Permissioned blockchain in banks and insurance companies

Status quo in Germany — few blockchain business models

In Study report 2019 The Federal Association of Information Technology, Telecommunications and New Media e.V. (Bitkom) came to the conclusion that blockchain technology is not yet widely used in companies in Germany. 17% of large companies with 500 employees or more used the blockchain. For companies with 50 employees or more, the figure was only 2%. Compared to other sectors, the banking and insurance sector tended to be open-minded about deployment. However, this was only used by 6% of companies.

Not much has changed in 2020 either. The “PwC Blockchain Survey 2020" confirms a high level of interest in blockchain technology for the financial sector (75%), but 97% of companies still do not provide a significant budget for it. The companies cite “regulatory and technological obstacles” as the reason. The framework conditions for crypto assets and digital assets have improved significantly since then. If market pressure increases in the future, this hesitation could have fatal consequences.

Permissioned blockchain as a solution for security and scalability

Permissioned blockchains are aimed at companies that formulate different requirements for a blockchain. In contrast to the public blockchain, companies, banks and the like can use the Permissioned Blockchain as needed. The operator of the blockchain modifies the authorization concept according to the respective needs.

As a result, banks alone can offer access to their customers and validate the transactions themselves. The bank continues to act as sole administrator. Customers can also be assigned individual authorizations.

Login processes and identifications are an indispensable part of the Permissioned Blockchain and are essential for banks. Before bank customers transfer funds, a unique identification is carried out. Hyperledger is a well-known blockchain platform that is based on the concept of permissioned blockchain.

Areas of application of the permissioned blockchain

Such permissioned blockchains are used whenever performance and security requirements increase. For banks and insurance companies, the technology offers the opportunity to advance digitization in a (BaFin) compliant and legally regulated manner and to use the benefits of decentralized blockchain technology to process transactions.

The strict regulation is considered particularly secure compared to public blockchain. Banks' sensitive customer data is protected from access by third parties. The absence of unhindered public access to the blockchain network also means greater security for customer data.

Revolutionize compliance environment with permissioned blockchain

Compliance management aims to ensure that companies, banks and insurance companies comply with government rules and internal guidelines. Otherwise, there is a risk of severe penalties. The head of the Deloitte Blockchain Institute Dirk Siegel points out that blockchain technology for more clarity and transparency can worry.

The permissioned blockchain offers practical added value in reporting, for example. Banks and insurance companies are required to forward certain information to regulatory authorities. Blockchain technology stores this data in an audit-proof manner and enables complete documentation. Data manipulation is made more difficult. This makes the compliance environment in banks and insurance companies more effective. At the same time, compliance management costs are falling and customer trust is increasing.

Operational efficiency and optimization of processes in the financial sector

The use of permissioned blockchain in banks and insurance companies results in less complex processing of transactions. In work-sharing processes, the various participants can interact simultaneously via permissioned blockchain in order to shorten transfer times. The time-consuming process of sending relevant documents is a thing of the past. Authorized participants can access the data at any time and drive operational business forward.

The optimization of banking processes also results from the integration of smart contracts — or chaincode, as it is known in the Hyperledger environment. If contractual requirements are met, the contract is concluded automatically. Possible application examples include the automated payment of dividends by banks or smooth refunds when the insured claim exists.

The banks of the future

The structural transformation of the banking sector in Germany is in full swing. As a result of COVID 19 measures, banks had to close branches or shorten opening hours. According to the “Digital Banking Maturity Study 2020" by Deloitte Many banks have implemented new digital functions, such as fully digital processes for account opening (34%), remote identification & verification (23%) and contactless payments (18%).

Banks and insurance companies must be future-oriented. The Covid-19 pandemic acts as a further catalyst for digitization. A rapid transition to digital processes is now a top priority for many banks and insurance companies. The permissioned blockchain or the concept of open banking are predestined for banking 2.0. When banks are involved Collaborate with FinTech startups, they can bring the expertise directly in-house.

It is essential for banks and insurance companies to further develop their own business model. The transformation of banks into technology and infrastructure providers offers the opportunity to remain competitive in the long term. With a holistic strategy and a focus on digital success factors, banks can form an interface with the digital economy and reaffirm their right to exist.