This is the fourth part of a multi-part series demystifying the recent developments and trends in the banking and financial services sector. Find a link to the third part here: India’s Evolving Banking Technologies – Payments
We now shift our attention to two general purpose technologies that can bring out a whole new set of financial services and products.
Distributed Ledgers and Blockchain
Distributed ledger technologies (DLT) are the most important new generation technology being developed with application ranging from banking and cross border payments to diamond trading. They provide a system in which a secure transaction can take place without the need for a central authority, thus allowing peer-to-peer transactions. They are essentially a method of recording transactions in an immutable way secured by cryptography while also securing the system against attacks. This is a dream come true for many industries dealing with sensitive information – such as financial services and banking. They offer a wide range of benefits revolving around efficiency and security when compared to the existing system – reduced cost, faster settlement time, reduction in counter party risk, disintermediated transaction, fraud prevention, greater resilience against attacks, increased security, and high level as well as micro level view of the system facilitating risk monitoring. While the current use is in cryptocurrencies, application areas are increasing very fast. There have been successful attempts at using the technology in various areas.
The most famous DLT is Blockchain. It is based on the proof-of-work concept. Transaction details are essentially placed in a ‘block’ which is cryptographically secured and added on to a chain of blocks with information of previous transactions. The addition of a new block of transactions is verified by the network before it can be added to the chain. Once the block is added, the information about the new block is spread across the network. This ensures immutability of transaction history as everyone has the same version of history of transactions.
There are many use cases for Blockchain in the banking system. Intra-bank usage for their internal use in areas such as asset management, opportunities for cross-selling, etc. In the inter-bank space, this allows for centralized KYC, cross-border payments, syndication of loans, trade finance automation, clearing and settlement in capital markets, supply-chain finance, bill discounting, monitoring of consortium accounts, facilitating regulatory oversight, etc.
In India, a few banks have successfully managed to integrate Blockchain into their operations. Over thirty banks and non-banking finance companies (NBFCs) in India and the Middle East are developing a network called ‘BankChain’ to help share KYC information. The participants in this project are State Bank of India, ICICI Bank, Axis Bank and Yes Bank. Yes Bank was also one of the first pioneers in the use of Blockchain in India. Bajaj Electricals in association with Yes Bank developed a vendor payment system on Blockchain to ease payments. SBI also plans on coming out with smart contracts and various other services based on Blockchain. Surprisingly, the regulator has also been very proactive in the use of Blockchain and is actively looking into various use cases and solution development.
(For more on Blockchain, please refer to some of our previous articles on the topic.
Aadhaar is a very powerful technology. One of the main problems in any system is authentication. Aadhaar enables authentication with a very high level of certainty. This makes it a very important technology in other services.
Aadhaar Authentication is a process where the Aadhaar number coupled with demographic or biometric information of the person is submitted to the Central Identities Data Repository (CIDR) for its verification. Based on the match, the repository verifies the correctness and replies with a yes or no answer which is then used in the authentication process. This makes it very secure as some of these details cannot be forged or replicated.
The most powerful example of using Aadhaar is that of JAM. The government’s policy Jan Dhan-Aadhaar-Mobile (JAM trinity) to link Jan Dhan accounts, Mobile numbers and Aadhar cards to reduce leakages in disbursement of government subsidies. Based on this, Aadhaar has also gone a step further and built payment systems such as Aadhaar Bridge Payment System and Aadhar Enabled Payment System. This shows the wide areas of application that this initiative has. In the future, we could see more services being based on Aadhaar. There is already talk of using Aadhaar to authenticate payments. Perhaps one day we could just walk into an ATM and swipe our fingers to access our accounts.
Accounting for the basic efficiency of the banking system, general purpose technologies play a pivotal role in the development of the sector as a whole. Systems like DLTs and Aadhar seem to work towards this ideal.
– Contributed by Bhargav
Picture Credits: strandofsilk.com