Blockchain in Banking- A key to Improve Customer Service

Soniya Khanna

06 Jul, 2023

Business amounts to serving customers. With the market moving towards an increasingly digital economy, businesses have a task at hand to satisfy the evolving demands and expectations of customers. So how can they provide better services to their customer?

Well, Blockchain can be the answer to that. In this article, we look at the impact of blockchain in banking.

What is Blockchain?

Blockchain is a technology that promote trust between the trading partners. It makes it possible to transfer currency and provide confidence that the transaction is successful.

Blockchain reimagines majority of the core workflows in banking and finance, such as keeping records, cybersecurity to currency, and debt and equity management. 

How can blockchain impact customer experience?

Blockchain has many applications for the future of computing and many of which have not been identified yet. There are many projects underway that incorporate this technology into existing and new IT infrastructure and others being defined to permit blockchain into the world of business applications.

One of the key features of blockchain is its ability to create business transparency. As it depends on the visibility of transferred data, this feature can be leveraged to foster trust among customers. This can lead to better customer experience due to the increase in trust.

A huge potential application for customer experience application is to change the underpinnings of the way finances are handled in apps. Instead of a completed order to go through standalone accounts receivable tool and risk the security concerns of interaction of data, the application can simply use blockchain to confirm payment has been done and can move the business process along shortly once the confirmation is received. This can reduce the amount of human capital required to verify this type of transactions. 

How can blockchain technology benefit banking?

Once we consider its specific features, it only makes sense that the banking industry shall be taking the lead in the adoption of this technology.

If we think about why banks were set up, they were created to connect groups of people together and allow all types of trade and commerce. A blockchain is a tool that can accomplish the same on a global scale.

Blockchain also has potential implications for global commerce. It can make trade more efficient by removing the manual and paper-based process. That’s why blockchain is more than being the underlying technology for cryptocurrencies.  

How can blockchain in banking stimulate customer experience?

Here are the ways how blockchain can stimulate customer experience:

• Simplifying payments experience

Convenience is what a customer desires the most. Blockchain can provide customers just that. This disruptive technology can streamline the payment process while also minimizing or eliminating the paperwork.

Moreover, by adopting blockchain in banking, banks would be able to cut down on the need for verification from third parties and accelerate the processing time for traditional bank transfers.

• Business transparency

Blockchain is transparent. Its potential of creating transparency can be leveraged to foster trust among customers. If one allows their customers to view all blockchain-related activity associated with them, it will improve loyalty and add to their trust.

• Serving customer data

The ground breaking technology keeps customer identity in an independent and trusted location. Thus blockchain puts control of their data back in the customers’ hands and thereby improve the customer experience.

• Credit and loans

Traditional banking institutions underwrite loans by using credit reporting. With blockchain, you are looking at the future of peer to peer loans, faster and more secure loan processes, and even complex programmed loans that can approximate syndicated loan structure.

Are there any limitations to using blockchain in banking?

Currently, three major blockchain limitations for banking include the following:

• Lack of governance

The decentralized nature of blockchain is considered as its advantage, but it has certain limitations for the financial sector. Without a decision-maker, members participating in a blockchain-powered financial transaction^[1] may have misaligned motives, and it can become a bottleneck.

• Non-scalability

As blockchain is a distributed system, its cumulative processing power depends on the computational power of the devices involved. When compared with visa’s 1700 transactions per second, blockchain can process around 4.6 transactions per second on average. This implies a massive challenge for the adoption of blockchain in banking on a global scale. As the popularity of blockchain increases, the scalability problem becomes more apparent.

• Regulatory compliance risks

Financial institutions face a lack of clarity around regulations. Right now, there aren’t any regulations as far as transfers made with cryptocurrencies and smart contracts are concerned. Until a proper regulatory framework is made, it is not possible for financial institutions to make use of this technology. 

What are the advantages of blockchain in banking?

The advantages of implementing blockchain in banking are as follows:

• Decentralized trust

The main advantage of blockchain is its method of verifying and tracking transactions. It allows individuals and institutions to process transactions without the need for a third party or a central bank. Several banks have been using the technology to provide a reliable alternative to systems that depend on intermediaries and third-party validation of transactions.

Rather than everything being controlled by a single central authority, blockchain produces a shared infrastructure by distributing control among the peers in the transaction chain.

• Enhanced security

After data is recorded in a block, it cannot be altered. This makes it inherently secure. As it is shared with a large number of users, it is tough to shut down or hack and can be seen by anyone using the system, ensuring transparency.

• Decreased costs

Banks can decrease transaction fees significantly by eliminating third-party intermediaries and overhead costs. The elimination of the middle man has caused processes like cross border payments and trading and settlement to become quicker, reliable, and less expensive.

• Increased Efficiency

Blockchain eliminates the risk pertaining error and duplication. The removal of intermediaries means reduced settlement time and transaction time. It further enables transactions to be processed 24/7. Blockchain allows banks to store data in blocks with a tamper-proof format; it allows them to improve the mobility of data and decrease the time taken for KYC.

The Future of Blockchain in banking

Financial institutions must focus on collaboration with the ecosystem before they launch any of the use cases. The operational effort to get the ecosystem accept the new system would be a challenge, and acceptance would be difficult. Therefore financial institutions should look to convince the ecosystem for a decentralized solution.

The real benefit of blockchain would be when financial institutions are able to work with other ecosystem players to redefine the business model. They should focus more on use cases that are tough to do in today’s world and leave some of the trivial use cases to get comfortable stage of their internal maturity. Blockchain could be a costly solution for problems that didn’t exist, or that could be solved efficiently using existing solutions.

The financial institutions are required to adopt a disruption mindset for the adoption of blockchain and focus on creating new business models in the customer’s favor.

Conclusion

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