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 fi nancial 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.
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- Investment banking: In trading and settlement of syndicated loans, corporate clients could benefit from shorter settlement cycles. Rather than the current 20 days or more, smart contracts could bring this down to 6 to 10 days. This could lead to an additional 5% to 6% growth in demand in the future, leading to additional income of between US$2 billion and $7 billion annually. Investment banks in the US and Europe would also see lower operational costs.
- Retail banking: The mortgage loan industry will benefit significantly by adopting smart contracts. Consumers could potentially expect savings of US$480 to US$960 per loan and banks would be able to cut costs in the range of US$3 billion to $11 billion annually by lowering processing costs in the origination process in the US and European markets.
- Insurance: Usage of smart contracts in the personal motor insurance industry alone could result in US$21 billion annual cost savings globally through automation and reduced processing overheads in claims handling. Consumers could also expect lower premiums as insurers potentially pass on a portion of their annual savings to them.