Banking on Blockchain
Think of a situation where a bank's know-your-customer (KYC) check on a corporate customer fails to show up a suspicious transaction done by the company with another bank. What if banks could share and also monetise corporate KYCs, including investigation reports and cross-border wire transfer reports, on a real-time basis, on a secure, private, immutable and consensus-based shared digital ledger?
Similarly, how much simpler would life become for a manufacturing company mired in input credit claims under the goods and services tax (GST) if its system automatically generated and shared pre-reconciled invoices with all its suppliers over a seamless and secure cryptographic ledger that is replicated and synchronised? This could help the company save hundreds of crores of rupees stuck in working capital currently.
Thirty banks and non-banking finance companies (NBFCs) in India and the Middle East including State Bank of India, ICICI Bank, Axis Bank and Yes Bank, are set to share corporate KYCs and more through BankChain - a blockchain consortium set up by financial technology firm Primechain Technologies. BankChain, now rechristened Primechain Money, is going live with five blockchain platforms that include cross-border remittances and peer-to-peer money transfers, and the banks should start using them real-time from February 2018. Besides, IBM is working on an invoice management blockchain solution for manufacturing companies to tackle their GST woes.
Like their global counterparts, Indian companies and financial institutions are rapidly taking to blockchain - the indelible ledger technology that became popular for powering the digital cryptocurrency bitcoin. And, they're realising that there's more to it than bitcoin or the other cryptocurrencies of its ilk, because of its inherent advantages of privacy, security, consensus and transparency. The record created on the ledger cannot be tampered with. They are encrypted and decrypted using cryptographic public and private keys, and a member/ company can only access records relevant to it. If a record is changed in one place, it has to be changed everywhere.
"India has taken a lead in blockchain solutions in the Asia Pacific region excluding Singapore. The actual business adoptions at the B2B level are quite extensive," says Jitan Chandanani, Partner - ISA Blockchain Leader, IBM India.
The bitcoin bull run - the currency crossed the $19,000 mark this month - has made headlines. But while regulators and governments are warning of an asset bubble, and frowning upon its unregulated use in funding illegal drugs and arms trade, companies and financial institutions are turning to its underlying blockchain technology to transform the way they conduct their business transactions and exchange information.
From banks and insurance firms to auto and generic drug makers, all are testing and implementing blockchain solutions for everything from supply chain management and invoice financing to remittances and insurance claims. And everyone from infotech majors IBM and Infosys to fintech start-ups Primechain Technologies and Cateina Technologies is racing to build these solutions.
Sanjay Jalona, CEO & MD, Larsen & Toubro Infotech, says: "Blockchain is enabling companies to significantly reduce costs and get visibility into processes that were hitherto complicated."
Rajashekara V. Maiya, Associate Vice President and Head, Product Strategy, Finacle, at EdgeVerve Systems, an Infosys subsidiary, says the biggest benefit of blockchain is that "it will make transactions cheaper, faster, smarter, secure and transparent".
Companies are even forming consortia to build industry-wide blockchain platforms since the technology's benefits are best leveraged when there are multiple participants. IBM has set up a life insurance consortium with 13 private life insurers looking at sharing medical records, among others. Last month, it launched a trade finance platform for India and South Asia with four leading banks.
The Central government and state governments, like Andhra Pradesh, too, are looking at using blockchain for land record registries and public distribution systems. The Reserve Bank of India's Institute for Development and Research in Banking Technology has also tested blockchain for core banking processes.
"We're building the financial technology platform of the future," says Rohas Nagpal, Chief Blockchain Architect, Primechain Technologies, who has worked in the area of cybersecurity since the mid-1990s. Along with BankChain's members, he has identified 10 blockchain solutions of which five, including syndicate loans, are going live this month. The idea is to facilitate, for instance, real-time global remittances and peer-to-peer money transfers on a 24/7 basis and at near zero fees without intermediaries.
