Experts believe that the underlying technology of blockchain will have far-reaching implications that will transform the banking industry. In this article, we will take a look in the applications of Blockchain in banking.
What is Blockchain?
Blockchain is a distributed, decentralized and immutable digital ledger of information which sits on the Internet.
If you are wondering what does this mean? Here’s a simple explanation of this new technology;
Decentralized: There is no central authority that can control or manipulate the ledger. All the involved participants can talk directly to each other. Blockchain doesn’t require the intervention of third parties for carrying out transactions.
Distributed: The digital ledger is spread across a network of peers where each peer is considered equal and participates by utilizing & providing a foundation to the network.
Immutable: It is cryptographically secured and no one can tamper with the data present inside the blockchain.
Blockchain was initially devised for cryptocurrencies such as Bitcoin and was created by a person or a group of people known by the name, Satoshi Nakamoto. It consists of a chain of blocks where each block is a collection of data and is connected to other blocks in the chronological order. Hence the name Blockchain.
Why Blockchain in Banking?
Blockchain acts as a highly upgraded system that helps banks to handle security, scalability and fraud issues giving the banks, the much needed technological edge.
Bank transactions are risk prone, still involves intermediaries and takes about a few days to complete. Blockchain makes banks self-sufficient entities without the need for intermediaries. This quickens the transaction process and helps banks to overcome risks on their own.
World economic rate is increasing due to the increase in small transactions and payments in the digital space. There will arise a need to keep up with the increasing economic rate. By ensuring low transaction fees, Blockchain can make small transactions feasible, scalable and quick. This helps the banks to keep up with the increasing economic rate.
How finance and banking can benefit from Blockchain?
Complying with Norms
Banks & financial institutions have to comply with various norms such as Anti-Money Laundering (AML) and Know Your Customer (KYC) which involves additional costs and are time-consuming. Moreover, banks and financial institutions perform the verification of customers individually.
With Blockchain in the picture, the independent verification of each customer by a bank or financial institution will be easily available for others and they don’t have to perform the KYC process again. This helps to reduce the duplication of the efforts and all the financial institutions can access the details of the clients in real-time.
Reduction in Fraudulent Activities
Using a centralized database for managing money and operations has become one of the major factors that leads to fraudulent economic activities. The centralized database is easily vulnerable to cyberattacks.
Blockchain is an immutable technology that operates on a distributed database where each transaction is stored in the form of a block which is cryptographically secured. This makes it extremely difficult for hackers to hack and corrupt the system.
A secured Blockchain system helps in the elimination of cyberattacks on banks & financial systems. Since all the blocks in a Blockchain are interconnected, a breach in one of the blocks impacts the other blocks and they begin to show the changes immediately. This helps to track the breach in the system quickly even before the hacker can tamper with the whole system.
Promotes Financial Inclusion
Blockchain being a distributed technology allows for the shared control of data. This helps to promote innovations that aid financial inclusion. Some of the major obstacles associated with financial inclusion are centralized entities, costs associated with account ownership, trust issues due to third-party involvement and others.
The decentralized nature of Blockchain eliminates the need for centralized entities and intermediaries required to complete a transaction.
A peer-to-peer network that runs on Blockchain eliminates the need to pay fees to third-party services. This, in turn, leads to low entry barriers and can also reduce the costs involved in maintaining accounts.
By eliminating the requirement for identity documents, it also gives the unbanked population access to financial services.
Smart contracts run on top of a Blockchain and are lines of code that execute automatically when some pre-defined conditions written on them are met. Using smart contracts for financial transactions helps to increase the speed and simplify the complex process.
The transactions are approved only when certain conditions are met and these conditions are visible to all the parties involved when smart contracts are implemented. This enables the transfer of accurate information and also reduces the chances of error at the time of execution.
Some Fascinating Statistics on Blockchain Banking
- Blockchain helps to reduce banks’ infrastructure costs by 30%.
- Adopting Blockchain helps financial companies to save up to $12 billion annually.
- In 2018, the annual expenditure of the financial sector is estimated to be around $552 million.
- In the year 2018, about 90% of the North American & European banks were exploring Blockchain technology.
- By 2024, the revenue of the global Blockchain market is estimated to accumulate around $20 billion.
Blockchain can transform the way banks perform execution as it is an open-source and trusted platform providing data in real-time. In addition to helping banks in reducing the cost of processing payments, it also aids in generating new revenue streams with the ability to transmit data securely.
But, still, not many banks have released any Blockchain-based platform into the market. They are still testing out the system in a controlled environment. It may take a while for the majority of the financial institutions to trust the technology and for it to reach a point of complete adoption.