How blockchain technology can disrupt financial services

24 June 2021 4 min. read
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Blockchain technology has the potential to change the world – at least from a financial perspective. Experts at Horváth lay down the technology’s disruptive potential, and some pitfalls. 

Simply put, blockchain is a secure, decentralised and transparent tool that records financial transactions in a large, distributed ledger. Transaction information is publicly visible – a verification tool – while the decentralised nature of recorded data makes it more secure, and fast.

According to experts at Horváth – member of global advisory network Cordence Worldwide– this technology could transform the way money is exchanged worldwide, solving many of the problems that plague the current financial system.

How blockchain technology can disrupt financial services

Two characteristics make up the financial world as it is: each transaction goes through an intermediary such as a bank, investment house or other financial institution; and each transaction goes through several stages of checks and verification to ensure legality. In fact, the researchers identify nine services that go into each transaction – from authentication to verifying value exchange. 

Several flaws present themselves. One is that financial intermediaries hold a vast central reserve of customer data – vulnerable to devastating cyber attacks at any minute. Then there is inefficiency , with vast amounts of time and money going into processing a single transaction. 

Topping this off is the lack of accessibility to this system and its benefits for people who cannot meet the standards set by financial institutions. And lastly, consumers within this system lose a few per cent of their wealth to intermediaries with each transaction. 

Transformational power

Blockchain could eliminate all these problems. Take the problem of data privacy. “With blockchain, it is not required for the merchant to know who the user is. It is just necessary for the user to have the money to buy the product,” explained Moritz Meyer, managing consultant for banking and financial institutions at Horváth.

“With a better online system (blockchain), you would not need to decide how your personal data is being shared with the issuer. The seller would simply get a confirmation of the payment,” he added. Next is the problem of inefficiency, which eliminates itself in the absence of myriad transaction intermediaries.

The experts use the example of Bitcoin to demonstrate how large sums of money can be transferred across borders in an instant using blockchain, as opposed to days taken up by intermediaries. Such is the threat to the conventional transaction market that even central banks around the world are piloting blockchain-powered digital currencies that can rival un-regulated cryptos. 

The third solution relates to inclusivity – given that blockchain can open up investments and securities trading to anyone in the world. “By making it easier for everyone to own securities, it could also broaden inclusion, for instance, by the creation of a new asset class, the inclusion of new customer segments and by facilitating trade,” noted Horváth principal Marcel Schmalisch. 

Hurdles ahead

So blockchain could disrupt finance as we know it. That said, barriers persist to edging out the mainstream – most notably the buy-in from regulators, financial institutions and consumers. While many reasons exist to make the switch, the scale of change will likely bring down big financial businesses – followed by job losses in unprecedented numbers. 

Other challenges include technological inadequacy to sustain a global financial system and unchartered territory from a regulatory perspective – although concerted efforts are underway to solve these issues. It remains to be seen how the technology fares through the future. 

Horváth’s digital operations lead Christian Angerer concluded: “All the tools are in place for each bank to utilise blockchain today for new products, new clients and new cost efficiencies. Similarly to the internet 20 years ago, it is people’s own decision whether to utilise the technology and win the market, or stay passive and get left behind.”