Blockchain and the banking sector

Some cryptocurrency enthusiasts will lead you to believe that there is an unseen war between the emerged Blockchain technology and the banking sector. Further, some others might claim that banks are developing a secret and well-funded consortium to fight the fast globalization of Blockchain as the main purpose of this new technology is to abolish the banks as intermediaries by providing a decentralized peer-to-peer system where transfers are fast, fees are low and security is top notch.

A cold war…

The above statement is not entirely accurate, as Blockchain will provide banks and the financial sector a new approach to overcome their problems and security challenges. Many banks already saw some interesting solutions that can be build up over Blockchain and started implementing new platforms and applications based on it. Some others already did see positive implications in implementing Blockchain and many do allow their services to be connected with cryptos.

How can Blockchain achieve the revolution?

With an initial purpose of a mechanism behind cryptocurrencies, today the Blockchain technology has stepped far beyond just powering the bitcoin or ether transactions. Blockchain is a powerful and secure technology that is getting into almost every industry, from banking and medicine to government sector and supply chain. According to Forbes, Blockchain brings the following benefits:

  • Blockchain records and validates each and every transaction
  • Blockchain does not require third-party authorization
  • Blockchain is decentralized

Blockchain Applications in Banking

Blockchain can provide several functions that improve the efficiency of the financial systems. These have been implemented in various industries with great success, due to their wide-ranged application. In the case of banking, several spheres of Blockchain are compatible with financial services. Below we will share several use cases of Blockchain technology in finance:

  • Payments

Blockchain disruption could be highly transformative in the payments process. It would enable higher security and lower costs for banks to process payments between organizations and their clients and even between banks themselves. In the current reality, there are many intermediaries in the payment processing system, but Blockchain would eliminate the need for a lot of them. For example, remittance costs within Blockchain are 2-3% of the total amount, as compared with 5-20% withheld by other third parties. Besides, as previously mentioned, Blockchain does not require third-party authorization, thus significantly speeding up the cross-border payment process.

  • Know your Customer – KYC

Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomson Reuters Survey. These regulations are intended to reduce money laundering and terrorism activities by having requirements for businesses to verify and identify their clients. Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant. A good example is ID2020, a project aimed at creating digital identities for people who have no paper IDs. The project is supported by Accenture, Microsoft, and the Rockefeller Foundation.

  • Fraud Reduction

Nearly 45% of financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Most banking systems around the world are built on a centralized database system that is more vulnerable to cyberattack because it has a single point of failure rather than many. The Blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our financial institutions. Even though Blockchain is new technology, but its potential to reduce fraud in the financial world is getting a lot of attention.

  • Smart Contracts

Because Blockchain can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, it enables us to have smart contracts. A code programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved. In the case of banks, the whole network would connect the business with its customers in a system that would provide speed and accuracy through smart contracts and low fees through unified cryptocurrency.

  • Trading and Stock Exchange

The traditional stock exchange process involves many stages and bureaucracy and can take up to three days. However, decentralized nature of Blockchain technology in banking can remove all those unnecessary intermediaries and enable trading to be run on computers all over the world. There is no doubt that the risk of operational errors and fraud would be dramatically reduced, that’s why NASDAQ and the Australian Securities Exchange are already exploring Blockchain solutions to reduce costs and improve efficiencies.

Uses cases of Blockchain in Banks

As mentioned earlier, several banks did implement their own in-house solutions that include Blockchain. An interesting fact is that mostly Swiss-based banks are the ones that are actively seeking to research Blockchain technology like UBS, Credit Suisse and Santander Group. Recently, Investment banking giant JPMorgan Chase is planning to expand an existing Blockchain project to include settlement features as it seeks to fend off competition from payments upstarts such as TransferWise and Ripple. The Blockchain-based Interbank Information Network (IIN), set up in partnership with Australia’s ANZ bank and the Royal Bank of Canada back in 2017, currently allows its over 220 banking members to quickly address payments that contain errors or get held up for compliance reasons while usually it can take weeks to solve with multiple banks being involved across the payments chain.

Final Thought

Beside infrastructure readiness and compliancy, the Blockchains that would be used by financial institutions would need to comply with privacy laws of today and the future and need to ensure the safety of the data. There are many questions regarding regulatory oversight for this new technology that need to be sorted out. Further, any Blockchain used in this sector would need to handle an extraordinarily large data set, therefore scalability is incredibly important!

The biggest key to turning Blockchain’s potential into reality is a collaborative effort among banks to create the network necessary to support global payments. Banks need to look at the bigger picture and work together—and with non-banks—to help define the backbone that can underpin a universally accepted, ubiquitous global payment system that can transform how banks execute transactions.

 “The technology will only work if everyone adopts it. It has to be all or nothing.”

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