• Roland Berger study: Blockchain is accelerating the creation of new business models and can help financial service providers reduce costs
• Broad-scale adoption set to begin in three to five years – first solutions already on the market
• Banks and insurers should take steps to prepare themselves for blockchain and the possibilities it holds

Munich, March 27, 2017

Blockchain, the backbone of the Bitcoin digital currency, is increasingly going to make its way into the financial sector in the coming years and will further accelerate the digital transformation of business models. The innovative blockchain technology provides a way of executing transactions involving networks of participants who need to share information in order to conduct business. It will eventually be possible to complete financial transactions that are currently conducted through middlemen without any outside involvement. According to the World Economic Forum, 10 percent of global gross domestic product will be stored on blockchain technology by 2025.

"Blockchain will change the way business is done around the globe," predicts Stephan Janssens, Partner from Roland Berger in Brussels. "The technology and its broad range of potential uses allows trade to be transacted or contracts concluded without recourse to any institutions or agents acting as intermediaries. This will enable financial service firms to reduce costs and develop new business models." The Roland Berger experts analyzed the opportunities and threats of blockchain technology in their new study, Enabling decentralized, digital and trusted transactions – Why blockchain will transform the financial services industry.

Blockchain: decentralized transactions and lower costs

What blockchain technology does is digitally store all of the steps in a transaction involving a large number of interconnected participants. The information is stored decentrally in a manner that provides end-to-end transparency, is secure and traceable, and enables the use of smart contracts with self-executing digital instructions. "With its huge volumes of data, numerous intermediaries and services that need to be secured and verified, the financial sector is one industry with many potential applications for blockchain," says Sebastian Steger, Partner from Roland Berger in Germany.

Using the technology will also enable the financial sector to reduce costs on a substantial scale – both by cutting out the various middlemen and by benefiting from the high level of process automation.

Exciting opportunities for the financial sector: customer-centric business models, new product offerings

Banks and insurance companies will also be able to develop new business models. "Financial service providers may look like they'd be cannibalizing their own business by offering blockchain transactions," explains Roland Berger expert Janssens, "but in reality what the technology does is enable them, for example, to win new customers around the world who are either unbanked or have never been insured."

Furthermore, the technology comes with high standards of security. And potentially, blockchain transactions can be completed much faster than traditional contracts and transfers. Financial service providers will therefore have the opportunity to acquire additional customers and generate new business in areas such as trade finance or covering transportation risks in international shipping. Currently, in overseas trade, the shipper and the receiver have to have their respective banks manage agreements that document the value of the shipment, how it is loaded and transported, and who is responsible for it up until which point in the proceedings. And all participants require an original of every one of these documents. In the future, however, companies could put all of the information and rights traditionally stored on paper into blockchain, where the digital data would be immutable, time stamped and traceable, and the trading partners could access it quickly and cost effectively. Payments could therefore be triggered sooner and shipments delivered faster.

Insurance cases too can be resolved with similar efficiency. Blockchain technology can safely store and update even sensitive data on customers and their property. Take car insurance for example: With the benefit of blockchain, insurers will be able to offer customized policies based on driver and vehicle data, and quickly offer help and assistance in the event of an accident or breakdown. How it works: The vehicle's ADAS (Advanced Driver Assistance System) system notifies the insurance company of an incident in real time, whereupon a repair service, taxi or other provider is immediately informed and can rush to the driver's aid. Smart sensors record the damage to the vehicle and notify the insurer straight away. "All of this creates higher customer satisfaction and reduces the cost to insurers of paying the various service providers. And it is easy to combine with other digital solutions that are already on the market today," says Stephan Janssens.

Broad-scale adoption to begin in three to five years

Nevertheless, the new technology still has certain hurdles to clear. According to the Roland Berger experts, these include common standards as a prerequisite for cooperation between countries, industry sectors and businesses. Legal frameworks and security aspects are other important considerations that will need to be resolved before blockchain can become established.

"Policymakers, regulators and blockchain activists as well as the industry itself are working on these aspects, and additional solutions will no doubt be forthcoming soon," says Sebastian Steger. "For the moment, blockchain technology is still very much in a trial and experimentation phase in financial services. But market-ready applications are already on the horizon." The Roland Berger experts believe that the technology is likely to be in use on a broader scale within the next three to five years. Financial service providers need to act now and get ready to secure their competitive edge.

• Photos Roland Berger