The financial industry continues to lead in blockchain adoption by investing heavily in blockchain technology and expanding its use.

According to Deloitte's March 2020 report on blockchain trends, 38 percent of financial services firms expect to invest $5 million or more in blockchain technology in the next year, up from 33 percent in the previous 12 months.

The money comes on top of massive investment in the industry over the past decade, with blockchain first gaining global attention back in 2009 with the arrival of the cryptocurrency bitcoin.

Now, more than 40 central banks are researching and experimenting with distributed ledger technology, which allows data to be stored on servers in a decentralized manner.

According to financial industry authorities and blockchain experts, through blockchain, the financial industry is improving security, reducing risk and saving costs, bringing visibility and reducing friction in the long chain of transactions that accompany most financial interactions. These blockchain benefits in turn reduce costs for financial firms.

McKinsey & Company estimates that blockchain technology for cross-border payments could save about $4 billion a year. Earlier studies, such as that by consulting and services firm Capgemini and another by Santander Bank, estimate that blockchain could lead to annual cost savings of $16 billion to $20 billion.

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1. Perform routine tasks faster and cheaper

Financial institutions have traditionally acted as intermediaries to transfer payments between different entities, which involves complex and time-consuming processes and adds friction to transactions.

Blockchain can simplify these processes, especially reconciliation and clearing and settlement, by removing friction, thereby reducing time and costs for financial institutions.

For example, in April 2020, the European financial technology company SIA launched a blockchain infrastructure to enable Spunta Banca DLT, an interbank reconciliation project based on private permissioned distributed ledger technology, organized by the Italian Banking Association ( ABI) promotes and is coordinated and implemented by ABI Lab.

“The reconciliation process for interbank transactions in Italy – previously managed by the spunta process – has always been very complex,” said Charley Cooper, managing director of enterprise blockchain technology firm R3.

"With multiple parties involved, the task of identifying and resolving inconsistencies has historically been hampered by a lack of standardization, use of fragmented and fragmented communication methods, and no single version of the truth," he added. "As a result, resolving mismatches in transactions has been a labor-intensive and time-consuming process. These issues make the spunta process ideal for automation through blockchain technology."

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2. Support for shared software network between entities

Since blockchain builds trust between multiple parties, the financial industry can use blockchain technology to build a network resource planner (NRP).

Consulting and research firm Everest Group describes NRP as a "blockchain-based software system that can help manage data and processes across multiple stakeholders in a business network." By allowing each organization access to the system, it enables organizations to provide a more cohesive customer experience.

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3. Facilitate and track data flows within financial institutions

While blockchain is often advocated to build trust between different organizations, financial institutions are starting to use blockchain to build trust between internal departments.

“What we’re seeing is more use of blockchain for internal use cases,” said Richard Walker, principal at Deloitte Consulting and head of blockchain financial services at the firm. "It really provides tremendous enterprise value for intra-company data movement, protecting customer data and complying with regulatory requirements."

For example, he cited some organizations using blockchain to facilitate internal payments, where financial information flows from one ledger to another. “It’s a chain of connected information across these general ledgers,” he said, adding that these blockchain use cases are creating transparency in capital and liquidity.

Walker said some entities are also considering using blockchain for know-your-customer activity to ensure customer data remains consistent and up-to-date across the organization, which is especially important for financial institutions to decide what risks to take based on customer data.

For example, large banks often have multiple customer systems of record. Having multiple systems disseminating customer information increases unintentional data discrepancies and increases the chance of deliberate misrepresentation, both of which can negatively impact business between customers and agencies.

Blockchain can address such issues by ensuring updated data is current across the system and creating an audit trail of changes made to customer data.

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4. Holding digital assets

In July 2020, the U.S. Federal Office of the Comptroller of the Currency (OCC) issued a statement. Confirm that national banks and federal savings associations have the authority to provide customers with cryptocurrency custody services. As a result, financial institutions will be able to hold cryptographic keys and digital assets.

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5. Alternative to banknotes

If the world wants to move away from physical money—paper money and metal coins—and the inefficiencies associated with it, it will need a distributed network like the blockchain to make it happen.

There is already a high level of interest in blockchain use cases, according to the experts, adding that financial leaders believe such a move would further reduce friction and create more transparency, leading to faster transactions and greater cost savings, Increase safety and reduce financial loss.

They point to work already being done using blockchain in the financial industry that is moving the global economy in that direction. While it’s unclear when the world will abandon physical currencies for digital assets, many leaders believe it’s not too far away.

According to Deloitte’s 2020 Global Blockchain Survey, 83% of the 1,488 respondents said they “strongly or somewhat believe that digital assets will replace or outright replace fiat currencies within the next 5 to 10 years.”