Why Blockchain will change Financial Services (Eventually)

As someone who has spent an entire career in Financial Services I strongly believe that Blockchain, or Distributed Ledger Technology (DLT) will have a profound impact on the way that the industry works in the future. Of course, I have been saying that for more than two years and some of my colleagues are starting to roll their eyes and say “but when?”

For me, I still believe that there are some unique challenges for the financial services industry that makes it the number one candidate for blockchain transformation.

The financial services industry has a uniquely complex market infrastructure, for all but the simplest of transactions. Multiple firms interact, whilst all keeping their own view of a transaction. This leads to increased cost, delays, disputes and reconciliation effort. Blockchain/DLT provides a particularly elegant solution for this.

To illustrate, let’s consider the number of parties that touch upon a typical pension fund. Each and every one of these cost money, which is paid for by the pension investor (i.e. you and me).

  • Pension Platform provider – collects your money, provides a tax wrapper and keeps a record of the funds that you invest in
  • Transfer agent (potentially multiple) – manages the buying or selling of funds to allocate to your pension and keeps a record of the funds you invest in
  • Fund Manager – sells you investment funds and keeps a record of the funds you invest in

This is just to allocate money to your fund, which is actually the easy part compared with what happens when the fund you invested in goes out to buy an underlying share or bond. Here the main parties include:

  • Fund Manager – Buys securities for the fund in line with investment goals - keeps a record of the securities the fund invests in
  • Global Custodian – Provides safekeeping for the underlying securities of the fund and keeps a record of the securities the fund invests in
  • Local Custodian (in markets where the Global Custodian needs one) – Provides safekeeping and keeps a record of the securities the Global Custodian  is holding
  • Central Security Depository (CSD)/International CSD – The depository for the security that keeps a record of all the owners of the securities held
  • SWIFT – Provides a messaging platform so that all these parties can send instructions amongst themselves to update their records and the messages to reconcile their records with each other

This is actually highly simplified, but it provides a useful illustration of the number of parties holding duplicated records, which creates complexity and waste and could lead to dispute and reconciliation differences. The cottage industry in keeping silo views of data and reconciling those views, plays a big part in the $20bn per annum cost saving for Capital Markets that Santander estimated in 2016 (Source Santander: The Fintech 2.0 Paper: rebooting financial services).

This complexity exists in many other areas of financial services too (e.g. payments, insurance, FX). The ability to reduce the duplication of record keeping and the wasted effort of reconciliation is a prize so great that the industry must deliver upon it eventually. And customers should demand it.

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