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PRIVATE BLOCKCHAINS IN FINANCIAL SERVICES

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Jonas Lundqvist, CEO and founder of Haidrun

Blockchain is well known as the technology that has made possible the introduction of Bitcoin, Ether and thousands of other cryptocurrencies, making it one of the most important innovations in finance today. It has however also created the misconception that cryptocurrency and blockchain must always co-exist, although this is simply not the case. Several banks and insurance companies, such as JP Morgan and MetLife, are using their own private blockchains, without cryptocurrencies, to simplify, streamline and verify transactions and contracts.

 

What is a private blockchain?

Jonas Lundqvis

Fundamentally, blockchain technology delivers a distributed database that provides a single time-stamped version of the truth. It then uses mathematics and cryptography to provide trust and security – rather than through third parties – and relies on an accessible and open user structure to confirm all is well. A private blockchain is a type of database where a single authority or organisation ultimately retains control and no one can enter this type of network without proper authentication. Private blockchains are, by definition, ‘permissioned’ and are more suited to enterprises for reasons of performance, accountability and cost. For many enterprises, using private blockchains is the preferred option to safeguard the company’s sensitive information and they are used for reasons of privacy, where it is not appropriate to allow every participant full access to the entire contents of the database.

The objective of a private blockchain is to empower and support the business rather than the individual users, retaining some overall control to improve privacy and eliminate any of the illicit activities often associated with public blockchains and cryptocurrencies. Enterprises are frequently required to demonstrate full accountability on the running and operation of their systems and processes and private blockchains can help achieve this. They provide a greater degree of demonstrable governance and regulation, often determined and set by external administrators in line with their industry’s regulatory codes.

Importantly, private blockchains do not need to use cryptocurrencies or native tokens to process transactions and any association with cryptocurrencies, good or bad, is not a required part of the private solution.

 

Blockchain for Financial services

First and foremost, Blockchain is a database, comparable to a general ledger used by accountants to record transactions and payments. In blockchain, data is recorded chronologically and it can digitally log the entire life cycle of any transaction. Recording this automatically means blockchain technology vastly improves the efficiency of the process, reducing the time and cost needed to keep accurate records.

Blockchains are decentralised, which means each transaction, or multiple transactions in a block, is recorded via independent nodes at the same time. Nodes can be on a smartphone, computer or a server, providing a complete financial record of every transaction and offering significant protection from fraud.

Blockchains are also immutable, meaning the blocks cannot be altered in any way and no single node has control of the chain.  Any changes that are attempted are immediately seen and corrected using a consensus mechanism across all the other nodes. Hacking the chain is not mathematically impossible but it is essentially economically unfeasible to change more than half the blocks to achieve the required 51% attack.

The improved security and automated implementation offered by blockchain means the use of third-party intermediaries to validate transactions can be reduced or even eliminated altogether. Every financial transaction requires validation from simple merchant shopping to investment banking and they all need paying for ‘touching’ the transaction. This is the area where many of the disruptors and innovators in fintech believe huge cost and time savings can be made.

 

Payment processing

Payments is an area of finance for which blockchain technology is ideally suited – tracking and verifying account payables/receivables, using smart contracts to automate processes and remove third parties, whilst practically eliminating duplications and errors. However, early trials on public blockchains involved cryptocurrencies, which proved to be too slow and volatile for any practical solution. The increasing value of Bitcoin for example has meant the transaction fee – payable in coins – has almost become prohibitive. Merchants and their banks were also very concerned about value swings during the transaction processing as well as the privacy and transparency needed for fraud and money laundering prevention required for B2B transactions.

The conclusion was that fiat currency or credit were still the better solutions for these transactions. However, a permissioned blockchain solution without any tokens but with its significantly higher transactions per second (TPS) speed, privacy and adherence to regulatory frameworks can provide the ideal solution. Essentially, blockchain provides immutable verification that the transaction has taken place and confirmed by each party.  For merchants and banks, the technology makes it safer, quicker and cheaper whilst leveraging the best elements of existing systems and processes and upgrading areas where step change improvements can be made.

