With the government of India giving a massive push to a cashless economy, especially after the demonetisation of high-value currency notes in November last year, the one big technology that has the potential of becoming a game-changer in the banking sector is ‘blockchain’ — the ‘digital ledger’ that is said to reduce turnaround times, is transparent (visible to anyone who wishes to explore) and ensures zero error.
It also does away with the role of an intermediary or a central authority to complete the transactions, as well as the detailed audit trail that it leads to.
So far, blockchain has only been known to many as the technology behind the popular digital currency bitcoin. “Beyond bitcoin, blockchain offers a comprehensive, transparent, trusted and secure technology for organisations to carry out transactions using secure algorithm.
It is a public ledger open to everybody in the network to view all transactions based on the permissions and also provides for decentralisation and helps in building a distributed ledger for participants,” said Rajashekara V Maiya, head, ‘Finacle’ product strategy, EdgeVerve Systems.
EdgeVerve is a product subsidiary company of global consulting and IT services major Infosys. EdgeVerve’s Finacle blockchain framework was behind the piloted transactions that were undertaken between two of its customer banks, Emirates NBD in the UAE and ICICI Bank, in October last year. “Adoption of blockchain has the potential of reducing frauds, improving efficiency, transparency and trust among the participants. For the end customers, it reduces the cost of transaction significantly,” he added.
Although still in its nascent stage in India – with use cases few and far between and most of them having implemented it on a pilot basis — some financial institutions are now experimenting with ways to make some of their transactions faster and more secure through the use of bitcoin technology.
Earlier this month, private sector Axis Bank became the third lender in the country to announce usage of blockchain solutions for its operations, after its peers ICICI Bank and Yes Bank. In a further boost to the use of blockchain technology in banking, the Institute for Development and Research in Banking Technology (IDRBT)—the Reserve Bank of India’s (RBI) research arm—recently completed the first-ever end-to-end test of the technology in a project involving regulators, banks, financial institutions and clearing houses.
Globally, banks such as UBS Bank, ABN Amro and Deutsche Bank are trying to find ways to use blockchain. London-based Earthport, an internet payment infrastructure provider, is also adding it to its existing product lines. As per a June 2016 report by Santander, a British bank, blockchain can help banks cut their IT infrastructure expenses by about $15 to $20 billion per annum by 2022.
However, the question that arises from the demonetisation, and the subsequent digital drive, is whether blockchain will actually benefit the average citizen of India. The answer can be yes, provided the government embraces the new technology with due diligence.
Since blockchain ‘exposes’ exactly what happened, when it took place and who was involved in it, filtering out black money can become easier. Without the role of an intermediary or a central authority to complete the transactions, manipulation of records will also not be possible, hence ensuring zero corruption. With the emergence of new technologies, smartphones and robust networks, the digital banking era has already heralded. Sending and receiving a major part of payments digitally and recording it on blockchain can help the country’s economy match income against costs and savings far more easily.
Blockchain is also expected to reduce the transaction duration. It is believed to be useful for any sector that has complex and large-scale back-office processes that may involve phone calls, e-mails and paperwork; for example, banks and its remittance businesses. “We foresee remittance corridors reinvented on blockchain. We believe so, as blockchain eliminates the need for financial messaging between banks and heralds the convenience of instant, cross-border remittances for retail customers. Currently, international remittances take a few hours to up to a few days. It is also envisaged to reduce the cost of remittance for customers as well as banks.
The same technology can be replicated in the domestic market as well,” said a spokesperson for ICICI Bank.In October last year, ICICI Bank became the first bank in the country and among the first few globally to set up a blockchain application. It was followed by Yes Bank and, earlier this month, by private sector Axis Bank to announce usage of blockchain solutions for its operations.
Anup Purohit, senior president and chief information officer, Yes Bank, said: “We believe that blockchain can be the next digital revolution. It will play an important role in business in the future. As a bank, we foresee blockchain to significantly transform the transaction banking space.” Using blockchain, Yes Bank has digitised vendor financing for Bajaj Electricals. From processing the invoices raised by Bajaj’s suppliers to disbursal of funds, earlier it would take a few days. With blockchain, this process is now seamlessly integrated with the bank’s systems and is done in almost real time.
Axis Bank deputy managing director V Srinivasan said: “We are committed to using innovation in technology to make banking simple and convenient for our customers.” However, Kunal Nandwani of uTrade Solutions — speaking at a recent forum in New Delhi — was of the opinion that blockchain “is not a solution to any of things that people think it is”. “Blockchain is basically all about decentralisation. The only blockchain application where it has worked till date is bitcoin, where there is no bank, regulator or financial institution. Now, a bank doesn’t necessarily need this particular technology to increase transparency, improve security or manage infrastructure, at least in the grand scheme of things. They can do this with any central database as well,” said the founder and CEO of the Chandigarh-based fintech start-up.