The India of the twenty-first century is at the cusp of an important revolution, and we must acknowledge it. Financial services aren’t the same they used to be two decades ago. This has been made possible by not just all the innovation and technology at our disposal but also the entire ecosystem shifting gears and gaining momentum. We are witnessing a revamp in financial services through an ever evolving FinTech space.
Ample financial reports and site data have suggested FinTech’s success and indicated its limitless potential. However, for the sake of brevity, we’d like to restrain ourselves and get to the heart of the matter. We’d like to discuss the potential and promise of the often debated technology, Blockchain.
Blockchain happens to be much misunderstood, mainly because of the buzz surrounding it and unclear representations from the media. In a gathering of top industry honchos, quite a few wanted to know if it can provide any IT cost savings, while few inquired if it will be possible to fire and replace their compliance department with Blockchain. With the initial stage being set by Bitcoin, the world wants to embrace Blockchain, but the hype makes it difficult to find the right problems to solve amidst the clutter of ideas.
This article is a part of the January edition of FICCI’s financial Foresights that focuses on ‘Leveraging the FinTech Opportunities in India’ and presents interesting propositions in the form of insightful write-ups contributed by both established and emerging players from the FinTech industry.
More articles from this series can be viewed here at: Financial Foresights
We’re organising Picup Fintech around this theme. Join us.
A note on the FinTech Ecosystem in India
Before we understand the role of any new technology in FinTech, it is important to acknowledge that Indian FinTech industry is well emerging from its nascent form because of the ecosystem in which it has been placed. A healthy relationship between the different elements of this ecosystem have allowed the overall industry to grow. These elements include the young minds who are ‘starting up’ ventures with the objective of disrupting the service sector with innovative technology, the investors who are coming to believe this disruption, thanks to the government and regulatory bodies recognizing the potential of the ‘disruptors’.
The central aspect of our FinTech ecosystem is the user or the customer. It is the customers’ behavior, requirements and preferences that define the extent to which a technology will prove to be disruptive in the real sense of the word.
Being a late entrant into the global economy, India is known to skip trends and jump to latest technologies; cases in point being pagers and answering machines. To a great extent, this is also true about the services sector in India. Indians, especially in the rural areas, haven’t still got used to quality services and have not formed technology habits. This eases entry for new entrants to acquire and create new habits.
…Indians, especially in the rural areas, haven’t still got used to quality services and have not formed technology habits..”
India has the third highest number of internet users in the world. In March 2016, 97.62 percent of India’s total 1,058 million telephone subscribers were wireless phone users. However, Therein lies the dichotomy. At one level, is the Indian that hadn’t been previously exposed to efficient financial service standards, and at another, is the Indian that is adapting to newer forms of technology every day and demands more.
The Government and regulators have also recognized the need for financial services to catch up with the technologically advanced Indian of the twenty-first century. Schemes like Jan Dhan Yojna are a step not just towards financial inclusion but also towards bringing India closer to adopting newer forms of technology.
In this dynamic space, it is worth opening the conversation around Blockchain now.
Blockchain for the CEO
Without getting too technical, Blockchain is simply a ledger which is distributed across multiple parties guaranteeing 100 percent consistent data with all of them. All parties can write to this ledger at any time and still be consistent with each other. Now data consistency across multiple parties has existed since ages, what makes Blockchain different is that you cannot change previous entries once they are a part of the ledger ‘ever’. Blockchain is therefore ‘distributed truth’ imposed by technology such that it can operate without the need of trust between a set of parties who agree to adopt it as their common ledger. Blockchain as a technology can bring in good governance and self-regulation without the need of a governmental body. However, this is just one technology that can be a potential game changer, and not one of the easy wins either, because it requires the industry to collaborate and adopt.
…Blockchain is the distributed truth, it can operate without the need of trust between a set of parties who agree to adopt it as their common ledger…”
Blockchain and use cases
The key to using Blockchain is first understanding that there is no real use case for a private Blockchain. It is impactful only when applied to business problems where multiple partners are writing and reading from a common ledger, without having to trust each other. If the problem statement doesn’t match this definition, Blockchain is an overkill or probably useless. For example, Bitcoin has been one of the direct consequences of Blockchain. It used Blockchain as a currency ledger. Needless to say, Bitcoin has reaped huge benefits from Blockchain, when it comes to problems like taxation, accounting and restricting black money.
Speaking of trust and our own experience in the domain, let us put the Insurance sector to test the principle that governs Blockchain. Insurance is largely based on trust and set policies. Here, the insurance company and the insured individual need to trust each other that either party will stick to the policies. So, if a complex insurance policy was to become a part of the Blockchain, settlement could happen without disputes based on the policy blocks.
With the help of Blockchain-based smart contracts, one can code the terms of an insurance policy into the contract itself. This means that in case of a claim, settlement would happen automatically. Let us explain this to you with an example of flight cancellation insurance. If someone had insured a flight which was later cancelled for some unforeseen circumstances, the Blockchain-based smart contract can get executed without manual intervention as soon as a flight gets cancelled. Similarly, if someone had insured their property against earthquake, the contacts could executed in case of an earthquake and the claims settled as per the magnitude of the quake.
A technology like Blockchain can also be used to minimize the perennial problem of frauds in insurance. Everything from a user’s medical history to claim history and profile can be put into a Blockchain and shared across as a part of KYC. Quite a few disputes in insurance claims happen when the insurer and insured give conflicting versions of the KYC, medical history and other details. If all such documents are a part of a centralized document management system supported by Blockchain, which can be accessed by the insured and insurer, then all such conflicts can get resolved without any intervention and need of a trust based system.
The Blockchain promise
Blockchain in itself is ineffective. For that matter, any single technology is ineffective in isolation. Blockchain will need other new age technologies as inputs to be practically used. At the same time, the insurance industry needs to collaborate a lot more to be able to manage frauds and customer profiling since they are the most common and amongst the biggest problem areas for everyone. Blockchain provides a great way to be able to do so without a regulator or an intermediary, all the while relying on technology which has other benefits to being fast, distributed and democratic.
Varun Dua, Co-founder, and Devendra Rane, CTO and Co-founder, Coverfox.com write this note for January edition of FICCI’s Financial Foresights