Other parts of this series:
- Blockchain: The newest solution for financial firms?
- Blockchain for Finance & Risk? We say, absolutely.
- A look at blockchain use in finance and risk
- Five ways to use blockchain for finance and risk
- When it comes to blockchain for Finance & Risk, Accenture can help
- Blockchain in finance and risk - know its limitations
Over the course of this blog series, we’ve talked about blockchain and how it can support the Finance & Risk function. Our previous post identified specific use cases, but are there more options?
Steve Culp, Senior Managing Director and leader of Accenture’s Finance & Risk practice, has written on blockchain use cases. We are actively working with clients on developing proofs of concept and prototypes for blockchain-powered solutions within the reference data, know your customer (KYC) and procure-to-pay business areas, plus trade finance and re-insurance retrocession (risk transfer):
1. Reference data
It is estimated that as much as 70 percent of the data used in financial transactions is reference data.1 But legacy systems and manual processes around managing that data could lead to issues around quality, accuracy and clarity.
By working with its clients to establish the main pain points in scope of reference data, Accenture has developed a blockchain proof of concept (PoC) for managing legal entity data across a group of related companies in the banking sector. Blockchain is used to manage entity reference data on legal entities within a banking group. This blockchain-powered solution supports distribution of entity data ownership across the group by providing each entity a unique digital identity and supporting a single source of trust with a complete and accurate view of all established entities. With the effective use of smart contracts, the solution manages the entire entity data work-flow.
2. Know Your Customer
KYC and, more broadly, customer due diligence, is another area where blockchain’s auditability, transparency and security can create value for financial services institutions. The common challenges faced in the KYC space include duplication of efforts, data redundancy, data inaccuracy and process inefficiencies. According to Thomson Reuters, some financial institutions are spending up to $500 million annually to ensure compliance with KYC and customer due diligence.2
Accenture has helped many clients address their KYC challenges by combining deep industry experience with gold standard business process outsourcing capabilities that perform key KYC functions in a highly controlled, scalable and cost-effective model. This extensive experience, along with Accenture’s propensity to help clients adopt leading technologies, uniquely positions us to bring blockchain-powered solutions to solve clients’ KYC challenges. We expect, as blockchain technology matures, that we may be instrumental in industrializing KYC on blockchain.
Procure-to-Pay (PTP), the multi-step process connecting a client with one or more service/product providers, is another area where blockchain can make a big impact. Among current challenges faced by PTP are generating sustainable cost reductions through disintermediation, efficiency improvement, fraud control and transparency enhancement.
Blockchain technology can disrupt PTP processes and provide huge operational benefits in terms of validation and authentication, speed, greater security, and decreased workload, by facilitating the exchange of information. The secured transaction ledger database, shared between vendors and clients, is immediately updated to reflect any new transactions, thus accelerating orders and invoices validation, reconciliations and vendor/end user enquiries. By permanently retaining historical payment information, money laundering risk can be reduced. The principle could also be applied in a post-Brexit world, where proof of origin may be required of UK financial services institutions to export their services to the European Union.
4. Trade finance
Trade finance (letter of credit) is on a continuous growth trajectory. According to Technavio (Infiniti Research Ltd.) analysts, the global trade finance market is expected to grow at a CAGR of 3.77 percent for the period 2016 to 2020, posting revenues of almost $47 billion by 2020.3
Trade finance processes are still quite labor intensive, time consuming and complicated. By capturing every step in the trade finance process on a distributed ledger, blockchain would allow transparency. At the same time, encryption would make sure only authorized participants have access to the confidential data, thus helping organizations improve the value chain and greatly reduce risk, complexity and settlement periods.
5. Internal insurance risk transfer mechanism
Ledgers maintained independently by different parties in the insurance sector (brokers, insurers and reinsurers) may not always provide an accurate record of business transactions and may require confirmation and reconciliation.
To address these challenges, Accenture has developed a PoC for a blockchain-based mutual distributed ledger solution, using smart contracts to orchestrate and operate the transactions. This approach means
groups of insurance companies can manage their balances internally and externally. All transactions are held on a distributed ledger system, giving all parties the ability to see an identical version of the records (and with the same data granularity)—completely removing the need to maintain and reconcile intermediary ledgers.
Blockchain offers many possibilities for the Finance & Risk function. But it all might seem overwhelming. In our next post, learn how Accenture might be of help.
1. Reference data latest area to benefit from blockchain tech,” The Trade, September 20, 2016. Access at: https://www.thetradenews.com/reference-data-latest-area-to-benefit-from-blockchain-tech/
2. “Thomson Reuters 2016 Know Your Customer Surveys Reveal Escalating Costs and Complexity,” Thomson Reuters, May 9, 2016. Access at: https://www.thomsonreuters.com/en/press-releases/2016/may/thomson-reuters-2016-know-your-customer-surveys.html
3. “Global Trade Finance Market 2016 – 2020,” MarketResearchReports.biz. Access at: https://www.marketresearchreports.biz/reports/816218/global-trade-finance-market-research-reports. “Global Trade Finance Market 2016 – 2020,” Technavio, September 7, 2016. Access at: https://www.slideshare.net/technavio/global-trade-finance-market-2016-to-2020.