With distributed, immutable features providing improved privacy, accuracy and security, it would be difficult to find a use case in financial services that would not benefit from adopting blockchain. Banking, lending, insurance, trade finance and asset management would all benefit from using the technology, which the finance sector acknowledges will save billions of Euros for banks and major financial institutions over the next decade.

www.haidrun.com

After spending 27 years in the software industry, Jonas Lundqvist founded Haidrun to help businesses meet the increased demands on efficiency and security whilst providing new revenue producing opportunities by using private blockchain technology.

 

Banking

WHY THE TIME IS NOW TO BANK BEYOND BORDERS

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by Lili Metodieva, MD of Monneo

 

As our world becomes more interconnected, so too does the need for banking systems to follow suit. In the past, businesses and individuals were often restricted to banking in a single country, but the rise of borderless banking is enabling both to benefit from greater financial freedoms. In this article, we will examine why this trend is so important and explain how Fintech companies are helping to make it possible.

 

What is borderless banking?

Simply put, borderless banking refers to any bank account, which allows users to spend, send and receive money across different countries and currencies, without incurring heavy fees. The concept has become increasingly popular in recent years, with more people now working in cross-border job roles and with many businesses requiring capital in a different currency than that of their country of origin.

For customers, borderless banking is making cross-border financial transactions more efficient and cost-effective. Through its rise, businesses and individuals can gain easier access to international streams of capital, which is crucial in this current moment of economic uncertainty. In fact, 74% of companies say cross-border payments have helped their business to survive [1].

 

Where do IBANs come in?

International Banking Account Numbers (IBAN) play a crucial role in facilitating borderless banking. The globally recognised system enables cross-border transactions to happen safely, by providing each international bank account with its own unique 36-digit alphanumerical code. On account of this code, financial institutions can quickly identify where funds are coming from, as well as where they’re going to.

More recently, providers such as us have been able to deliver Virtual IBANs (vIBAN). Working alongside a network of well-established European and International banks, we’re able to offer businesses a single platform interface that consolidates the management of all IBAN accounts. In turn, our multi-currency service makes conducting global financial transactions incredibly straightforward.

 

How has Brexit affected borderless banking?

The COVID-19 pandemic has accelerated the growth of borderless banking and services related to it, but other developments, such as Brexit are beginning to stand in its way. Most notably, the drawn-out withdrawal process has seeded a growing reluctance amongst risk averse, larger organisations to settle transactions using UK bank accounts or IBANs, due to unfounded concerns around regulatory complexity.

Despite leaving the EU, the UK remains a member of the Single Euro Payments Area (SEPA), so it’s unclear why these concerns around British IBAN accounts exist. Regardless, this unfortunate development must be addressed quickly as it has the potential to adversely affect the livelihood of businesses and individuals at a time of critical need.

 

What does the future hold for borderless banking?

There’s clear demand for borderless banking and borderless payments, but the discrimination of certain IBAN accounts represents a major obstacle, which could stand in the way of their widescale adoption. Moving forward, there needs to be a push towards borderless IBANs, which will make international financial transactions more reliable. At the end of the day, this is what IBANs were originally created for, so it’s important the current problems are rectified quickly.

To ensure this can happen, the industry needs protection and clarity from regulators. Likewise, it’s now time for membership organisations to stand up on behalf of the sector and lobby for the financial inclusion of businesses.

If the confusion regarding UK IBAN accounts can be sorted in a timely manner, businesses across the nation, as well as those further afield can look forward to a future of more streamlined and effective financial services. With this support, the diverse sector can deliver further access to innovative financial services and products, which improve outcomes for businesses and consumers alike.

As a sector, Fintech has the potential to provide vital assistance to the wider economy, particularly in an era of increased cross-border business. At Monneo, we’re committed to being part of that change and as a part of organisations like ‘Accept my IBAN’, are working towards reporting and ending IBAN discrimination.

