Smart contracts are estimated to offer savings of over $500m for an average consumer by reducing banking and insurance fees, according to a study by Capgemini’s Digital Transformation Institute.
The report also highlighted the challenges in using the technology, including privacy, the security of the blockchain technology and the regulations.
It said that smart contracts work like standard written contracts in executing a legally binding agreement based on a set of agreed terms and conditions.
They can automatically enforce actions like payments after the agreed conditions are met, eliminating the need for independent verification or manual processing.
The technology enables speedy processing of loan applications, cut processing costs and accelerates transfers.
Capgemini’s Digital Transformation Institute lead blockchain researcher Amol Khadikar said: "Contracts have largely escaped the digitization of financial services, leading consumers to bear the financial brunt of manual, antiquated processes.
“We’re at a point where distributed ledger technology can, and will, drive a revolution in contracts. This will hugely benefit the industry to reduce risks, cut costs and enhance operational efficiencies.”
By using smart contracts, banks are estimated to be able to cut between $3 and $11bn annually by lowering processing costs in the US and EU alone.
In syndicated loans trading, smart contracts could reduce the settlement cycle for corporate client from 20 days to 6-10.
Financial institutions such as BNP Paribas, Deutsche Bank, and Credit Suisse are already involved in the development of contract technology and systems underpinned by blockchain.
BNP Paribas CIB Blockchain Initiatives head Philippe Denis said: "Now is the time to start experimenting with smart contracts in a sandbox environment.
“By 2017, we will begin to see early-stage contracts enabling practical use-cases and also a connection to legacy platforms. By 2019 we might even begin to see consumer adoption ramping up."
Image:Capgemini office, Rondo Business Park, Kraków, Poland. Photo courtesy of Astrorek/Wikimedia Commons.
