Decentralization, transparency, and security are among the benefits provided by blockchains in banking. Explore how the industry is using this technology to tackle the main issues it faces. Due to breaches of security, digital threats, network downtime issues, and other problems that may occur, most financial services sectors have invested significantly in numerous services and apps.
Traditionally, the banking industry has been the most pioneering, embracing new technologies for transforming its traditional banking practices into practical banking services. This is why Blockchain is gaining much attention in banking from every direction. Recent developments have made this technology one of the most promising for transforming the operations of the financial sector.
A blockchain-based banking system can improve security, reliability, efficiency, transparency, and flexibility. In the banking industry, blockchains are most popular because of security concerns.
Features of the Conventional Banking Industry
The main responsibility of banks and other financial institutions is to keep our money secure and safe whenever we need it. The entire banking procedure may be slowed down and made more expensive if they use too many procedures and mediators. Also, the financial sector is vulnerable to errors, fraud, and risks because it is comprised of so many manual procedures and human mediators.
The advantages of blockchain technology for banking are its decentralization, transparency, and security, which will help address problems in the traditional banking industry. We will now examine several ways blockchain in banking can help to solve these challenges.
The way Blockchain is Reshaping the Banking Industry
In the banking industry, blockchains could be especially helpful in resolving the most noteworthy problems. Here are some problems and the ways Blockchain technology can help:
- Security Enhancement and Fraud Reduction
Throughout the world, financial institutions continue to be irked by cyber-attacks and financial crimes, such as hacking of bank accounts, data leaks, and fraud, to name just a few. Cryptography standards are developed on top of blockchain technology, namely hash functions, private keys, and public keys. They are also formed on a shared ledger system, meaning more than one party can participate.
In this way, banks can avoid fraud and hacker attacks, and their transaction information is secured. In addition to allowing faster transactions, blockchain technology also makes it easier for hackers to intrude. The shared and decentralized ledger system makes it impossible to interfere with a ledger entry once it has been verified and preserved.
2. Faster Payments and Transactions
A conventional bank allows money to be transferred around the world. Even so, the existing system currently allows a transaction between two parties to be verified and settled within 1 to 3 days.
A blockchain allows money transfer via ledger entries without requiring a third party to verify the transactions. Using Blockchain technology, banks can decrease the time needed to verify and resolve transactions. As technology advances, real-time transactions may also become possible. The bank can therefore reduce its processing time and facilitate payment processing that is quick, efficient, and affordable.
3. Enhanced and Authenticated Data Quality
The amount of information that banks have to keep up with is enormous. It is a problem of the traditional structure since much of the banking data is scattered across different places. In this way, data can be changed by several parties in several areas. Incomplete or outdated data are a result. In reality, the systems are much more complicated, and when the information is not properly maintained, it will lead to chaos.
Data of any type can be preserved using modern Blockchain technology. Additionally, the use of Smart Contracts allows data to be utilized and transformed based on pre-determined rules. Everyone has access to the same copy of the data with the shared ledger system. By doing so, transactions with authentic data will be more secure and faster.
4. Improved Credit and Loans
Traditional banks offer loans based on your credit rating that are offered by third-party companies. In some cases, these types of systems can negatively impact clients’ ability to obtain loans.
Financial entities can use Blockchain to have a decentralized and cryptographically safe registry of a user’s last payments by using it in the banking sector. The result can be used for calculating the global credit score and offering loans to a wider spectrum of clients more effectively and cost-effectively.
5. Reduced Expenses
The conventional banking industry has a lot of middlemen and intermediaries when it comes to doing transactions and interacting. The cost of a transaction is maximized by these interactions with middlemen. Blockchain-based technologies aid in performing administrative functions, maintaining and executing contracts in banking. Communicating with intermediaries is thus made easier. Therefore, overall expenses are decreased as a result.
6. Eliminate Complicated Paperwork
The majority of financial affairs involve a great deal of paperwork. This involvement includes maintaining invoices, bills, and contracts. A smart contract is a contract that uses Blockchain technology to make decisions, terminate contracts, and update their values. The use of this technology can decrease the complexity of financial transactions and relieve bureaucracy.
7. Reduces Know Your Client (KYC) Expenses
KYC is an accurate ID verification solution, but it drains the organization’s funds. Updates are time-consuming and banks rely on a single database to access current information about another bank’s clients, so updating their data requires updating the database as well.
A Blockchain-based system, however, refreshes client data in real-time for all system members. As a result, financial institutions will not have to restart KYC protocol when someone registers as a client. Moreover, updates would be delivered almost immediately, reducing waiting times.
Banks Adopting Blockchain Present
A growing number of people are taking an interest in blockchain. Representatives from 15 territories reported that this ledger has already been implemented to some degree. Particularly in the USA, there is a high level of adoption, with many big names showing interest. Among all, three are different. Let’s look at them below!
- Goldman Sachs is investing heavily in a project called Circle. To this day, cryptocurrency volatility remains a problem. Circle aims to resolve this issue. The proposed project is among the most funded start-ups in the history of Blockchain, which is hopeful.
- In recent years, Bank of America has shown interest in Blockchain technology. US Patent and Trademark Office has been notified that the institution filed a patent related to Blockchain. The plan is to create a ledger that offers data validation as well as secure records.
- Quorum is owned by JP Morgan Chase. The Smart Contract Facilitator and a deployed ledger combine to form a single system. Its primary objective is to grow Blockchain solutions and study innovative applications.
We can anticipate greater acceptance after looking at current trends and be sure that all bumps in the application have been smoothed out. According to the Global FinTech Report, 77% of FinTech companies plan to use Blockchain in banking this year, demonstrating that many people are amazed at what the technology is capable of. Nearly 24 percent of financial representatives around the world know about Blockchain, according to a PwC report.
Since the aforementioned projects (Circle and Quorum) are coming from such big institutions, individuals will most likely have more faith and awareness of Blockchain. Currently, this technology needs some improvement before it can be efficiently integrated. There are several factors that FinTech institutions must address to realize the full potential of Blockchain. Energy consumption, interoperability, and scaling are a few examples.