By Rajesh Kamath
Building on the transformative potential of blockchain technology, internal blockchains look like a promising area for organizations today – they present enterprises with a way to test drive and roll out blockchains with minimum risk and without having to wait for an entire industry to agree on standards and protocols. As large, more established organizations have started exploring this technology, financial institutions are among those leading the charge; looking to capitalize on the potential benefits as they get their first blockchain implementations going.
Though financial institutions are incubating or piloting blockchains today, it will take some time for the long-term blockchain strategies in the industry – business, operational and technology – to stabilize. And of course, industry participants will adopt strategies that best meet their specific needs. For example, the blockchain requirement for a large multinational bank will look completely different from that of a regional institution, which in turn might significantly differ from that of a small institution like a credit union or community bank.
Many financial institutions have started to experiment with blockchain but what are internal blockchains and how can they help? I define them as blockchains implemented completely within the enterprise – where all immediate providers to and consumers of information (and value) from these blockchains are internal applications. The blockchain data flow or process does not spill over the walls of the enterprise. Since there are no external dependencies, organizations can exert complete control over the various aspects of their blockchain rollout in this case.
The key driver for internal blockchain implementations is typically operational efficiency – the other benefits like immutability, security etc. are mostly covered through existing technology and operational mechanisms. The promise of almost simultaneous availability of the same data at multiple “locations” when any application writes to the blockchain offers exciting possibilities – instant data with significantly reduced reconciliation needs. The benefits of such a mechanism are even more evident in large multinational multi-LOB financial institutions – with operations and information flows spread across multiple geographies and lines of business.
To understand how much an organization can expect to gain in terms of operational efficiency by implementing a blockchain internally, it helps to look at the causes of operational inefficiency in organizations. Below are three common but critical contributing factors:
Systems that participate in today’s processes might spend a lot of time waiting for data. Some of this wait is driven by legacy technology while some of this might be process design or architecture related drawbacks.
Implementation of a blockchain can help drive efficiencies in this context – the ability to update multiple applications participating in a business process almost simultaneously without having to undertake massive process or system re-engineering is indeed where blockchain can play to its strengths. Some amount of application & process changes will however have to be factored in.
However, the quantum improvement due to blockchain will differ – bottlenecks in other parts of the end-to-end process often play a vital role in determining overall efficiency gains. For example, if updates about transaction information are available instantaneously across the process in a post-blockchain world but other parts of the overall fulfillment process continue to be batch-based, then the end-to-end process has become faster but not optimally so.
Errors in data, missing data, mismatched data, lack of high quality reference data – a lot of the operational inefficiency in today’s processes can be traced back to problems with data quality. Lack of data quality holds up smooth operations in many ways – rejections / NIGOs, need for manual data investigation and need for rework.
Unfortunately, all the manual interventions that are required in the current process on account of data quality might still need to be made, even after a blockchain rollout. This fact means that blockchain is unlikely to deliver the promised operational efficiency improvements in a bad data quality environment.
Another aspect of the data environment that is evident in many financial organizations, as well as other industries, is lack of data standards – both external as well as internal. As enterprises evolve, both organically and inorganically, one of their visible characteristics are differences in how to manage and process data across their application landscape – different schemas for the same dataset, different names for the same attribute, different rules to handle the same transformation. This problem also tends to get worse with increased scale and age of the organization. This lack of consistent data standards can also lead to the need for manual intervention, which mostly manifests as data reconciliation tasks.
Such lack of standardization in the data ecosystem can also have a stunting impact on blockchain-driven efficiency improvements in some scenarios. All the reconciliation interventions that are needed in the current end-to-end process due to a lack of data standards will need to continue in the future state.
Though automation can help mitigate some of these interventions, the long term solution remains harmonization of data standards across the enterprise working in conjunction with blockchain.
…Value will come to you shortly
To summarize, it is critical to understand what parts of the end-to-end process deliver (or indeed, impede) value and how, before taking up a blockchain implementation. The enabling factors enumerated earlier need to be in place in the organization before benefits of operational efficiency can be derived from a blockchain, even in an internal implementation.
In fact, with the additional burden the program will impose on the IT department during the implementation and after, a blockchain implementation that ignores these factors is more likely to be a pair of cement shoes than the hoped for silver bullet.
-Rajesh heads Incubation and Solutions for the Financial Services business unit at Incedo Inc. a California-based technology services firm specializing in data management, product engineering and emerging technologies. With nearly 17 years of experience in technology, mainly in financial services, Rajesh and his team help clients innovate in emerging technologies like big data, data automation, text analytics, machine learning, chat bots and predictive modeling.