Blockchain is a decentralized and distributed digital ledger to record transactions across different computer networks. The transaction records cannot be modified without authorization from all computers in the network. For those interested in getting an in-depth understanding of this technology, you can refer to our previous articles: What is Blockchain and History of Blockchain.
Blockchain technology is being mainstreamed, not only in cryptocurrency space but also in education, supply chain and healthcare. How about the banking industry? How the technology will impact the banking industry?
Blockchain Can Change the Current Banking Landscape
As we all are aware, the global banking system acts as a trusted third party in the provision of financial services, transfers and loans and much more. They generally have internal ledgers and the system, thus raises the issue of trust in the banking industry.
If blockchain technology is taking place in the banking industry, there is no need for intermediaries to verify any transactions that are transparent, borderless and reliable. All transactions in blockchain will be carried out through the ‘peer-to-peer’ method and offer a faster and easier process than conventional banking.
Taking into an example, cross-border transactions may take up to three days. With blockchain, it will improve capital access, data security and regulatory compliance. Currently, Visa, Standard Chartered, DBS and ING are among the financial firms that are starting to study the blockchain technology. Meanwhile, the blockchain technology provider Ripple is actively offering its services to financial companies worldwide, including American Express, Money Gram, PNC, Santander, Interbank – just to name a few.
Positive Impact of Blockchain for Banking
The features that blockchain offers make the technology reliable, highly secured, as well as being the solution for banks and financial institutions. Below are the benefits of blockchain:
As explained earlier, conventional banking has a centralized internal ledger which all data including transaction history is stored in it. If the system is replaced with a distributed ledger by blockchain, the data recorded by banks can be shared by institutions and consumers. This is impossible to do in a central ledger.
As a result, this would reduce the likelihood of individuals being held accountable for trespassing or altering payment data, or keeping transaction details. Most notably, the existence of this technology in the banking system will take out the involvement of middlemen to keep the stored data.
Blockchain technology simplifies the financial process and creates just one source of sharing for all participants in the network. Certain parties can access transaction data at any time through the distributed ledger that has been shared.
In addition, the blockchain system that records and lockdown transaction data offers high-level transparency. Besides that, the technology also ensures that privacy aspects can be leveraged in selected data sharing between businesses.
Blockchain allows the process to run automatically through the execution of smart contracts. With smart contracts, some of the tasks that have been ‘directed’ will be carried out if the terms and conditions apply. A smart contract is different from a legal contract where it is a code that is executed on the blockchain.
- Low Costs
In the traditional banking system, an international transaction that takes place will be charged by the bank. The transaction will be sent to the central bank and then transferred to the local bank. Whereas, with blockchain, transactions will occur directly to each other, borderless.
The technology not only benefits consumers but also banking institutions. As per a report, the technology is expected to save approximately $15-20 billion on banking and financial infrastructure by 2020.
For instance, by using smart contracts, banks can reduce the interaction charge with counterparty and middlemen.
- Improves Data Quality
Blockchain networks are designed to accommodate a large number of transactions while supporting the interoperability of different chains within the blockchain, thus improving performance and data quality.
The existing data storage systems in the banking world is seen to have a high probability that data can be altered by the institution. Not only that, as the data is controlled by them, hence, it is impossible for existing information to be kept up-to-date, incomplete and distorted for bad use.
Even though every financial institution or bank has information management, it is impossible to clarify the issues. Consequently, security and transparency of the blockchain need to be adapted in order to prevent those mentioned issues.
Other Capabilities of Blockchain in Banking and Financial Industry
Blockchain capabilities should never be stopped and should be explored in greater depth. In addition to providing transaction services, the banking industry also offers other services such as loans, fundraising and many more. Can blockchain offer similar services?
Looking at the existing conventional financial system, businesses tend to seek funds from external sources such as investors, venture capital or banks. The process is not only tedious but takes a long time to be done.
As such, blockchain works to create funds through Initial Coin Offering (ICO) and Initial Exchange Offering (IEF) without the involvement of banks or financial institutions. Traditionally, banks will charge high fees for providing security to businesses, while with blockchain, these charges can be avoided.
- Asset Tokenization
Buying and selling other assets such as stocks, commodities, bonds and currencies is not as easy as expected, as the process is more complex and requires the cooperation of banks, brokers, clearinghouse and exchanges. The process must be precise and efficient; hence, it often costs a lot of money and takes time.
Through blockchain, it simplifies the process by tokenizing those assets. As most of the assets are sold online, with blockchain, it will go smooth and easy.
Loans are often monopolized by the banks and firms involved. Therefore, they have the right to control the high-interest rates which may eventually trap the borrowers.
Thus, blockchain technology allows consumers to borrow in an ecosystem called Decentralized Finance (DeFi). To create a more accessible financial system, DeFi aims for more financial applications using blockchain. A peer-to-peer loan allows individuals to make loans easier, safer, inexpensive and no unnecessary restrictions.
Banking is one of the industries that will receive a huge impact on blockchain technology. As the world’s financial development moves without boundaries, online and easily accessible to other financial institutions that are also adopting the technology, the banking industry should do the same.
The current banking industry is competing in offering more efficient financial services, and blockchain technology is one of the great solutions. In your opinion, will the banking industry completely give up the control of data and transactions, and move to blockchain technology?
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A keen researcher who believes in enriching her knowledge. For Shuhada, the crypto world intrigues her sense and offers plenty of high delicious 'crypto cuisines'.