Table of Content
In the last few years, blockchain has transitioned from a buzzword associated primarily with cryptocurrencies to an evolving blockchain use case across various industries , including banking. For banks, which are arguably the slowest industry to adopt new technologies and ideas, the continued interest in distributed ledger technology (DLT) is a serious reframing of the way they think about new technologies being integrated into their systems to improve function, security, and customer experience.
But what is motivating these changes? We’ll take a closer look at the reasons banks are moving to implement blockchain.
An important benefit of blockchain, of course, is the immutability and decentralization. Transactions in the blockchain are recorded in a distributed ledger, so a person would find it very difficult to corrupt this data after it has happened.
This is also sometimes referred to as tamper-resistance. Used beneficently and responsibly, these efficiencies mean banks/financial institutions can realize decreased operating costs incurred, and provide their customers a cheaper and faster international transfer.
For banks, security is the number one priority. The financial sector is vulnerable to security breaches and can be hacked for financial gain. Using blockchain technology in the fintech industry like banks can take advantage.
Blockchain records are time stamped and tracking and visibility into each transaction is the beauty of it. Stakeholders can see a transaction (for example a payment) from when it is created to when it reaches its final destination.
This presents an even greater advantage - after each series of transactions is finalized on a blockchain, no one can alter past records without it being obvious.
In contrast, banks and financial institutions store their client data in centralized databases, leaving it vulnerable in the event of a cyber-attack or breach. A blockchain device can provide security to banks because there is no single point of failure.
In addition, transparency is inherent to blockchain architectures. Each participant in a blockchain based network has access to the same transaction data, which in turn allows banks to easily and accessibly trace transaction trails to identify legitimacy.
Cross border payments are one avenue where banks can realize significant efficiencies through blockchain. Current international money transfers can take several days, if not longer, to process, and they often incur high transactional costs, stemming from the fees charged by intermediary banks and currency exchange fees.
Blockchain introduces efficiencies into the payment process by allowing banks to provide direct peer-to-peer transactions, eliminating the need for intermediaries.
With blockchain
Blockchain can reduce transaction time from days to a matter of minutes, regardless of transaction distance or cost.
Eliminating intermediaries means that transaction fees and currency conversion charges will be reduced, resulting in a cheaper, more cost-efficient cross border exchange.
These efficiencies mean that banks and financial institutions can reduce the operating expenses incurred and can deliver cheaper and faster international transfer services to their customers.
Also Read About:- How to Develop a Cryptocurrency Payment Gateway Platform
Another reason for blockchain's appeal to banks is its capacity to automate and streamline execution. Smart contracts are agreement clauses that automatically execute by programming the contract's terms into code, which is why banks see this capacity to drive operational efficiencies.
In banking, smart contracts can
As an example, smart contracts can automate the ecosystem surrounding loans, insurance claims, or settlements. This would eliminate human involvement and therefore shorten the time to process the transaction.
Smart contracts are executed automatically when the conditions are met, while minimizing the risk of human error and fraud.
Smart contracts do not require intermediaries, which means everyone involved is likely to consider the terms previously agreed upon.
For banks, Smart contracts on a blockchain can help reduce paperwork, improve back-office functions while ensuring the conditions agreed to and executed, are based on previously agreed upon terms.
In finance, regulatory compliance is always a top concern. Banks must continually contend with significant regulatory pressure that often changes in relation to anti-money laundering (AML) and Know your customer (KYC) regulations.
Blockchain can offer a plethora of capabilities that may consonantly make regulatory compliance easier, as discussed below:
Blockchain provides an unimpeachable record for every transaction that can be documented to help banks track and maintain transparency for auditors and regulators.
Banks could leapfrog to faster and more securely onboard customers using blockchain to build secure and decentralized repositories of KYC information.
The banks can improve regulatory compliance in efficiency and reduce the costs associated with non-compliance which include significant costs.
The emergence of Decentralized Finance (DeFi) financial services built on blockchain technology without traditional intermediary organizations like banks has also been a factor in banks' evolving interest in blockchain. While DeFi is a threat to traditional banking models, it can also be leveraged to create new revenue streams in the future for some progressive banks.
Here is an examples of some trending defi business ideas
By engaging in blockchain and becoming actively involved in a DeFi ecosystem, banks could:
Banks can create blockchain-based financial services such as decentralized lending, yield farming, and decentralized exchanges (DEXs).
DeFi will provide banks the ability to serve a global market that may not have access to the traditional banking system - especially in underbanked areas of the world.
Many banks today are exploring partnerships with stablecoin projects - digital currencies either pegged or restrained to real world assets like the US dollar - to allow for stable, low-cost cross-border transactions.
Blockchain will provide banks the ability to diversify what they offer, in order to remain relevant in an ever more decentralized financial environment.
Another promising area of application for banks is tokenization, or the creation of digital tokens out of physical assets such as real estate, stocks, or commodities that can be traded on a blockchain.
Tokenization can provide the following three specific benefits for banks:
Tokenized assets can be traded 24/7 on decentralized exchanges, and they can trade assets that are typically considered illiquid (e.g. real estate or artwork) in the form of tradable tokens which creates liquidity.
The nature of blockchain and everything it automates & tracks, and the transparency it provides means faster settlement and reduced paperwork in the asset tokenization process.
The tokenization process allows for fractional ownership of assets, creating new products available to a wider array of investors, including retail customers who may typically be excluded from this type of investment as they have smaller capital to deploy.
This is a space that banks are excited about, because they can create new markets and revenue streams.
Lastly, Blockchain adoption can be part of banks' larger initiatives to future proof their business and implement the digital strategy that is part of the evolution of technology. In a world where technology is changing at the speed of light, it is imperative to come up with innovation in relation to offerings in order to maintain relevance & competitive positioning.
Banks' adaptation of blockchain positions them as advanced suppliers of financial technology in a way that participants can adopt innovation that can develop a competitive advantage in a rapidly advancing digital world.
Adopting Blockchain Technology in Banking has many advantages when it comes to improving security, efficiency, transparency, and most importantly the customer experience. With the use of this blockchain technology, banks could aid & assist with seamless, more affordable, and expedited cross-border payments or explore the consideration of a new revenue stream.
Blockchain development has the potential to revolutionize the way banking is conducted. While this space has generally seen a cautious approach, the possibilities and benefits for banks are apparent: banks that adopt or secure blockchain technology will put themselves in a better position of staying competitive, becoming compliant with regulators, and paving the way for future innovation.
As the technology develops, it is anticipated that blockchain could represent a cornerstone of banking in the future. The world is likely to see the advent of a new decentralized, transparent, and trusted financial ecosystem.
With the help of a Trusted Blockchain Development Company Banks can adopt Blockchain Technology to improve security, efficiency, transparency, and the customer experience.
Connect With Us Now
Drop us a line through the form below and we'll get back to you as soon as possible
Services
Resource Hub
Connect
Visit us
Follow
