Executive Summary
The potential of smart contracts – programmable contracts that automatically execute when pre-defined conditions are met – is the subject of much debate and discussion in the financial services industry.
Smart contracts, enabled by blockchain or distributed ledgers, have been held up as a cure for many of the problems associated with traditional financial contracts, which are simply not geared up for the digital age. Reliance on physical documents leads to delays, inefficiencies and increases exposure to errors and fraud. Financial intermediaries, while providing interoperability for the finance system and reducing risk, create overhead costs for and increase compliance requirements.
In this report, we aim to cut through the speculation and hype around the potential of smart contracts. We have conducted detailed discussions with financial services industry professionals, prominent smart contract startups, and academics (see Research Methodology at the end of this paper). Our study confirms that smart contract adoption will lead to reduced risks, lower administration and service costs, and more efficient business processes across all major segments of the financial services industry. These benefits will accrue from technology, process redesign as well as from fundamental changes in operating models, as they require a group of firms to share a common view of the contract between trading parties. Consumers will benefit from more competitive products, such as mortgage loans and insurance policies, along with simpler processes that are free of many of the hassles of today’s customer experience.
To realize those benefits – and build a smart contract strategy and approach – executives will need to answer a number of questions.
What are the potential benefits of smart contracts for financial institutions and their customers?
What groundwork is required for smart contracts to enter the mainstream?
When will smart contracts become a reality?
How can banks and insurers realize the true potential of smart contracts?
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