"Blockchain has the potential to disrupt industries and change the way financial services are carried out. The distributed ledger technology and the benefits of its immutability pave the way for participants to design direct collaborations in common areas of interest instead of relying on any intermediary," says Subrat Mohanty, Senior Executive Vice President and Head of Strategy, Operations, BS&T and Health, at HDFC Standard Life, which is part of the life insurance consortium.
Early Adopters
Several companies are already testing and rolling out blockchain solutions. Over the next few weeks, Yes Bank will bring Bajaj Electricals and 32 of its vendors on board an invoice financing blockchain. As against the current four-day process of manually presenting, verifying and reconciling invoices before disbursing working capital loans, Yes Bank will finance the vendors real time on the blockchain solution developed by Cateina Technologies.
With blockchain, the company, bank and suppliers will be on a single shared ledger, and everything can happen at the click of a button. The vendor submits invoices to Bajaj Electricals, which verifies and submits it to its ERP portal. The blockchain's smart contract (which codifies the business rules of the transaction) automatically pulls the invoice from the ERP system onto the blockchain and also prompts the vendor to enter his purchase order details as a validation. It then matches the two, submitting the same to the bank.
At the bank's end, the smart contract then runs three checks - a KYC on the vendor, the credit limit against Bajaj Electricals, and the vendor's credit limit. Then the system automatically debits the loan into the supplier's account, and at the end of the credit period, it credits the amount from the company's account to the bank. The interface for all the participants is like a normal web page. When the vendor logs in, he can only see his status. Bajaj Electricals can see the status of all its vendors and their invoices. And Yes Bank can see all its customers.
"We wanted to create a blockchain banking solution for our clients that would have immediate, measurable impact and provide a quantum leap compared to the current process," says Anup Purohit, Chief Information Officer, Yes Bank.
By the first quarter of 2018, Mahindra Finance, too, will launch its invoice financing blockchain for the group's auto and tractor businesses, which will have 100-150 suppliers by year one. "Blockchain works when there is a large ecosystem at play," says Tina Singh, Chief Digital Officer, Mahindra Finance.
Last month, Axis Bank launched two bilateral blockchain-based inward remittance solutions with RAKBank in the Middle East for retail customers, and with Standard Chartered Bank, Singapore, for corporate trade remittances.
ICICI Bank, too, has two blockchain solutions with Emirates NBD for remittances and trade finance, developed by EdgeVerve. And its working on a closed-loop wallet using blockchain to facilitate transactions within a campus. Also off the starting block is Bajaj Allianz General Insurance Company, which, with its blockchain-based Travel Ezee mobile app, is automatically paying claims for overseas flight delays regardless of whether the policy-holder files a claim or not.
L&T Infotech is executing a blockchain solution for tracking global shipments of raw materials by sea for a consumer products company which imports raw materials from India for its healthcare division. Jalona of L&T Infotech, says, "We're now building production-grade solutions for our clients. The use cases outside of financial services are moving into production faster as they are not so dependent on government regulations to evolve."
Sanachit Mehra, who set up Cateina Technologies with four other IIT graduates, has got an Indian generic drug maker on a supply chain blockchain, and is in talks with automakers, logistics firms and defence manufacturers seeking blockchain solutions. "We've seen firsthand the huge interest corporates have in blockchain, and how it can solve their business problems," he says.
BFSI: Leading the Way
Undoubtedly, the BFSI sector in India is taking to blockchain in a big way. EdgeVerve's Maiya believes that's because Indian banks have already built a strong technological backbone. "They're already connected real time, making it easier for them to come on blockchain."
Axis Bank is using international blockchain major Ripple's cross-border transactions network to run its two inward remittance blockchain products. Himadri Chatterjee, President, Transaction Banking, Axis Bank, cites two reasons for the bank's inclination towards blockchain: one is transparency in charges - in classical wire transfers, the correspondent bank can levy an additional charge; and the second is faster settlements - on blockchain, money is transferred in minutes while in the existing SWIFT money transfer system, it takes two to three days. "Everyone is looking at blockchain because you have a ledger that's transparent on ownership and transactions so the integrity of the deal gets protected," says Chatterjee. Axis is looking at putting domestic trade transactions on blockchain too.
