Could this technology have benefits for takaful and potentially disrupt legacy systems?
Despite what you may have been seeing in the mainstream news, advances in technology have enabled us to enjoy things that were once only accessible to a limited few.
Just consider the smartphone. (In fact you may be reading this on your smart phone right now). Almost everyone you know now probably owns a smartphone and within each smartphone contains software or apps that used to cost lots of money but are now available for free (or almost free). An example is WhatsApp, which has enabled communication with anyone on the planet for free. It has transformed the way we communicate and as well as the way we work and do business (WhatsApp groups are everywhere!).
It is however only one example of technology disrupting an entire industry.
Today’s technology has the potential to disrupt almost any industry and we are seeing examples of it on a daily basis. From Uber disrupting the taxi industry to Airbnb disrupting the hotel industry. These examples have now become household names, even up to the point of becoming verbs themselves; I recently overheard a conversation where someone said: “So do you want to uber it?”
Financial services have also been not spared from this wave of disruption with a myriad of startups and apps coming online. N26 is a mobile bank which operates entirely on your smartphone. It was launched in 2013 and currently has 2.3 million customers. The insurance startup Lemonade acquired nearly 250,000 customers within 2 years. As practitioners in Islamic Finance or more specifically Takaful, we should ask if we on the verge of seeing something similar happen within our realm.
Will these technological innovations be able to be implemented by takaful companies in the near future?
In an article published online on July 5, 2017 entitled “Disrupting Islamic Finance”, Dato Seri Hassan Kamil, the group CEO of Takaful Malaysia said: “Ultimately, Islamic finance players must recognize that digital disruption is real. It has been observed that these businesses can effectively engage technology to sustain and reinvent their business models and have the ability to effectively adapt to the different dimensions of change”. He goes on to say, “Meanwhile, most are struggling to maintain profitability as margins are under pressure and investments in new capabilities are required to capture growth opportunities”.
Bringing Blockchain technology into the picture
Blockchain is technology that is defined by Don & Alex Tapscott, (authors of the book Blockchain Revolution) as follows: “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value”.
One of the more interesting examples of the application of blockchain technology was presented by Nathana Sharma, a principal faculty member on blockchain at Singularity University, during the 2018 SU Global Summit. She presented an example of blockchain technology being used in the World Food Program to help Syrian refugees in Jordan.
“In Jordan there are almost a million Syrian refugees and the world food program has been successfully using blockchain technology to support feeding those refugees. A refugee can go into an aid depot to get food and things like hour and sugar without having to carry an ID card. An iris scanner is used to verify identity. The system pulls up the refugees’ identity and also the equivalent of a bank account where they can go and get food and supplies from the store. What blockchain technology does is that it means that this account can be administered for less than 90 percent of what would be required using traditional technology. This significant reduction in administration costs means that the world food program can feed more people and one dollar of donations goes further which is very powerful. Tthe program has been successful and it is being rolled out to more and more refugee camps.”
Some other interesting aspects of blockchain technology:
- In a traditional database system, a person with higher privileges could alter data, that might lead to security concerns, blockchain removes that and can store all changes or alterations as transactions over the system, which can even help to track changes.
- All transactions on a blockchain are cryptographically secured and provide integrity.
- Each block is connected to all blocks before and after it. This makes it difficult to tamper a single record because a hacker would need to change the block containing that record which needs, he/she needs to hack as well as those linked to that block to avoid detection.
- By removing third-party intermediaries and overhead costs for exchanging assets, blockchains have the potential to reduce transaction fees significantly.
- In the financial industry, especially in post-trade settlement functions, blockchain can play a vital role by allowing quicker settlement of trades as it does not require a lengthy process of verification, reconciliation, and clearance because a single version of agreed-upon data is already available on a shared ledger between financial organizations.
- Keeping records or data on a blockchain is cheaper than cloud computing and does not have to rely on trust from the cloud provider.
So would takaful operators stand to benefit from this technology?
We will attempt to discuss this in the next article of this series as well as look deeper into how blockchain technology works and some potential use cases for takaful.