue to work with Standard Chartered and IDA to facilitate the participation of other banks in this initiative, to create that open ecosystem. And they are inviting more banks and other key stakeholders in the trade finance ecosystem, such as shipping companies and customs houses, to join the pilot. Promoting wider adoption—not just in Singapore but in other countries—according to Lum, may help “improve Singapore’s standing as a global trade center.”

“This has been a very enriching experience for us, as we learned a lot throughout the process,” Lum says. “We shared knowledge in distributed ledger, exchanged views on the best practices in trade financing processes and brainstormed ways to improve controls, which will definitely benefit the industry as a whole.

 “This will be the game changer,” she adds.

This {cooperative pilot project} has been a very enriching experience for us.

—Lum Yin Fong, DBS Bank

Interoperability And Interconnectivity

Ripple is a bank-grade infrastructure technology that lowers the cost of transactions by enabling banks to settle instantly and directly with one another with complete visibility and control of each transaction.

Ripple CEO Chris Larsen says Ripple is a key component for an Internet of Value, wherein value can be exchanged as easily as information moves today. “This Internet of Value will operate across multiple distributed ledger technologies and applications. There will be many companies providing many ledgers for many different use cases, and we believe Ripple provides the infrastructure and connectivity for frictionless transactions across different systems.”

In support of this vision, Ripple recently introduced the Interledger Protocol (ILP)—a free, open source and neutral Web protocol for efficient and safe payments across payment networks. “ILP enables interoperability between the world’s ledgers—both centralized and distributed—and delivers the core benefits of multicurrency distributed ledger technology with infinite scalability,” explains Larsen. “The introduction of ILP will give us the ability to interconnect ledgers of any kind, be they bank ledgers, PayPal ledgers, or M-Pesa ledgers. Ultimately, we believe, interconnectivity of the world’s payment systems will be a key part of building the broader Internet of Value.”

Larsen, Ripple: There will be many companies providing many ledgers for many different use cases.

More than 30+ banks have piloted Ripple to date, with another 90+ banks in the pipeline and 10 commercial deals under way. “The focus of these pilots and deployments is purely on cross-border payments,” Larsen says. “This is because Ripple provides direct access to a network of global banks and dramatically impacts the time and cost efficiencies of a transaction.”

Larsen thinks banks will continue to collaborate with distributed ledger companies like Ripple rather than develop solutions in-house because collaboration is the fastest, most efficient way to bring innovations to market. “But regardless of origin,” he concludes, “the key to realizing the Internet of Value will be interoperability. That’s why we are so excited about ILP and its ability to seamlessly connect these varied ledgers and applications.”


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