Smart Contracts are the transaction tools of the future. Through creating safe, trackable contracts of law that are automatically enforced, smart contracts will change the way many industries interact with their clients and manage their agreements and by using Ethereum blockchain technology, smart contracts are self executing contracts when all the criteria are met.
Smart contracts benefits include better security for the safety and confidentiality of the contract, transaction costs are reduced and the redundancy is increased as multiple copies are held across the Internet.
Smart contracts are most effective in area’s where the terms of the contract are absolute and measurable, for example in the shipping and freight industry and in the financial industry, where the terms are not subjective but can be calculated and tracked.
As a result of this, one of the greatest opportunities for smart contact applications is in the banking industry, where commercial contracts are an inherent part of the nature of the business and the terms of the contract are not subjective. In addition, because Ethereum is decentralized and open source, any developer can use it to create and write smart contracts.
Smart Contracts: Banking uses cases
In October 2016, Capgemini Consulting released a paper named “Smart Contracts in Financial Services: Getting from Hype to Reality ” which highlighted how Ethereum contracts reduce risk, inefficiency, error and fraud for the banking industry in comparison to the traditional paper based contracts. The report foresees most first world banks moving to smart contracts in totality as early as 2020.
Some of the area’s within the banking industry that have been identified as ideal for smart contracts include:
These require huge amounts of data to be collected, documented and monitored, including property values and large amounts of personal data of all the parties involved. Through access to online information such as title deeds and Land registries, the process can be automated and the turn around time greatly reduced. In addition the monitoring of the activity in terms of the contract can be done automatically reducing the delay of manual interactions and eliminating the chance of error. Capgemini estimated savings of up to $960 per mortgage.
Due to the ability of Ethereum smart contracts to calculate and manage huge amounts of data and execute complex calculations, the development of smart bonds,where the legal requirements of the bond are coded into the contract, is a given.
Knowing your customer: before any interaction with a bank a large amount of information about the customer needs to be collected. With the introduction of smart contracts and blockchain the information of all current clients will be easy to access and update new applications, reducing the frustration of the customer and the costs and time delay for the financial institution.
Clearing and Settlements:
This is another huge processing area for a bank where smart contracts can make a big difference. Currently a consortium of banks is testing the possibility of smart contracts in this arena to understand the possible impact. By using smart contracts the calculations of the trade settlements can be done automatically and show significant savings.
Not all the possibilities mentioned here are immediately available for the banks. In most cases, careful thought and planning still needs to be applied before the move to smart contracts in total, but the opportunity for the banks to improve their service, accuracy and bottom line makes involvement in this area inevitable.