Paris – A report by Capgemini’s Digital Transformation Institute reveals the average consumer could save more than 500 US dollars in banking and insurance fees thanks to the emergence of a new type of smart contracts based on blockchain technology. The report draws on extensive discussions and initial trials with industry professionals, prominent smart contract start-ups and academics from the financial services sector, predicting mainstream adoption beginning 2020. However, there are a number of challenges detailed, including privacy, the security of the blockchain technology and the regulations that surround it.
So-called ‘smart contracts’ work similarly to standard written contracts in serving as a legally binding agreement based on a set of agreed terms and conditions. Where smart contracts differ is that they are electronically programmed and based on distributed ledgers such as blockchain technology, meaning they can automatically enforce actions like payments as soon as the agreed conditions have been met, and without the need for independent verification or manual processing. For instance, when buying a house, instead of the current process involving heavy documentation and manual intervention, details would be shared in a permissioned ledger smart contract network1 connecting all parties in the system. This would simplify the loan process, drive down processing charges, and result in a speedy transfer of property title to the consumer. Subsequent disbursement of loan amounts and interest payments would take place automatically as per the terms encoded in the smart contract.
While smart contracts could be used in a wide range of scenarios, the report, "Smart Contracts in Financial Services: Getting from Hype to Reality" focuses on the financial services industry, where contract technology and systems underpinned by blockchain are already in development by many major institutions such as BNP Paribas, Deutsche Bank, and Credit Suisse. It details three major areas where smart contracts are anticipated to have a significant impact for both consumers and organisations:
- Retail banking: Personal loans and mortgages are set to benefit through the adoption of smart contracts. Smart contracts can help eliminate today’s paper-based appraisal and documentation processes, reducing the time involved in interacting with multiple agencies to verify applicant and property details, and in processes related to the transfer of property ownership. This could translate to an average saving of between $480 and $960, or eleven to twenty-two percents on mortgage arrangement and account fees for consumers. Meanwhile, it is estimated that banks would be able to cut between $3 and $11 billion annually by lowering processing costs in the US and EU alone.
- Insurance: Smart contracts will speed up claims across areas such as health, motor, home and travel insurance, with fewer forms to fill out and interactions between claimants and insurers needed. A smart contract system would bring all parties in the insurance value chain – consumers, insurers, claim agents and third-party vendors – together on one platform. This would result in fast and seamless claim processing due to reduced documentation, reduced dependence on manual checks and faster settlement of dues to vendors. In the personal motor insurance industry alone, smart contracts are estimated to have the potential to result in approximately $21 billion in annual cost savings globally for insurers through reduced processing costs. Were insurers to pass even half of these savings on to consumers this would lead to an average annual saving of $45 on premiums.
- Investment banking: In syndicated loans trading, settlement typically takes 20 days or more currently. Smart contracts could reduce the delay in processes such as documentation, buyer/seller confirmation and assignment agreement and checks such as KYC, AML and FATCA2, which are currently performed by back and middle-office staff. This could reduce the settlement cycle for corporate client from 20 days to 6-10. This could lead to an additional five percent growth in demand in future or 2 to 7 billion dollars, leading to higher income in addition to lower operational costs for the investment banks in the US and Europe. In addition, regulatory capital requirements and risk associated with delayed compensation payments during the settlement of the leveraged loan would reduce.
The broad applications of smart contracts within the financial services industry and the potential benefits to consumers have led many organisations to explore them as a matter of priority. Philippe Denis, Head of CIB Blockchain Initiatives at BNP Paribas, said: "Now is the time to start experimenting with smart contracts in a sandbox environment. By 2017, we will begin to see early-stage contracts enabling practical use-cases and also a connection to legacy platforms. By 2019 we might even begin to see consumer adoption ramping up."
Meanwhile, startups built around the idea of smart contracts are thriving. Louis Stone, Managing Director-Head of Business Development, Symbiont: "Two years ago Symbiont was started to show the transformative potential smart contracts could have on financial institutions and capital markets. In a short space of time, having proven the success of several use cases involving smart securities and syndicated loans, we’ve seen huge interest from the industry in exploring and adopting smart contracts."
Amol Khadikar, lead blockchain researcher at Capgemini’s Digital Transformation Institute, said: "Contracts have largely escaped the digitisation of financial services, leading consumers to bear the financial brunt of manual, antiquated processes. We’re at a point where distributed ledger technology can, and will, drive a revolution in contracts. This will hugely benefit the industry to reduce risks, cut costs and enhance operational efficiencies. Consumers would benefit, not just financially, but also from processes that are simpler and free of many of the hassles of today’s customer experience."
Please read the full report: https://www.capgemini-consulting.com/blockchain-smart-contracts
The Digital Transformation Institute is Capgemini Consulting’s in-house think-tank on all things digital. The Institute publishes research on the impact of digital technologies on large traditional businesses. The team draws on the worldwide network of Capgemini experts and works closely with academic and technology partners. The Institute has dedicated research centers in the United Kingdom and India.