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Capgemini explores potential of 'smart contracts'

Oct 14
Tags: Capgemini
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Capgemini explores potential of 'smart contracts'

Consulting and technology outsourcing firm Capgemini has explored the potential benefits that could be gained from 'smart contracts' in the financial services industry.

The company noted that smart contracts work in a similar way to standard written contracts - meaning they create a legally binding agreement based on set terms and conditions - but have an additional element that offers unique advantages.

By harnessing distributed ledgers such as the blockchain - a shared database containing protected records of transactions - smart contracts can automatically enforce actions such as payments as soon as the agreed conditions have been met, without any independent verification or processing.

One example of how this approach could be used is in the housing industry. Where the current process requires lots of documents and manual intervention, smart contracts could use shared ledgers to simplify the loan process, reduce processing costs and guarantee a quicker transfer of the property title to the buyer.

According to Capgemini, the average consumer could save more than US$500 (£408) in banking and insurance fees through the use of smart contracts based on blockchain technology.

The company's research was based on discussions and initial trials with industry professionals, smart contract start-ups and academics from the financial services industry.

It examined the potential of smart contracts in a number of sectors, including retail banking, where it's estimated that financial institutions could reduce their processing costs by up to $11 billion a year in the US and EU alone.

In the insurance sector, smart contracts could make claims much quicker and easier, with less paperwork to complete and fewer interactions required between claimants and insurers.

Investment banking could also benefit from using contracts in this way, with reduced delays in processes such as documentation, buyer/seller confirmation and anti-money laundering checks.

Louis Stone, managing director and head of business development at blockchain technology company Symbiont, said the firm has spent two years investigating the "transformative potential" of smart contracts for financial institutions and capital markets.

He revealed that there has been "huge interest from the industry in exploring and adopting smart contracts".

Amol Khadikar, lead blockchain researcher at Capgemini's Digital Transformation Institute, said: "Contracts have largely escaped the digitisation 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. Consumers would benefit, not just financially, but also from processes that are simpler and free of many of the hassles of today's customer experience."

While it highlighted the significant potential of these innovations for businesses and consumers, the report also acknowledged some of the challenges to more widespread adoption, such as privacy, the security of blockchain technology and regulatory constraints.

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Image: iStock/vadimguzhva

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