Blockchain is big news in the finance world right now. A complicated database system that’s an integral part of Bitcoin, Blockchain creates time-stamped, secure blocks of data that can’t be altered. The finance world loves it: Both IBM and Microsoft are building major blockchain partnerships designed to make it easier for financial institutions to adopt the technology.
As a fintech tool, blockchain is only about a year old, but it holds major potential for banks and other institutions to protect customers and reduce overhead. This could simultaneously drive down costs for consumers and raise corporate profits.
The system’s secure data blocks make it much easier to verify money transfers and the parties involved at a given time. But because there’s a limited number of finance people conversant in blockchain, many consulting agencies are working on helping clients get up to speed with the system. The IT consulting and outsourcing firm Synechron, for instance, offers software packages called Accelerators that integrate blockchain into transactions like mortgage lending and global payments. Fast Company spoke with Synechron’s CEO Faisal Husain about what blockchain means for the finance world.
Fast Company: Why is blockchain important for the financial world?
FS: In simple terms, let’s talk about how certain things work in today’s world. For example, if you think about securities trading, stock trading, foreign exchange, money transfers, or buying a home—all of these transactions take many days to complete. Stock trading typically takes three days to complete. Really, it takes so long for these transactions to complete because many different actors are involved in the whole chain. The person who wants to make the trade, the brokerage, the investment bank . . . it goes on and on.
Each one of them has their own record-keeping system, like a database or a ledger. They get the data, then store it in their own format or record-keeping system, they work on it, and they pass it to the next person down the chain.
With blockchain, however, each party can have their own record-keeping system that is linked with everyone else’s. It’s automatically kept in sync, and everything is instant. It’s all automatic. There is no chance for mistakes when things are passed, and less requirement for an incredible amount of back-office operations to make sure data is stored correctly. That’s why it’s called a distributed ledger: Each person has their own record-keeping system, but it is plugged into everyone else’s.
The second big thing about blockchain is how highly, highly secure it is. There is incredible trust and confidence in a blockchain system. For a blockchain system to work, it needs to be distributed around a wide number of computers. Even if you hack into one computer, you have to hack into more than 50% of the systems in the network. That’s virtually impossible.
The third feature is smart contracts. These are contracts that can be placed on the blockchain that execute at certain events. They get you to a point where you and I can transact with each other and any middle party we both trust. With smart contracts, if we both agree to that on a blockchain, that creates more efficiency.
FC: How has large financial institutions’ adoption of blockchain played out so far?
FS: It’s still in its early stages. One can argue that Bitcoin . . . was the first big blockchain project. But for banks and financial institutions, it’s still early. There’s a big project in Australia with the Australian Stock Exchange, which is the first big runout.
FC: What are Synechron’s blockchain accelerators, and how do they help companies adopt blockchain?
FS: Our contribution to blockchain is that we built six applications that we call accelerators. They focus on specific business scenarios like straight finance, money transfer, know your customer, and margin management. We applied blockchain to these business situations and brought the promise of blockchain to them, which means much faster and secure transactions that require less manpower to run them. We actually built the applications and showed them to the marketplace, the industry, and our clients.
While there’s a lot of talk and hype about blockchain, very, very few people are building substantial applications for it right now. Our applications are comprehensive, and clients just need to modify them to their particular enterprise.
FC: Is there a big talent pool of financial specialists with blockchain knowledge?
FS: No. It’s a new market, which means that the technology is new, and there’s a steep learning curve. It’s complex stuff! The talent market is very thin, which is one of the values we provide. We’re a consulting company and a technology company that has invested significantly in blockchain. We built it up to benefit our clients. We’ve retrained and invested at least six months of training in a team of 50-100 technologists and analysts in blockchain at our own cost. That was our investment to learn and master technology.
FC: What does the future hold for blockchain?
FS: Payments! I think the current model of transferring money is quite antiquated. It’s too long, and there are too many people involved across the chain. Also, when you look at areas like trade settlements and securities trading, the model can be reduced to a few hours in both the middle office and back office.
Also, trade finance. Trade Finance involves financing global trade and is a highly fragmented industry. It brings together the bank financing the trade as well as corporate players involved in the trade supply chain, such as the shipping company, credit rating agency, and insurer. Since there is no single view of trade finance across banks, there is a challenge where one company can approach multiple banks with a letter of credit and fraudulently receive funds from multiple banks using the same letter of credit.
This is known as the “double-spend issue.” Blockchain can give these parties a single view of the transaction on a distributed ledger, and use smart contracts combined with digital payments for a full, straight-through process.
Additionally, if mortgages and title deeds can be made electronic and on a blockchain, which is highly secure, the time it takes for the process, which can be 45-60 days to buy a house, could significantly go down. The length of time it takes for the appraisal, legal checks, title checks, and insurance would all be reduced.
There’s also a process called KYC [Know Your Customer, a system used by banks to verify customer identity] that holds promise as well. Right now, each bank stores their own KYC data. With blockchain, they could reduce the amount of investment they make in KYC data and share that data among themselves.
Over the last few years, KYC utilities have emerged to help banks and brokers manage the cost of compliance and other applications. While these banks have helped to standardize best practices, the fragmented KYC utility market leaves banks sharing their data with multiple utilities. Bringing KYC data onto blockchain helps create a centralized view of that data, minimizing or illuminating the need to share it with multiple utilities. Banks can also then maintain the ability to own their KYC data and potentially monetize it in a future Blockchain marketplace.
This interview has been edited for length and clarity.