ICICI Bank, meanwhile, has got a trade finance blockchain with Emirates NDB to process transactions instantaneously between a customer in India and an oil trader in the Middle East, for instance. "Trade finance is a cumbersome process that takes 10 days to a month to complete, and involves three flows - flow of documents, of actual goods and our ability to track them, and the flow of money," says B. Madhivanan, Chief Technology & Digital Officer, ICICI Bank.
The bank is now scaling this up - it is customising trade finance blockchains for a client in the Far East and also for two large export-oriented clients in India, as also working to bring other banks onto the platform.
Yes Bank, too, is in the process of scaling up its invoice financing blockchain by offering it to its customers across the electrical, automobiles, e-retailing and power sectors. The bank is also using the Ripple network for remittances. "Ripple helps banks leverage this (blockchain) network to make money move as fast as information, and raise the bar for customer service," says Purohit.
The ability to enhance the customer experience prompted Bajaj Allianz to turn to blockchain too. It created a mobile app called Travel Ezee for its overseas travel insurance product with four participants: itself, customers, a flight aggregator which tracks flight movements, and a payment gateway. Once a person buys a travel policy on the app, all his purchase, flight and policy details are converted into a smart contract, which triggers the claim as per the policy automatically. "We're now looking at extending this to all retail claims. We want to give the best claims experience as a company," says Sourabh Chatterjee, head of technology, digital marketing and sales, Bajaj Allianz.
Meanwhile, HDFC Standard Life is looking at blockchain solutions internally, besides "working with an informal group of like-minded insurers to build certain use cases which benefit the customer". Says Mohanty: "For issuing a new insurance policy, today, there is reliance on customer declaration, reconciling between inconsistent data sources and seeking customer medical information. If insurance companies used blockchain to store such data, there is an opportunity to have a single source of customer medical, KYC, claims and other useful records. The customer then does not have to go through multiple instances of furnishing documents for different insurance needs." This way, insurance companies can ensure reduced costs and lower likelihood of frauds.
Banks and finance companies realise it isn't enough to have their own blockchain platforms and that they need to come together on a multi-party platform, like BankChain, to create a network effect. For instance, only those Bajaj Electricals' vendors may come on the Yes Bank blockchain who are willing to take financing on its terms.
Industry-wide Adoption
A host of logistics, manufacturing, food processing and pharmaceutical companies are also getting on the blockchain bandwagon.
"Automotive, energy, agriculture, the public arena and government are areas where it can make the maximum impact," says Mahindra Finance's Singh. The Mahindra group, which began looking at blockchain two years ago, has already identified six to seven use cases apart from invoice financing.
IBM, meanwhile, expects to bring other parts of the supply chain on blockchain over time. "The beauty of the technology is that you can create solutions in silos, but they can all connect very simply," says Chandanani. That's what it has done globally: linking, for instance, two shipping lines at Maersk across the entire chain including logistics, ports and customs. IBM is now talking to the Indian customs authorities to digitise documents.
Primechain Technologies has created a contract management solution for storing, sharing and digitally signing contracts that three pharma, auto and healthcare companies are trying out currently.
Challenges
Needless to say, these are early days and challenges persist with multiple blockchain fabrics like Hyperledger and Ethereum in use. "Blockchain technology itself is evolving; we don't know which platform will take off. And that is why we are on different networks," says ICICI's Madhivanan.
Cultural adoption by participants and clearing misconceptions because of bitcoin are other challenges. There are trust issues, too, since members may not want to part with their proprietary data. "In a blockchain ecosystem, it is all about how multiple participants view each other because at times, even competitors have to become collaborators," says Singh. Also, its real benefits will only accrue when there are multiple participants.
There is still time before people really start working on the transformative potential of blockchain. But, clearly, the technology developed by the mysterious bitcoin developer Satoshi Nakamoto, in 2008, has caught on across industries.
