Smart Contracts in

Financial Services: Getting

from Hype to Reality

What is a Smart Contract?

Programmable contract capable of automatically enforcing

itself upon the occurrence of pre-defined conditions

How Smart Contracts Work in a Permissioned Blockchain System

Smart Contracts
Physical Contracts
Lower operational
overheads and costs leading
Alice Bob to economical financial
Physical Contract
products
1
2
3
4
5 Banks, Insurers,
Smart Contract
6
7
Smart Contract Capital Markets
1
2 1
3 2
Act as custodians of
Alice Bob 4
5
6
Smart Contract
3
4
5
6 assets, validators and
7
7

1
2
authorizers of all contracts
3 A software program and transactions
4
5 on the distributed
.
ledger, allowing an
Blockchain/permissioned ledger,
.
.
.
immutable, verifi-
Programming and Encryption 10
able and secure
record of all Reduced
contracts and administration and
transactions
Faster, simpler and service costs owing
hassle-free processes, to automation and
reduced settlement and ease of
Smart Contract
times compliance and
reporting
1
2
3
4
5
6
7

Regulators/Auditors
Central authorities that keep
Transacting parties a tab on the system with a
wide-ranging read-access
Alice Bob Individuals or Institutions
to blockchain

Smart Contract Lifecycle

Record the terms Connect with internal Evaluate Self-Execute

and external systems

Alice Bob
Oracle
Transacting parties Services Alice Bob

A smart contract The smart contract The contract waits for The contract
records the terms connects with external triggers to self-executes upon
of a contract banks’ internal evaluate pre-defined fulfilment of
between Alice and systems or external conditions conditions via triggers
Bob on a distributed world, e.g. account
ledger shared balance, share
between all prices etc. Provides data for Provides data for
participants and compliance and compliance and
validated by reporting reporting
validators

Banks, Insurers, Regulators/

Regulators/ Capital Markets Auditors
Auditors

When will Smart Contracts Become Mainstream?

Mainstream
adoption begins

Take-off 2020

Experimentation 2018-2019 Mainstream

adoption of smart
contracts begins
2015-17 Regulations and
Origin laws to bring Emergence of
blockchain and new products and
2014-15 R3CEV initiative smart contracts services enabled
consortium of under the purview by smart
banks, insurers of law arrive on contracts
2012-14 Smart Contract and IT service scene
solutions providers is
introduced formed Expected first
1997 Basic smart in-production
Banks and other Several POCs implementation of
contract companies set up
capabilities added succeed, smart contracts
labs to develop implementation by financial
Nick Szabo coins to Bitcoin proofs-of-concept gathers speed services firms
the idea of smart (POCs)
contracts

2009
Satoshi Nakamoto
introduces the
concept of block-
chain

Why do we Need Smart Contracts?

Offer a Higher Reduced Potential to Weed out

Degree of Trust Administration and Inefficient Business
and Reduced Risks Service Costs Processes

What are the Opportunities in Financial Services Industry?

Capital Markets and Commercial and

Insurance
Investment Banking Retail Banking

Corporate Finance: Trade Finance: Automated claims processing

Initial Public Offers (IPOs), Supply-chain documentation, in motor insurance, crop
Private equity invoicing and payments insurance, etc.

Structured Finance: Syndicated Mortgage Lending Fraud prevention in luxury

loans, leveraged loans goods
Loans and crowdfunding for
Stock exchange market startups and small and medium New products: insurance for
infrastructure enterprises the sharing economy,
autonomous vehicles,
peer-to-peer insurance, cyber
insurance

Regulatory reporting and compliance;

Know Your Customer (KYC) and Anti-Money Laundering (AML)

What do Financial Services Firms and their Customers

Stand to Gain from Smart Contracts?

Syndicated Loans Business

Faster Trade Increased fee income
Settlement in
6 - 10 Investment
US $2 - $7 billion
Clients per annum globally
days per loan in the US Banks

Mortgage Loan Origination

Lower Processing Fees Lower operations costs

$480 - $960 US $3 - $11 billion

Customers savings per loan in the US Banks per annum in the US and EU

Motor Insurance Policy Servicing

Lower claims
Lower Insurance Premiums settlement cost

Customers
$45 - $90 US $21 billion
savings per annum in the US and EU Insurers per annum globally

Key Challenges in Smart Contract Adoption

Technological Challenges Legal Challenges Organizational Challenges

Scalability Governance
in speed of execution Regulatory Challenges of blockchains
in applicable laws
Interoperability Lack of Talent
with legacy systems in smart contracts

Common Challenges

Privacy and Security Inflexibility

of users and transactions of smart contracts

How can the Financial Services Industry Realize the Full

Potential of Smart Contracts?

Be Prepared for Critically Evaluate Conceptualize Build Capabilities Take a Portfolio

the Arrival of Your Needs – Do New, Smart and Approach to
Smart Contracts We Really Need Contract-Enabled Fast-Forward Smart Contract
Smart Contracts? Products and Smart Contract Experimentation
Services Innovation with
Strategic
Partners

Reach out: Interested in reading the full report?

https://www.capgemini-consulting.com/blockchain-smart-contracts
Follow us on Twitter @capgeminiconsul or email dti.in@capgemini.com

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