Significance of Blockchain in Banking Sector

Ashish M. Shaji

12 Jun, 2020

The significance of blockchain in banking sectors has been rising like never before. It has the potential to revolutionize the world economy. It can do more than just to support bitcoin. Blockchain is transforming the way we make payments, and one is expected to see more mainstream banking services that rely on blockchain.

It is among one of the most discussed topics in the financial services industry today. Its full adoption will cause faster processing of payments by the banks. In order to capitalize on this potential of blockchain technology, banks must build infrastructure to create a global network.

What is Blockchain?

A blockchain is a form of technology that promotes trust between trading partners. Blockchain makes it possible to transfer currency and provide confidence that the transaction is completed successfully. Blockchain reimagines majority of the core workflows in banking and finance like keeping records, cybersecurity to currency, debt and equity management. 

Blockchain in Banking: Interests of Banks

Banks are very interested in the adoption of blockchain technology, but banks are yet to wake up to their true potential. It is in the early stage of adoption. Irrespective of the progress the most prevalent cases that banks are studying involve Intra bank cross borders transfer.

Cross border remittances, corporate payments etc. are receiving less attention as compared to intra bank cross borders transfer but wherever they seek to deploy blockchain executives expect a whole lot of benefits like lower costs, quick settlement, fewer errors and new revenue opportunities.

Blockchain in Banking: Importance of global network

A global network is essential to help banks use the blockchain so that payment is transformed and help reduce the risk of failure.

For an effective network, two defining characteristics are crucial. These include:

• It must have the necessary defined rights, obligations, control and standard.
• It must provide a quick and effective onboarding process that allows the banks to virtually plug and play into the network for existing and future corridors. 

There is a lot of pending work such as defining the rules of engagement and facilitate the creation of the basics of the network before banks can go past the discussion of the technology itself and start exploring how they can be used to improve their businesses. Irrespective of who creates and drives the network, the banks agree that blockchain needs a robust network for its success.

A global network is an essential factor for adopting blockchain, but another vital key to adopting blockchain is generating internal momentum for integration and implementation of blockchain.

However, banks are cautious in doing so. Security could be the reason why banks are reluctant to embrace blockchain. There is a need to educate key stakeholders about the potentials of blockchain in banking, along with its benefits and positive impact.

Benefits of Blockchain in banking

A blockchain is a secure ledger or a list of transactions. Its benefits can be derived from two key features:

• Distributed

A public blockchain such as the Bitcoin blockchain, gets published and copied in multiple places. New transactions are broadcasted to a large number of participants who add these transactions to the ledger. 

• Immutable

A blockchain must maintain an accurate history of transactions because of multiple copies of the ledger, and it’s difficult to change or delete the transactions. So how it would affect you? Well, most people don’t really care about technical things, but one can expect a transformation in banking.

Some of the key benefits of blockchain in banking include the following:

• Security

The financial sector is prone to hacks and such predicaments. Its vulnerability is comprehensive as proprietary banks manage centralized systems where a single point of failure may lead to exposures of the whole.

With blockchain’s distributed network, banks eliminate such individual points of failure. Transactions that are recorded in the blockchain ledger go through a set of encryptions interconnected with the next. It provides protection against hacks and frauds.

• Transparency and Traceability

Blockchain technology will increase transparency between the market participants considerably. Its implementation will promote the creation of a public record of activities in the ecosystem, which could be accessed in real-time by all the market participants. Blockchain provides unprecedented visibility to the entire lifespan of the transaction or value exchange within the operation of the bank. Moreover, it reduces the requirements of third party verifications which are expensive and time-consuming.

• Speed

Blockchain can help in managing, approving and logging any transaction instantly. It contrasts today’s often manual authentication, verification and data sharing finance which is relied upon by workflows banking and finance professions to conduct services.

• Provenance

Blockchain has an irreversible record of transactions and asset ownership from the time the asset appears in a transaction on the blockchain. It reduces the risk and needs for associated mitigating operations for multiple forms of assets.

• Risk and Cost management

A hard to breach decentralized data system streamlining transactions minimizes a lot of security concerns for banks. Rates of errors and fraud decreases and administrative costs also reduce while eliminating the requirement for redundant storage of sensitive financial data belonging to customers.

How banks use Blockchain?

Blockchain in banking provides one of the most exciting commercial frontiers of the modern generation. Financial institutions like banks use decentralized data ledgers for many functions.

• KYC fraud detection

The extensive timeline of the KYC process is due to the number of players involved in the KYC verification process that involves independent request reviews from third-party vendors and also from other banking institutions. It may result in duplication of user account data.

Blockchain in banking transforms the slow process. A blockchain system allows the authorized users to access the same data system instead of every bank and their party vendor maintaining siloed customer data portals. It expedites verifications.

• Secure Digital Remittances

A globalized marketplace requires firmer and smoother management of digital exchanges and money conversions. Blockchain streamlines the modern remittance function. Its unique design permits it to handle financial transactions across the world. Its unalterable ledger, blockchain reduces the risk for chargebacks and payment related disputes and does not carry the fees relating to cross border remittance.

• Smart Contracts

Smart contracting needs technology with an integrated bank with transfer of fund capabilities, contract verification safeguards and automated contract enforcement abilities. Blockchain provides a platform that handles such digital contract procedures. With smart contract blockchain, core pieces of the contract are also noticeable, irreversible and undisputed.

• Faster lending

Blockchain benefits loan syndication activities. Banks have seen improvements in timelines for transfer of approved sums to lendees. As we all know, loan processes take a long time due to its complicated process. With blockchain in banking loan activities become quicker, safer and traceable. It shall also reduce administrative costs, third party approvals, duplication of data and chances of manual errors.

Future of Blockchain in Banking

Blockchain and distributed ledgers are expected to take off. As real-time, open-source and trusted platforms that transmit data and value securely, they can allow banks not only to reduce the cost of processing payments but also would create new products and services that generate essential new revenue streams.

One of the critical factors that can turn blockchain potential into reality is a collaborative effort required among banks to create the necessary network to aid global payments. Banks must work together with non-banks to help in defining the backbone that can underpin a universally accepted global payments system that is empowered to transform the execution of banks transactions.

Conclusion

Also, read: Is Blockchain a threat to Accounting and Auditing?