Written by Chris Lamb, Wealth Consultant at Simplify Consulting
The industry disrupter, the future, the next everything. Blockchain has been hyped ever since it was introduced into the mainstream during the early 2010s.
But today, there are genuine opportunities for wealth management companies to use blockchain to bring about real benefits to clients.
What started as a concept born in the 90s, as a way of time-stamping digital documents, has evolved into what we know today as a blockchain: a distributed database that is shared among the nodes of a computer network.
In other words, as a database, a blockchain stores information electronically in digital format which cannot be altered or doctored.
We’ve been looking at Blockchain in Financial Services for several years – and back in 2018 we outlined the use cases.
It has since become something that HSBC, Calastone, Santander – the latter to support an international money transfer service – and many other leading financial brands have made good use of. In fact, banking and financial services now account for 29.7% of the net total spend on blockchain1.
Disruptive, yes. But it’s also transformative.
Cost savings for clients?
Moreover, with the regulator’s attention on firms from a consumer duty perspective there are untapped opportunities to provide better outcomes for consumers. Distributed ledger technology (DLT) allows wealth firms to reduce overall transaction times and costs across each part of the value chain, but there will be an expectation that some of these savings are passed to the customer.
The pace of development is quick. So much so, that it seems more a matter of when not if wealth firms will adopt blockchain technology. Worldwide spend on blockchain solutions is forecast to reach $17.9 billion by 2024 and will grow at a compound annual growth rate of 46.4% according to the IDC 2020 projections.
Wealth firms will struggle to serve modern clients effectively without a digitised operating model, so a move from legacy models should be a priority.
Here are five areas in which blockchain could make a material, positive difference to companies in the sector:
1. Corporate Actions – Faster processing of dividends and Rights Issues.
2. Data privacy protection & GDPR – Smart contracts and encrypted single point of truth (SPOT) will reduce costs.
3. Managed portfolios – Investors will be able to more easily access alternative investments and potentially crypto assets.
4. KYC & AML – Using blockchain to collect information into one cryptographically secure database without third party verification.
5. Settlements – Quicker and potentially real time settlement periods.
While these areas lean towards back-office processing, there is a clear need and demand for blockchain technology right through the customer journey. For example, a recent research report found that wealth managers spend up to 70% of their time conducting non-advisory tasks such as administrative, regulatory and compliance duties.
With blockchain-backed centralised data repositories, integrated AI capabilities, and process instructions, advisers can spend more time on achieving the right outcomes for customers.
FCA and regulation
Any new technology requires appropriate regulation to protect firms and customers alike. There is a recognition that blockchain has the potential to deliver significant benefits, as long as the risks are managed.
Overall, the Financial Conduct Authority has supported the introduction of blockchain, within regulated parameters – it’s believed this can also create more highly skilled jobs across the UK, boost trade, and extend the UK’s competitive edge over other leading fintech hubs.
It’s not all been plain sailing
Many blockchain projects have been referred to as “experiments” and there’s a good reason why, because many have failed and failed hard.
Globally, one of the biggest failures resulted in the Australian Securities Exchange pulling a project to upgrade clearing and settlements of shares to a Blockchain based platform – over six years after initiation and at a cost of over $165m.
Blockchain projects are typically reliant on existing legacy systems rather than replacing them. This is particularly so with distributed ledgers that allow a select group of firms / services such as banks or government houses to share information on an immutable record. This means enhancements can be timely and costly to construct.
Other factors may also be preventing the growth of blockchain in wealth. Namely:
· A lack of awareness of the technology and how it works. Not understanding its capabilities has a direct impact on investment and the exploration of ideas.
· The wealth management sector features centralised control of manual processes, dependencies on third parties and reliance on legacy systems. Blockchain places trust and authority in a decentralised network rather than people, teams and firms working together. This loss of control and oversight will be a major concern for many.
· Many potential applications of blockchain require smart transactions and contracts to be indisputably linked to known identities. This poses important questions about privacy, and the security and accessibility of stored data.
· Introducing Blockchain requires industry expertise, time and the right resource to help realise the benefits of adoption. With shrinking budgets, short delivery expectations and the risk of not getting it right, firms are more averse to including them in their terms of reference.
Blockchain can bring an endless array of benefits to the wealth management sector.
But it is not yet clear if the industry is ready for these changes or if blockchain is deemed the right solution. Blockchain will take firms into a new era for technology, a place which puts the customer at the forefront, a place which can take automation to the next level. For many this will be uncharted territory, especially those who are still heavily reliant on aged technology stacks from long periods of under investment.
