Have you been part of the latest technological innovation? Known as blockchain technology, this distributed ledger advancement promises to create a leaner, more efficient and more profitable financial services world. Throughout the global stage, banks, investment networks, and even governments are pouring money into the curation and testing of blockchains. Blockchain that has the potential to be used as cryptocurrency is affecting all domains in the industry. But its implementation comes with the challenges like high start-up cost and unifying procedures and models. And when these challenges are overcome, we would see returns.
So in the struggle to adopt the latest technology? Have we evaluated the ROI of Blockchain implementation? Factors like computing power, consensus protocol may affect the ROI of blockchain projects? Have we thought about that? If not, let’s explore –
ROI of blockchain trials/implementations by Financial Institutions
The long-term prospect for banks is to repoint critical operational, risk and finance systems to blockchain-based, shared data platforms. Could blockchain implementation help banks and financial institutions in saving cost? Let’s look at some of the use cases in this field –
Reducing syndicated loans settlement time
The Leveraged Loan market faces critical settlement issues. If we see the number of days required to settle a High Yield Bond and Leveraged Loans –
|High Yield Bond||Settled in T+3 days|
|Leveraged Loans||Settled in T+20 days[almost]|
That could be a reason, which since 2008 the global Leveraged Loan market has shown negative growth. On the other hand, the High-Yield bond market is growing significantly by 11%. Involvement of smart contracts here could be beneficial as it would remove the clutter of documentation, acknowledgments delay, KYC, legal agreements, AML with the help of a permissioned ledger.
With smart contracts in place, the settlement cycle could be reduced to T+6 or T+10 making it attractive and transparent for investors. As per estimate with the reduction in the settlement period, there could be a growth of at least half that of the High-Yield Bond market growth, i.e., 5% – 6%. , thereby increasing the loan demand of an additional $149 billion.
The investment banks that charge 1-5% of arranger fees could benefit by translating into the additional income of $1.5 billion to $7.4 billion. Apart from this, regulatory capital requirements, operational costs, or costs related to delayed compensation could be reduced further with shortened settlement cycles.
Benefits to the mortgage industry
The Mortgage Loan system is a complex ecosystem with different layers and vendors involved, adding to costs and delays. Blockchain-based smart contracts could effectively reduce the time and cost, by automating processes and shared access to physical document across trusted parties. The solution could also have access to external information like sales deed or land records. As per the research report, automating banks back office system could help in saving 6% to 15% for mortgage lenders. Based on these numbers estimating other savings, the report states that taking the base of owning a house with a mortgage, a minimum savings of $1.5 billion could be achieved by loan providers through the automation of tasks. Involving other third parties like credit scoring firm, tax authorities on Blockchain network could additionally save $6 billion with faster processing and cost reduction.
That could also result in dropping of mortgage processing fees by 11% to 22 %, that in absolute terms amounts to savings of $480 to $960. Based on the US mortgage market case, smart contracts could potentially save between $3 billion and $11 billion in the new mortgage origination process across the US and EU.
Claims processing cost savings in the motor insurance industry
Another area that Blockchain has been helpful with multiple parties involved and non-existence of single platform leading to affect efficiencies and reducing claim processing cost and time. As per a report estimate, on adapting to a blockchain network $21 billion could have been saved for the UK motor insurance industry that processed 3.7 million claims and spent $13.3 billion in claim costs and expenses.
The lower cost could have been passed onto the customers in the form of lower premiums on auto insurance policies. As per the estimate, if the insurer adopts to a smart contract and agrees to pass on all the savings to the customer, a reduction of $90 on average on every premium payment could be seen. However if the insurer decides to pass on just 50 % of savings, $45 per premium could be observed.
Firms With Measurables Results on Blockchain
While Accenture is actively involved in Blockchain practices since 2015, they have around 50+clients across Banking, Financial Services, Manufacturing, Government and Travel and Transportation. One of the key assets of Accenture Blockchain Solution is the patent for editable blockchain and use case evaluation framework.
In one the white paper they shook hands with a benchmarking firm McLagan to conduct an in-depth impact analysis and make fact-based estimates of the cost savings and other benefits that might be achieved by a blockchain based business application.
70% – POTENTIAL COST SAVINGS ON CENTRAL FINANCE REPORTING
50% – POTENTIAL COST SAVINGS ON CENTRALIZED OPERATIONS
50% – POTENTIAL COST SAVINGS ON BUSINESS OPERATIONS
30-50 % – POTENTIAL COST SAVINGS ON SAVINGS ON COMPLIANCE
The study highlights that concerning present cost structure, there could be a savings of $8 billion on a cost base of $30 billion. Accenture study also claims, that while running POC’s on early test environments, the trials had a potential to enhance the savings to be more than 70%.
However, the study also states that in the case of regulatory hurdles these savings may not be realized.
Another innovator in Blockchain space, active since 2014, the solution mainly focus on Insurance, Banking, Financial Services, Healthcare, and Lifesciences. The USP of their solutions is integration with significant platforms and multiple blockchain solution accelerators.
In an aim to enable financial Inclusion, Cognizant in their white paper estimates $380 billion revenue generated by banks by 2020 within emerging markets from the unbanked population. The report also cites as per Santander; blockchain could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 Bn per annum by 2022.
Others Factors Deciding the ROI of Blockchain
While the above use cases and firm have provided an insight on how Blockchain could yield to positive ROI, some of the other factors that are not yet considered are –
Miners are an integral part of any blockchain network. On the one hand, they provide validation to add a new block; they also have to pay the electricity bill used by their computers/laptops. To regulate the usage of electricity amongst miners community, quite recently New York Regulation approved of new power rates, that means miners would be charged higher than household customers.
Blockchain that is a distributed ledger storing data block by block needs enormous computing power. Blame it to the design, but each byte of data entered onto a blockchain network has to have a copy on each node till infinity. Recently Bitcoin’s Computing Power Growth outpaced the Bitcoin Price, in fact, the bitcoin hash rate, i.e., the amount of computing power used by bitcoin’s network of computers to create new coins have been soaring up; it seems it’s in a rush to catch up with the bitcoin market price.
Experts and researchers are trying to come up with a solution to find measures where blockchain compute power efficiently, but they are still in the early phase.
Thanks to technology that now storage capacity comes in all shapes and sizes at a reasonable price. Unlike olden days when Bill Gates, co-founder of Microsoft said – 128MB would be enough storage for each, now 4TB is considered an optimum storage capacity. So with an ever-increasing need of data storage, it does add up to the cost of each transaction made onto the blockchain network. One should also consider whether its on-premise or off-premise storage, as that would increase the expenses, thereby affecting the ROI.
Agree to the fact that blockchain technology is in a very nascent phase and to expect expertise level skills in this domain would be a challenge. The job market shows positive growth in the Blockchain domain with statistics from Indeed.com indicate that, since November 2015, the number of jobs within blockchain has risen 631%. However there is a significant gap in demand and supply, so either you would need to reskill your existing employees to deliver or get it from the market at a higher price. So that needs to be accounted while making ROI calculations.
With the numbers generated via trials, POCs Blockchain does seem to return a positive ROI. However, it is worth noting that many factors have not been taken into account. Blockchain technology with all its hype does carry the potential to disrupt all the sectors, but it would all depend on the ROI it shows over the next 12 to 18 months. Till then, do not sit back and relax, go on and explore the disruptive force – Blockchain.
BitcoinMagazine, Hfs, Deloitte, Accenture, Capegemini, Avasant, Cognizant