How is Blockchain Revolutionizing Traditional Banking?
Radical shifts are taking place in the banking industry. The business models are changing, the regulations are getting mounted, and the compliance pressure is increasing. People are also becoming more concerned about privacy, and the demands of customers are always evolving. As a result, the banking industry is indeed facing several challenges.
Upgrading legacy banking systems in order to support innovations of today is also a challenge, however, with blockchain — digital transformation in traditional banking is possible. In this article, we will discuss how blockchain drives change in the world of banking today.
Blockchain drives development of new services
Blockchain removes incorruptibility and drives simplicity and efficiency by developing new financial services and process infrastructures. It facilitates the inflow of liquid cash via smart contracts. This will allow participants to convert their fiat currencies for supporting foreign exchange and will prompt real-time cross-border payments.
Blockchain refers to an expanding records list known as blocks. Each of the blocks has the previous blocks’ cryptographic hash known as a timestamp. Right away from financial services to telecom and healthcare and sciences, almost all industries have been greatly influenced by the development of blockchain applications.
The electronic ledger
Blockchain development in the banking sector revolutionizes paper-intensive processes that are internationally trade finance-oriented and converts them into an electronic ledger that is formulated on decentralization. This decentralized ledger provides the ability to participating entities like banks to access information from only one source.
Most of the banks are trying blockchain for record-keeping, money transfers, and any other back-end functions. It allows the banks to track documentation and validates digital assets’ ownership.
Reduces fraud and corruption
Across the world, the majority of the banking systems are created on a database that is based on centralization. Such databases are vulnerable to cyber-crimes and cyber-attacks. The money transfer services and stock exchanges are also prone to online financial crimes. But the technology of blockchain in banking industry will reduce these crimes that take place online against banking and financial institutions.
Know your customer (KYC)
Blockchain service providers enable organizations to have access to a client’s verification details. This prevents the repetition of all the KYC processes. Most financial institutions spend uncountable amounts of money to ensure they know their customers in regard to their banking needs. Large expenditures like the before mentioned can be reduced by applying blockchain technology.
Smart contracts
Smart contracts are facilitated by blockchains because they store almost every type of digital information, including the computer code that can only be executed by a few parties on entering their keys. According to the criteria of the set, contracts can be made, and finance transactions can be executed when the code is correctly programmed.
Settlement and clearing
The unorganized web that stores securities costs and loans needs the bank to invest uncountable money for running. Nowadays, blockchain application development can be implemented through a myriad of manual reconciliation and messaging.
Trade finance
Most of the finance trade is dependent on paper, like the bills and credit letters that are sent by the post or faxed across the world. Several individuals consider blockchain to be the most obvious solution, especially where several parties need to access the same information.
Credit and loans
When it comes to credit and loans, blockchain can be utilized in two distinct ways. Firstly, by allowing it to be used in the loans business, where the lender will be able to check the potential borrower’s creditworthiness. The credit bureaus store data in centralized databases, which is vulnerable to hackings, which can directly affect an individual’s creditworthiness. For resolving this issue, blockchain can be utilized by the banks for availing the correct and authentic data about the borrower.
Secondly, by using blockchain, a loan seeker can get a loan via peer-to-peer lending, where a lender is a person instead of any lending institution. With the support of blockchain technology, lenders have the capability to check the loan seeker’s creditworthiness.
Payments
In the process of payments, blockchain disruption can prove to be highly transformative. With higher security and minimum costs, the banks will be able to process payments between themselves, their clients and organizations, with the use of blockchain. The intermediaries can also be eliminated from the system of payment processing by utilizing blockchain.
Trading platforms
There exists operational error in the platforms of trading. It means, overall, these platforms are vulnerable to fraud. With blockchain technology development, fraud cases can be reduced.
Blockchain is transforming traditional banking
The banking and financial sectors are taking blockchain mechanisms seriously. The decentralized, tamper-proof, and immutable characteristics of blockchain technology make it perfect for cost reduction and streamlining asset trading, payments, retail banking, securities issuance, and settlements and clearing. Blockchain technology is no longer just limited to cryptocurrencies, and bitcoin in particular can be used to transform traditional banking services.
Special thanks to Tremis Skeete, Executive Editor at Product Coalition for the valuable input which contributed to the editing of this article.
