Blockchain is a revolutionary technology that aims at improving the way we make monetary and non-monetary transactions. Central Banks, multinational companies and governments throughout the world have been experimenting with this technology to increase the efficiency and productivity of their operations.
The applications of blockchain technology aren’t restricted to the telcos; this technology has spread its wings to cover almost every sector under the sun – finance & banking, IT, AI to name a few. Almost every industry is reinventing itself to adopt this lucrative technology that has broad applications, offers a high degree of transparency and functions effortlessly. One of the earliest adoptions of blockchain technology was the invention of Bitcoin. In this article, we’ll try analyzing how the blockchain technology can revolutionize the banking system, and why Bitcoin is the most searched word in Google for the year 2018.
How is Blockchain Beneficial for the Banking System?
In earlier days, blockchain technology was received with a high level of skepticism. But the perspective of financial organizations has changed drastically over the past few years. Companies that have adopted the blockchain technology have raised 240 million USD worth venture capital. A World Economic Forum report released in 2015 stated that around 10% of the world GDP would be stored in blockchain by the year 2045 due to its highly economic perspectives. Let’s discuss the significant blockchain trends in the banking and finance industry.
A Foolproof Way of Storing Customer Data
Anyone from the banking sector can tell that the verification of customers is a vital component of this sector. If the company messes up with the identities of its customers, they lose trust in the bank. Banks are responsible for ensuring that the identity of their customers is verified and protected. A study by Reuters suggests that some companies spend around 500 million dollars annually on KYC and Customer Due Diligence. The banks can also incur penalties for non-compliance or discrepancies in data.
The era of blockchain revolution offered a digital tool to the banking system for overcoming the demands and liability problems. To avoid the high cost, many banks are trying to implement a digitally shared system that records and continually updates user’s identities and other data. Many investors believe that Blockchain Technology in the banking system can provide a solution for protecting and updating the array of customer data economically through cryptographic mechanisms. The massive amount of data can be moved to the new system with the help of KYC and anti-money laundering algorithms. To save costs and get faster output, many startups in the banking & finance sectors have aligned all their customer data to follow the blockchain technology.
For the last few years, central banks across the globe have been experiencing great complexity in the payments infrastructure due to an infestation of a large volume of digital currency (such as Bitcoin and Ethereum) in the system. A report from Bank of International Settlements, known as Central Bank Digital Currencies, raised many eyebrows. The report ponders over some basic concerns linked with blockchain, such as effects of central banks replacing real currency with digital currency, the advantages and disadvantages of adopting blockchain technology, etc. With central banks from various countries testing the blockchain technology and considering infusing the global payments system with digital currencies, we can predict that blockchain technology would be a large portion of global payment system in the coming years.
Commercial banks aren’t far behind in experimenting with the blockchain technology either. There’s a long list of tech companies that are working to adopt this technology into their operations. Forbes gave a list of large companies that are exploring blockchain network. This list consists of biggies such as IBM, Infosys, American Express, Wells Fargo, JP Morgan, etc. Union Bank of Switzerland developed its own digital currency known as ‘utility settlement coin’ that will be used in the financial market.
The inter-bank payment system, SWIFT, handles the cross-border payments. US Treasury states that SWIFT manages roughly 14.5 million USD every day. The world’s leading interbank electronic payments messaging system has been experimenting with the blockchain technology for many years and has achieved positive results. With the global financial market becoming more conducive to blockchain technology, it’s just a matter of time until you make the payments with digital currency.
A Use-Case of Trade Finance
The area of trade finance is based on a large volume of paperwork as well. Large volume of paperwork implies slow processing and high expenses. Financiers and technology experts believe that blockchain technology is an obvious solution to this problem. The vast array of data handled by finance companies can be handled only through a highly competent technology which makes the transactions faster and more transparent.
Clearing and Settlement Operations
The clearing and settlement operations in banks can be highly expensive and complicated. Blockchain technology can streamline the data and reduce costs for the banks and other financial institutions. It was estimated that investment banks could save up roughly 10 billion USD by implementing blockchain technology.
Efficiency in the banking system would enhance manifold with the adoption of blockchain technology. Companies like Australian Securities Exchange have moved their post-trading settlement entirely to the blockchain network. The winds of change have hit the money markets already. Soon enough, we’ll be making payments and transactions through blockchain networks.
Ways in Which Blockchain Could Help the Banks
The major ways in which blockchain technology could help the banking system are:
- Process automation
- Digitization of the banking system
- Decentralization of banking information
- Intra-bank settlements
- Internal transaction messaging
- Product data structure
- Reconciliation & Synchronization
- Safer data storing
The major ways in which blockchain network could be used in managing customer data for banks are:
- Reduction in Paperwork
- Simplified operations and settlement
- Faster transaction handling
- More efficient Customer data management
- Reduction in Fraud
- Generation of Smart Contracts
To conclude we can say that,
There are inherent inefficiencies and major drawbacks in the present financial ecosystem. Blockchain technology aims at providing a solution to over-complicated payment systems, tedious book-keeping, manual recording and managing customer data, etc. Overall, this technology can offer simplistic and efficient solutions to the problems that the global banking systems and financial markets are facing.