Blockchain and How it Impacts Credit Unions

By Sarika Tainwala

Block chain is a digital, distributed and decentralized ledger underlying virtual currencies that are responsible for logging transactions without a bank. It was conceived based on the issue of current banking system having flaws. Under the garb of third parties, banks were pilfering transaction fees payment validation and were taking five days to settle cross-border transactions.

Therefore Block chain was conceptualized to facilitate the following –

  • Payment processing and money transfers

Block chain ensures transfer of funds from one party to another & enables transaction processing in seconds.

  • Monitor supply chains

It enables businesses & consumers to view how products perform in quality-control in the movement from the place of origin to the retailer.

  • Data sharing

Acts as an intermediary in storing and moving data to improve a host of industries.

  • Copyright and royalty protection

Copyright laws can be developed for digital content downloads ensuring the creators get their fair share.

  • Real estate, land and auto title transfers

In case of buying or selling land, a house or a car, instead of transferring or receiving a title, block chains store titles on its network, ensuring a transparent view on legal ownership.

  • Medical recordkeeping

In storing patient records, the patient with access to the digital records decides who gains access to it.

  • Equity trading

The advantage of validating and settling transactions is enjoyed by users of Block chain, as it eliminates the multi day wait time investors face when selling stock(s) and looking for access to funds for reinvestment or withdrawal.

  • Expediting energy futures trading and compliance

Block chain offers the ability to help energy companies settle futures trading considerably faster than they currently do. It’s also worth noting that block chain could help energy companies with regard to logging their resources and maintaining regulatory compliance.

  • How Credit Unions Can Use Block chain

It enables person-to-person payment & international remittance. It also enables large-scale transactions between financial institutions.

Additionally it records changes in asset ownership. Block chain can also provide proof of a user’s identity through the storage of a digital representation of a driver’s license, birth certificate, passport, biometric such as a fingerprint, a photograph or other data.

  • Identity management.

Block chain creates a platform that ensures the safety of an individuals’ identity from theft and minimizes frauds. The technology helps businesses manage issues of authentication and reconciliation.

Users can also create encrypted digital identities that replace multiple usernames and passwords, and offer detailed security features that save customers & institutions time.

How Block chain impacts credit unions

Today right from fintech firms like R3, Chain, Ripple and Coinbase are conducting R&D, in addition to ING, Citi Bank, Visa, NASDAQ, DBS and Commonwealth Bank, are all experimenting with Block chain. These industries can use Block chain to distribute ledgers, minimize the role of intermediaries & reduce transaction costs.

The first step for Banks is to implement the technology internally and take a two-phased approach to block chain implementation as given below.

     In Phase 1 one must implement block chain for internal transactions where there is exercise control and access. And in Phase 2 they must associate with other block chain networks & partner with other financial institutions.

KYC and AML process

Using Block chain banks can store KYC details of customers in different lines of business. This data is stored in block chain and used by different departments. Therefore facilitating the sharing of data between banks & other institutions with a private key. This enables monetization of data and completing the KYC process fast.

 Trade finance

Documentation, transmission, validation, and certification are all possible with Block chain. It enables transactions as per date, terms & conditions in the document.

Identity management

Block chain ensures the protection of an individual’s identity from theft and reduction of fraudulent activities, plus issues of authentication & reconciliation. It creates encrypted digital identities that replace multiple usernames & passwords. This enables people to take onus of their data and have a self-sovereign identity which they control.

Identity management systems developed by block chain have this basic tenant, as their departure thereby making it more difficult for the unauthorized entities to monetize it.

The challenges faced by users are

Initial costs

It’s expensive to implement block chain, owing to the software required to run it. To purchase, acquire and develop it in-house, is a huge expenditure and organizations need to get specialized hardware for it. Additionally qualified personnel to work on it, considering its new is difficult, and set up costs are very high.

Integration with legacy systems

One needs to completely remove their previous system and implement Block chain which takes too much of time, money and labour.

World Economic Forum has reiterated the point that mammoth amounts of energy is needed to run block chains, which hampers an organizations goal of sustainable methods of doing business.

Public perception

Block chain is unknown to lot of people and is known to be similar to bit coins, which in turn is associated with shady money dealings, black market trade & illegal activities. It’s important for people to know the difference between bit coins, crypto currencies & block chain

Privacy & security

Block chains are inherently designed to be publicly accessible, which is a crucial aspect of bit coin and crypto currencies.

This is an issue with governments and corporations that need to protect and restrict access to their data and until that issue is resolved, block chain technology cannot work.

From the above its evident that block chain has create tremendous value, but capital markets leaders need a more detailed impact analysis to assess the business case for block chain. More so for C-suite executives under pressure to constantly evaluate the potential of multiple emerging technologies. With legacy systems to consider, regulation to comply with and stakeholders to convince, how can you be sure that backing block chain will deliver the competitive advantage and shareholder value you need?

 So let’s understand why there is a buzz about block chain and and banking on it….

 Block chain enables a progression from today’s multiple and sequential data reconciliation models to an effective method in which reconciliation is key in the transactional process.

 Banks can repoint operational risk and finance systems to block chain-based, shared data platforms. This would enable decommissioning of large parts of their process and data infrastructure.

 However a lot of interest and investment is required to reach this end-state with multiple iterations, significant potential for cost and efficiency gains.

 Let’s look at an example to give weight rage to the above points. At today’s cost structure, post research with 8 banks, the results demonstrated initial savings of $8 billion on a cost base of $30 billion and this equated to approx. 27%.

 An analysis was also conducted, where a conservative set of criteria was used, including assumptions.  However regulatory hurdles prevented block chains to get adopted which prevented savings.

 Apart from the above, predictions on material cost savings indicated that investment on block chain and the rising cost of capital made it hard to increase profitability with traditional means.

Furthermore, research conducted with two renowned firms forecasted that block chain spending among capital markets players would be around $125m2. And after nine months the spends would increase to $280m3 by capital markets firms. This proves that investment in block chain is rapidly rising and making it difficult unquantifiable.

The components of Block chain are cryptographic hashes, distributed databases & consensus building, the combination of which makes it a lethal version of data sharing and asset transfer, capable of removing intermediaries, central third parties and reconciliation processes.  It also has implications for trade confirmations, cash management, asset optimization and other exceptions based business logic processes that cost $billions a year.

In a similar way, block chain is challenging industry players to fundamentally reimagine their data sharing processes. There is no turning back.

 About the Author:

Sarika is a corporate marketing professional with 6+ years of work experience in Client Servicing, Business Development, and content writing with Imagic Creatives Pvt Ltd, Think IMC, Aegis BPO, and Air Deccan airlines among others. Academically she’s studied – Executive General Management Program (EGMP), IIM, B, Six months of Management Development Program-(YPP) from IIM, K, PGDMM, St. Joseph College of Administration, Bangalore,B.Com- Mount Carmel College, Bangalore. She’s also a voice-over artist and loves to gym and watches movies.  She’s a management professional turned into a writer and loves reading the romance genre and Indian authors. She aspires to release her own novel someday.




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