[1] – https://www.mastercard.com/news/research-reports/2021/borderless-payments-report/

 

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IT’S TIME FOR BANKS TO SIT THEIR CUSTOMERS DOWN AND TALK OPEN BANKING

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Eugene Danilkis, CEO at Mambu

 

We are living in an experience economy, and banking is no different. Customers need innovative payment and finance management solutions. New entrants are edging into the landscape and challenging existing players. This should mean users have a better view of their finances and the tools they need to manage their money – but banks are failing to deliver.

Personal finances are a complex beast, emotional pulls are strong, and the worry of financial security is always on the mind. It’s the job of banks to be the shoulders customers can lean on and trust.

Open banking was supposed to take this to the next level, enabling banks to deliver personalised products and services based on improved data sharing and customer insights. But three years on, adoption remains sluggish. So, why is open banking failing to live up to its promise?

 

A missed opportunity

Open banking was introduced to the UK in 2018, but consumers are still mired in confusion as to what it means and how it helps them. According to Mambu’s global open banking survey, 61% of consumers say they’ve never used open banking, despite more than 8 in 10 using one or more mobile banking apps.

Eugene Danilkis

This is a problem for banks and consumers alike. Lack of understanding around the technology is hindering its adoption, despite this being in the best interests of both. By enabling the secure sharing of financial information, open banking creates an improved customer experience. Not only does this minimise friction and make online payments faster and easier, but allows for personalised services and greater automation, enabling customers to take advantage of tools like budgeting apps.

For banks, open banking is an opportunity to build innovative new products that will improve the customer journey, helping them retain accounts and acquire new ones. By collaborating with third parties, banks can hyper-target customers and build services that address specific user needs, increasing customer satisfaction and in turn brand loyalty.

It’s true there’s been a recent spike in open banking users. According to Juniper Research global, open banking users rose from 18 million in 2018 to 40 million in 2021. But this can be traced to the necessities of a pandemic rather than any sudden clarity in communications.

 

Putting customers at the heart of communication

Mambu’s research shows more than half of consumers (52%) have never heard of open banking. COVID-19 may have increased the uptake of the technology, but it hasn’t increased understanding among users.

So, what can banks do to encourage consumers to embrace open banking? Fundamentally, they must better educate their customers in terms they understand. This means talking to them like human beings, using clear and transparent language to simply explain the personal benefits open banking brings and why it’s really just smart banking.

The understanding gap between technology and terminology shows that consumer demand is there, but better communication is needed. Making sure consumers truly understand the tools they’re using, the control they now have over their finances and how open banking improves the customer experience is vital to dispersing the current fog of confusion. It’s the benefits of this technology that banks need to hone in on: customers ultimately care about what open banking can do for them and how it’s going to make their lives easier.

Centering the customer and their needs in this way will allow banks to fully realise open banking’s potential. The technology has already given them the opportunity to develop valuable services for customers that help build brand loyalty. But the industry has failed to put the customer at the heart of their communications and processes, and show them how much better banking can be.

 

Building trust

Key to reversing this trend is addressing consumer concerns around data privacy and financial safety. Yes, banks need to prioritise simplicity and clarity in messaging, but this isn’t an excuse to shy away from important conversations. Just because there’s an understanding gap around open banking doesn’t mean consumers aren’t switched on about tech and financial issues.

Mambu’s survey found nearly three in five customers have concerns about privacy and security in relation to open banking. So, it’s vital that banks provide reassurance and relevant information about data sharing from the outset if they’re to assuage these fears.

The industry can also encourage greater adoption by developing and improving open banking interfaces. Banks are the gatekeepers to how easily end-users can authorise certain actions, manage third-party access and navigate different open banking functions. If the interface is user-friendly, customers will have a better experience of the technology and be more likely to use and recommend these services.

 

Time to get talking

Customer communication is holding the industry back.. The ability of open banking to transform financial services is a concept that industry players are well-versed in. But the feeling isn’t mutual for customers.

Banks are failing to capitalise on the open banking opportunity by engaging with new and existing customers about what the technology can do for them. Debunking  common myths can open the door to increased growth and trust for banks, as they seek to open up new revenue streams post pandemic..

Make no mistake, open banking isn’t going away. But customers will if banks don’t get talking.

 

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