Blockchain promises a greater level of decentralization, transparency, and security in the banking industry. Learn how this technology helps the banking industry address key challenges facing the sector.
Most financial services industries have invested heavily in many services and applications due to security breaches, digital threats, and network downtime issues, among other issues that may arise.
As the banking industry has always been a key driver, it has adopted new technologies to move from traditional banking practices to viable banking services. This is why the blockchain has become so popular in all aspects of banking. It has become one of the most advanced technologies and has great potential to transform the financial sector in recent years.
According to a leading industry website, 40% of Americans have not visited a credit union or bank in the past six months.
Isn't that surprising? As we all know, banks are now critically examining their financial management. This does not mean that the bank will be destroyed. Taking advantage of this situation, open banking will increase both the impact on consumers and businesses, as well as the value of the products it can develop.
Here, this article focuses on how the blockchain can transform the banking industry by answering the following questions:
GoodBye Banks, Hello Blockchain!
In addition to banks, many companies provide loans, savings, and investments more easily, cheaply, and faster than financial institutions. All this was made possible by the advent of the blockchain scene. Although there are challenges to overcome before blockchain banking and financial services can be adopted, the potential labor and cost savings are so attractive that most financial institutions are already investing millions of dollars in rigorous research to implement it.
General problems faced by the traditional banking industry
Banks and other finds on financial institutions are used for protecting our money securely and safely. They required many mediators and procedures to achieve the success which resulted in the whole banking procedure being quite costlier and slow. Additionally, some added manual procedures and human interventions might suscept the financial sector to risk, errors and fraudulence.
In the banking field, blockchain promises a high degree of decentralization, transparency, and security, which are key features of the technology that can solve the problems facing the traditional banking industry. Now let's take a look at some of the ways the blockchain can help the bank overcome these challenges!
How blockchain is changing the banking industry?
Blockchain may be particularly adept at solving some of the most promising challenges facing the banking industry. Here is a list of these issues and how blockchain technology can help.
1. Increased Security and Fraud prevention
Banks and financial institutions around the world are constantly affected by cyber attack incidents and financial crimes, such as bank account breaches, data breaches, and fraud. Blockchain technology is developed based on the encryption standards of hash functions, and private and public keys. In addition, it is composed of a shared Ledger system, so there is no need to rely entirely on one organization.
It helps banks withstand attacks from hackers and scammers and protects their transaction data. Blockchain technology allows for faster transactions, which means less time for hackers to enter. Additionally, once ledger entry is verified and stored, they cannot be altered due to a shared and decentralized ledger system.
2. Faster payments and transactions
You can send money around the world through regular banks. However, with the current system, it takes at least 1-3 days to confirm and settle a transaction between two parties.
Blockchain allows the transfer of money through a simple register without the need for a centralized intermediary to check the money. This means that banks can use blockchain-based solutions to reduce the time required to verify and resolve transactions. With the development of technology, transactions are made in real-time. As a result, banks can reduce processing times and offer customers fast, low-cost, borderless payments.
3. Guidance and improved Data Quality
Banks need to store large amounts of information. The problem arises with the existing structure because most banking information is not in one place. As a result, multiple parties may change the same data in multiple domains. This results in outdated or incomplete data. This is a simple explanation of what happens in real life, but in reality, the systems are much more complex and can be confusing if the information is not stored correctly.
Modern blockchain technology can protect any data. And the use of smart contracts allows you to use and exchange data based on predefined rules. A shared ledger system allows everyone to work with the same copy of the data. This ensures safer and faster transactions with real data.
4. Increased Credits and Loans
Conventional banks offer loans based on credit ratings provided by third-party agencies. This kind of system sometimes harms customers, which can negatively affect their ability to get credit.
Using a blockchain in banking, financial institutions can obtain a decentralized and cryptographically secure record of a user’s recent payments. They can use it to assess global credit ratings and offer more effective and cost-effective loans to a wider range of customers.
5. Reduction of Cost
When it comes to transactions and interactions, there are many brokers and intermediaries in the traditional banking industry. Interactions with these brokers maximize the final value of the transaction. The use of the blockchain in banks helps them to perform administrative functions and to manage and execute contracts. This helps to reduce contact with intermediaries which tends to decrease the entire cost.
6. No complicated documents
Most financial problems are related to working with documents. Traditional banks are responsible for maintaining invoices, accounts, and contracts for this participation. The concept of smart contracts uses blockchain technology to create contracts that define, terminate, and update the values of the rules. This type of technology can simplify a lot of bureaucracy and can make all financial transactions smoothly.
7. Decrease Know Your Client (KYC) costs
KYC is initially an identity verification solution, but it attracts a lot of money from organizations. An ongoing update takes time and banks have to go back to the database to access other customers ’current customer data, so they cannot update their data until the database is updated.
However, with Blockchain, every transformation of customer data is automatically updated for each member of the system. This way, financial institutions do not have to run the KYC protocol again when someone registers as a customer. Updates are almost instantaneous, reducing latency.
Application of blockchain in the Banking Sector
The bank transfer usually takes a few days. Therefore, moving money around the world is a logistical problem for many banks. However, decentralized ledger technologies, such as blockchain, help banks track and regulate transactions. Therefore, banks should not rely on custody services and regulatory intermediaries.
Lending and borrowing are the primary services offered by banks and it is tedious by most of the conventional banking sector. But, smart contracts integrated with a crypto-wallet can help the borrowers in making their payments. If the borrower does not pay the installment on time, a late fee is added to the actual amount and will be updated to the ledger.
Accounting is a branch of banking that has been relatively slow to digitize. This is why accounting needs a blockchain transformation. All transactions recorded in the joint ledger can be distributed on the blockchain. It will ensure the transparency and security of banking information. Blockchain in accounting and bookkeeping improves efficiency, reporting, and access to data.
Trade Finance covers all financial activities of trade and international trade. These activities are still based on documents such as letters of credit and invoices. Management systems do this process online, but it takes a lot of time. Therefore, transactions based on blockchain solutions simplify the process with less paperwork, less time consumption, and minimal regulations.
The bank's blockchain also helps customers get loans faster based on their credit history. Lenders spend a lot of time checking your credit history. Small business owners may not use third-party credit reports. Thus, blockchain tools can be used to generate credit reports for borrowers. These results in transparency, accuracy, and distribution in a secured way. Thus, blockchain-based credit reports reduce the cost, time, and complexity associated with data validation.
Future of Blockchain Banking
After identifying current trends, you can predict more adoptions and create any obstacles for your application. According to the 2019 Global Fintech Report, 77% of fintech companies plan to use blockchain for banking, indicating that many are wondering how will blockchain helps in the future. According to a PwC report, about 24% of people in the global financial field are familiar with blockchain.
In addition, the aforementioned projects (Circle and Quorum) will give people in these large institutions the confidence and awareness that blockchain is a sustainable process for platforming financial operations. Effective integration of this technology requires some work. Energy consumption, interoperability, and scalability are some of the obstacles that fintech institutions must overcome to achieve productive results on the blockchain.
EndNote
Blockchain technology has come so far in a very short time. In the meantime, he has made amazing progress, and for now, this is the only way forward. Overall, the main benefit of blockchain to the banking industry is that it provides the level of security and accessibility that any financial institution desires. For this reason, the banking sector will be reconfigured using blockchain technology in the next few years.
Are you also looking for blockchain experts to develop blockchain-based solutions in the banking industry? Contact Clarisco's blockchain development service team to learn how we can help banking institutions explore the growing potential of blockchain technology.
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