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Dubai’s banking sector has seen a solid first half of 2019: The four largest banks, which account for almost 70 percent of banking assets, reported a combined net profit increase of 16 percent compared to the same period in 2018.

While earnings have increased significantly, costs have gone up as well. Together, the top four banks’ operating costs increased by 4 percent in 2019. Therefore, UAE-based banks are increasingly looking for solutions to reduce operating costs. That’s one of the main reasons why blockchain banking has become one of the most talked-about topics in the financial services industry today.

Ahmed Jacob, Dubai-based Managing Director of Blockchain Investment Manager INVAO, said: “Blockchain could bring significant cost savings in core parts of the retail banking business model.”

Remittances: faster and more cost-effective cross-border transactions

Cross-border payments currently total $600 billion annually, and the market is growing at about 3 percent every year. However, international payments are costly, slow, and highly mediated. Fees usually range between 2 and 3 percent of the transaction value and can be as high as 10 percent.

Jacob said: “Blockchain can generate value by fixing inefficiencies. If counterparties exchange cryptocurrency assets rather than fiat currencies, for example, payments will be made and settled in minutes via blockchain, rather than in days as with current systems.”

The management consulting firm McKinsey estimates that blockchain applied to cross-border payments could save about $4 billion a year.

“The cryptocurrency Ripple, for example, connects banks and payments providers via RippleNet, allowing them to make payments with fiat currency or Ripple’s own XRP cryptocurrency,” explained Jacob. “It takes about 3.6 seconds to settle an international XRP transaction, compared to several working days via the banking system.“

Blockchain-based bond issuances

Earlier this year, the French banking group Societe Generale has issued a 100 million euro covered bond on the Ethereum ($ETH) blockchain. The Blockchain technology creates more efficient processes for bond issuances in real-time.

Jacob added: “In bond issuances, blockchain reduces time to market, increases transparency, and leads to faster settlements; and a smart contract can automate the entire process.”

KYC and ID-fraud prevention

Worldwide, banks lose $15 billion to $20 billion annually from identity fraud, says Javelin Research. With more regulatory pressure to protect customer data, compliance costs have increased significantly over the past year. Global anti-money laundering spending, for instance, exceeded $8 billion in 2017, which is 36 percent higher compared to 2013.

A blockchain-based identity system could be a greatly beneficial solution. Jacob said:“Banks can use digital fingerprints for customer onboarding processes, which can be stored on a blockchain and referenced by any bank in the shared network.”

“Using a digital identity on a distributed ledger, banking customers would only have to create a digital identity once and can reuse it for any business they conduct with a bank connected to the network. This will reduce bureaucracy and allow banks to share data while still protecting the user’s data privacy rights,” added Jacob.

McKinsey estimates blockchain-based solutions for customer onboarding could create up to $1 billion of savings in operating costs for retail banks globally. Additionally, blockchain solutions could reduce losses from fraud by up to $9 billion every year.

Enhanced Risk assessment using data pooling

Risk assessment when making credit-decisions depends on the availability of data. Especially in emerging markets, such data is not always obtainable. Underbanked microenterprises, for example, may not have made enough noncash financial transactions for assessing their creditworthiness. As a result, banks tend to be conservative when making credit decisions.

Blockchain technology enables banks to pool large quantities of data that can be anonymously stored and protected by encryption protocols. Jacob stated: “All banks in the network can asses this data, given the permission of the banking customer. This way, banks could use data that have been uploaded by any bank in the network, which results in faster decision-making and more informed credit-allocation processes.”