Talk to analysts, IT professionals or business leaders these days, and you’ll notice that the word “blockchain” is really a buzzword. But the real question is what it means in today’s context. The blockchain technology has really gathered pace in various industries especially the financial markets and is surely rewriting the rules of competition. Initially thought as a fad, blockchain and its related technologies (think cryptocurrencies) has now hit the mainstream.
What started out as a means of payment for a handful of tech savvy users and a few merchants now has proven to be quite the force in the financial industry. In fact, studies show that 77% of financial institutions expect to adopt blockchain as part of an in production system or process by 2020. Banking is one industry that has embraced this technology and wants to leverage it to improve the industry service offerings and reduce bank infrastructure costs by 30%.
Examples of financial institutions and banks that are leveraging this technology or are making plans to leverage it include Deutsche Bank, Nasdaq, DBS Bank, U.S. Federal Reserve, Standard Chartered Bank, Santander, BNP Paribas, Wall Street, ASX- Australia’s biggest stock exchange.
Breaking Down the Blockchain Technology
Atits core, the blockchain technology involves the creation of new business models, processes, software (think decentralized applications) and systems that results in more profitable revenue, greater competitive advantage, and higher efficiency.
Let’s look at some of the defining features of the blockchain technology:
· Digital- All the data on blockchain is digitized, and as a result, this eliminates the need for manual documentation.
· It leverages the Distributed Ledger Technology- This means that indistinguishable copies of all information are shared on the blockchain network. As a result, participants independently validate information without a centralized authority and even if one node fails, the remaining nodes continue to operate, thus ensuring no disruption.
· Cryptographically sealed- This means that blocks created are cryptographically sealed in the chain. Therefore, it is impossible to delete, edit or copy already created blocks and put it on network, thereby creating true digital assets and ensuring a high level of robustness and trust. In addition, the decentralized storage in a blockchain is very failure-resistant. Even in the event of the failure of a large number of network participants, the blockchain remains available, eliminating the single point of failure. Data stored in a blockchain network is immutable.
· Consensus-based- A transaction on the blockchain network can be executed only if all the parties on the network unanimously approve it. However, consensus based rules can be altered to suit various circumstances.
· Chronological and time-stamped- The blockchain technology is a chain of blocks just as the name suggests and each block is a repository that stores data pertaining to a transaction and also links to the previous block in the same transaction. These connected blocks form a chronological chain providing a trail of the underlying transaction.
This article seeks to look into why banks should adopt blockchain in mortgage processing and the benefits associated with this move.
The Mortgage Industry is better with Blockchain
The mortgage industry has experienced significant changes over the last decade. The 2008 financial crisis not only caused an increase in the number of delinquent borrowers that required assistance but also heightened the expectations that regulators, investors, and consumers have of the mortgage market. This means that the challenge that banks faces is to bridge the gap between current systems and platforms and the ease of use of a more streamlined mortgage–centric system.
The technology framework that most banks use today has been achieved through years of acquisition and integration of utilities, components and systems. It is typically driven by mandated changes: new industry offerings, new regulatory requirements and new investor requirements, which are quickly designed and implemented. The banking institution reactively responds to these changes rather than taking a proactive approach and implementing long-term sustainable solutions that differentiate the organisation through thoughtful customer offerings. Take, for example, the implementation of Mortgage Electronic Registration Systems (MERS) created in the 1990s for the mortgage system in the U.S. market. One critical component of this system involved the creation of a private system wherein underlying mortgages were assigned and reassigned outside of the traditional county-level recording process.
The legitimacy and overall accuracy of this alternative recording system has, a result, faced serious hurdles with the onset of the mortgage crisis: as the U.S. courts flood with foreclosure cases, the inadequacies of the Mortgage Electronic Registration Systems (MERS) model are being exposed, and both local and federal governments have begun to take action through suits of their own and the refusal (in some jurisdictions) of the courts to recognize the legal authority of MERS assignments. Legal inconsistencies in MERS originally appeared trivial, but they may reflect dysfunctionality in the entire U.S. mortgage industry.
