Don’t understand the blockchain hype? Look at smart contracts.
By Annie Teh for TechInAsia
Ask a bank about bitcoin, and you will get skepticism. Understandable, considering that the cryptocurrency scene is riddled with volatility and distrust. But ask about the blockchain, and the experts will tell you that it is “the biggest innovation since the internet.”
The hype is real. Citibank, Santander, Wells Fargo, and HSBC have begun testing the blockchain in their banking processes. A paper by Duke University even calls blockchain “the true innovation behind the Bitcoin protocol.”
So if you’re still thinking about blockchain as bitcoin, you’re going to be left behind.
The hype manifests
So why are banks and MNCs looking to blockchain as the next big thing? Basically, it offers something new and previously unattainable — automated authentication.
Take insurance as an example. Fraud is a common threat to insurers. AIG Singapore’s head of claims Shane Lowndes tells The Straits Times that the company has seen a 130 percent increase in false or inflated insurance claims, from 21 in 2014 to 49 in 2015. The prospect of fraud makes the verification process long and tedious, making it difficult for legitimate customers to get claims. And, increasingly, customers are demanding quicker, and sometimes even immediate payouts for their claims.
Blockchain can improve the claims process through smart contracts, which are self-executing protocols that work with a blockchain to enforce contractual agreements. By enforcing the rules for insurance claims through code instead of text, it reduces ambiguity and makes it possible to automate small and frequent claims. The fact that it lives on the blockchain gives it permanence and certainty that it will always execute as written.
For example, a smart contract can automate the claims process for flight delays. A policyholder simply keys in the flight number and policy number, and the smart contract can verify the claim through publicly available flight schedules instantly. Hospitalization claims could also be automated through publicly-held health records.
At the same time, blockchain technology can mitigate fraudulent claims. Blockchain consists a distributed ledger that is immutable, allowing insurers to share information easily and securely. This allows a detailed audit trail of all past insurance claims to be maintained, enabling insurers to reject claim applications accepted previously by another provider.
Allianz is even testing out blockchain-based smart contracts to handle catastrophe swaps and bonds, which guard insurers against big disasters. The German insurance giant told Coindesk that smart contracts can reduce the payments process from weeks or months to a few hours, thanks to the automation of previously manual processes.
Another difference between traditional contracts and smart contracts is that smart contract terms don’t have any margin of freedom. Smart contract terms are written in code, making them clearer upfront. This means less friction between parties involved, and no opportunities for anyone to abuse the contract for personal gains.
Moreover, some banks are experimenting with blockchain to perform Know Your Customer (KYC) checks, allowing customers to have a single financial identity across banks and other financial institutions. Not only will customers’ banking experience improve, it will enable banks to reduce fraud, significantly reduce operational expenses, optimize operations, and move towards a common KYC standard. Insurers will also benefit from this.
Waiting for the world to change
While blockchain is becoming more mainstream, it still has some way to go. There’s limited understanding from corporates’ perspectives, and limited availability of talent. There’s also deep-seated comfort with existing systems.
Nonetheless, there is an abundance of startups leading the blockchain charge. Bluzelle, a Singapore-based startup which builds blockchain solutions for the financial industry, is working with KPMG Digital Village to overcome challenges for mainstream adoption. Another Singapore-based startup, Otonomos, is creating a business registry enabled by blockchain technology.
Corporates unfamiliar with blockchain capabilities also have help available. For example, KPMG’s recently launched Digital Ledger Services provides full lifecycle support – from ideation, market needs validation, business case development and the building of prototypes – to systems and operations integration, and ongoing management of a company’s blockchain infrastructure.
With corporates taking interest in the technology and with growing interest in blockchain from the very industries it disrupts, there is hope that widespread adoption will take place. It’s only a matter of when.
First appeared at TIA