Why Should Banks Embrace Blockchain Technology?

Why Should Banks Embrace Blockchain Technology?

“The question is not whether network business models supported by blockchain technology will disrupt these organizations, but when.”

Internet has touched 4.021 billion users in 2018. The benefits of digitization engulf a little less than half of the global population now. In a fast-paced digitized world, it is impossible for the financial world to remain unaffected. Tech savvy customers no longer wish their banks to have a lavish building with multiple counters; they prefer convenience over anything else. This is one of the major causes of disruption in the financial as well the logistics market. The survival of a financial institution now depends upon how well they adapt to the dynamically evolving needs of their customers.

Blockchain technology lies in the core of this digital disruption. Blockchain, a distributor ledger based technology which aims at providing streamlined, transparent and quick financial solutions, will be revolutionizing the way banks function in the upcoming decade. Authors from the Harvard Business Review believe that blockchain will do the same to the financial system what the internet did to media. Like the internet, blockchain technology is designed to be a decentralized system of transactions. For a technology which was developed at least three decades ago, the banking sector has been slow in adopting it. This is primarily because the financial markets throughout the world overlooked the impact of digitization on the way their customers transact. It’s a matter of time when people will be using this technology to make a majority of their transactions due to the high utility and convenience that it offers. Let’s look at the reasons why banks should embrace the blockchain technology.

Combating Fraud and Money Laundering

Blockchain technology could give a solution to the increasingly stringent Anti-Money Laundering (AML) laws and Enterprise Fraud Management (EFM) requirements emerging for the financial services industry.

According to a report published by Forrester Research, blockchain technology is ideal for keeping the identification of its customers private since it is highly secure and immutable.

Last year, the cost of retail fraud amounted to INR 18,170 crores. On top of that, the cost of identifying and countering money laundering is rising , and  so is the penalties imposed on the firms that are non-complaint to such requirements. Blockchain technology offers an immutable and easily auditable electronic record hence guaranteeing that the transaction records bear the identifiers of previous transactions. This allows the authorized investigators to track down the transactions which happened in the past quickly. Implementation of the blockchain technology could also challenge the monopoly of the credit rating agencies, which are the only institutions that can verify the identity of the customers.

Granting Loans Made Easy

Presently, banks use inefficient and outdated techniques to share information linked with a customer for offering them loans. Blockchain grants a more streamlined and faster approach of identifying the credentials of the customers that could help the banks in granting (or rejecting) loans immediately.

Improving the KYC System

The logistics costs of managing the KYC system is known to all. Reuters suggests that major financial institutions spend up to 500 USD on KYC compliance. This adds up to the anti-laundering costs that we discussed above. Rather than centrally storing the customer information on a device, cloud or the government/bank’s repositories, blockchain decentralizes the entire system for providing the information across the chain.

If the financial institutions adopt the blockchain technology, whenever a bank wants to acquire your identity data, you’ll be required to provide your consent by giving your private key to the institution which needs your data. This way, even if your identification data was managed and stored by another party, you have control over its distribution. It could keep you safe from frauds and identity theft.

Beneficial for Trade Finance

The domain of trade finance requires a massive volume of paperwork. A large volume of paperwork impedes the processing and incurs high costs to the companies involved in trade. Financiers and technology experts maintain that blockchain technology is an apparent solution to this problem. The ever-increasing data fed into the finance industry can be handled only through a highly competent technology that makes the transactions faster and more efficient, which is made possible by the blockchain technology.

When Do Global Financial Companies Think Blockchain Will be Commercially Adopted?

Reports by Finacle, a banking product developed by Infosys, suggest that most of the financial services leaders believe that blockchain will be commercially adopted by banks by 2020. Let’s take a look at this graph to understand this.

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
  • Auditing

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 Sum Up

Technology has upended sectors before; to avoid such a situation, the global financial system has to adapt to the influx of high-end technology. Blockchain is the solution to the indivisibilities and impediments faced by modern financial institutions. Hence, it is beneficial for banks to embrace it.