The point here is that the current mortgage framework that banks uses is a collection of utilities, applications, components and systems that have been strung together to solve specific needs throughout the process. Such a model often lacks extensibility into new ways of doing business, lacks capability reuse and limits the ability to respond to future needs.
And besides the flaws within the current technological framework of the mortgage process, banks normally struggle to significantly reduce costs. This substantial rise in costs is due to the reliance on many intermediaries to perform most of the functions within the mortgage application process. In addition, due to the higher error rate of most of the current mortgage application processes, banks are forced to insert double and triple reviews within the process. The borrower engagement approach of today’s lenders is disparate and in fact, in the UK mortgage market, for instance, intermediaries still control 62% of market share.
Customers are able to initiate the loan application process with intermediaries or the bank’s online point of sale (POS) platform but, in most cases, the document collection and additional borrower information normally involves various other avenues and intermediaries. Furthermore, when you consider the loan underwriting document collection process, it’s really time consuming. Borrowers, lenders and closing agents go through fragmented channels that involve repetitive processes. As a result, the current mortgage application process is both costly and time-consuming, and to some extent creates uncertainty for the consumer.
Improvements on this front can only come from changing the way the process is managed. The mortgage banking industry will need to invest in the blockchain technology to improve the mortgage loan processing process. Once the mortgage application processes are moved to the blockchain ecosystem, true automation and effective management can be realised that not only reduces processing times and costs, but also creates a much more engaging and predictive customer experience.
As a matter of fact, data from PwC, shows that the blockchain technology could provide the ability to create shared copies of legal agreements and full electronic audit trail of changes, confirm agreement to contracts based on digital identity and defined permissions and provide the opportunity to speed up release of funds and reduce the time from contract exchange to completion. The data can be trusted to be accurate and secure (no single point of failure), with no data duplication or reconciliation errors.
The Agricultural Bank of China, for instance, in a bid to deepen the reform of mortgage loans has issued a farmland loan worth $300,000 on the blockchain in a trial– its new blockchain solution is referred to as E-Blockchain Loan. The bank used a segment of agriculture land as collateral to issue the mortgage loan in one of its Guizhou province branches. It also distributed the details of the loan across other node partners, including various commercial banks, Guizhou’s Land and resources Bureau, and the local branch of the People’s Bank of China.
Other new players that are making headway in this space include MorLabswhich seeks to simplify the global industry through its blockchain-based loan platform. MorLabs is a next-generation blockchain-based mortgage technology platform for consumers, real estate agents, mortgage brokers, lenders, aggregators and securitization. This platform will help banks to easily adopt the blockchain technology when it comes to mortgages.
Blockchain- Rethinking the Mortgage Process
For the banking industry participants, it is paramount that the flexibility exists to adapt business models and strategies when the markets dictate change. The blockchain revolution underway in the mortgage industry is not a fad. Across the mortgage industry, it is quite clear that customer experience and operational efficiency can be achieved through a blockchain enabled end-to-end home buying experience. Some blockchain capabilities will be ‘felt’ by the customer — they will interact with them throughout their journeys. However, a large number will be hidden from customer view. But, while they may not see the cogs physically turning, they will certainly reap the benefits of an easier, more transparent and faster experience.
The technology will help improve customer experience, spur innovation within products and service offerings, increase compliance and lower origination costs. And remember it’s not just the customers who will benefit but all the stakeholders in the mortgage market (think lenders, brokers, etc.).
It’s, however, worthwhile to note that the journey from a traditional mortgage model to a blockchain-based model cannot have a short-term focus that capitalises on quick wins. According to a survey conducted by Cognizant, only 48% of respondents said their organization has defined a blockchain strategy, and just 42% said they’ve identified the functional areas and business processes that could be affected by blockchain.
This is not a technology issue to be left to the IT function. It requires a holistic change in the mind-set of the entire banking institution and the ultimate delivery of products and services. When implemented adequately, this technology can potentially address all of the major challenges that the mortgage market faces and banks that do not formulate a comprehensive digital strategy risk losing business to competitors.