Blockchain technology, as we know it, has been disrupting industries with the immense potential it has and the use cases it provides. However, banks have only recently started to embrace this disruptive technology. The technology proves to be great for the banking system due to the transparency, decentralization, and security features of blockchain. Blockchain eliminates the chances of fraudulent transactions and errors, thereby, strengthening the security of the system. Implementing the blockchain technology in the banking system has the capability of replacing manual processes with more secure and cost-efficient transactions. Due to the many use cases of blockchain and its success in different industries, the banking sector is also changing its perception now. Therefore, we will be looking into how blockchain will impact banks in 2020.
Key Features of Blockchain Technology
The key features of the blockchain technology provide direct benefits and can especially be leveraged by the banking and finance industry. These features are:
- Immutability – Transactions on the blockchain are immutable and cannot be changed as every node on the blockchain can access the copy of the ledger and therefore transactions need to be validated before they can be added to the ledger. Therefore, transactions are transparent and tamper-proof.
- Decentralized – The blockchain network is decentralized in the sense that no single person or governing authority can control the network alone, The network is basically maintained by a group of nodes.
- Programmability – Through smart contracts, blockchain facilitates the automation of agreements and business processes.
- Security – SInce there is no single person controlling the network and data is encrypted and cannot be tampered, therefore, transactions on the blockchain are highly secure
- Performance – The blockchain network can handle numerous transactions and supports interoperability between different blocks.
Although, there are still a few concerns about the scalability, regulations, and interoperability of the blockchain technology, however, the banks are working on these issues to make the best use of the technology. Moreover, countries are now coming up with regulations to adopt the technology successfully. That said, blockchain certainly has the potential to transform the banking industry, and here are a few of the impacts that can be witnessed.
- Fraud Reduction
Due to the involvement of intermediaries in the banking system, fraudulent activities, cybercrime, and money laundering are prevalent issues. Over 50% of money laundering occurs due to the involvement of intermediaries like stock exchanges within transactions. Moreover, hackers are able to break into the security systems of the banks where all the bank ledgers are stored. The decentralized and transparent nature of blockchain will solve this challenge of the banks with the real-time execution of transactions. Also, data tampering on the blockchain is not possible due to immutable blocks, which means the data can not be changed once recorded.
- Smart Contracts
Preparing agreement contracts in banking or other businesses is an expensive affair with many legalities and documents involved in the process. There is also a risk of these agreements being tampered. However, with smart contracts in blockchain, this challenge of the banking industry can be overcome. Smart contracts facilitate tamper-proof agreements through a deterministic code that runs on blockchain. With smart contracts in place, the money is released when the required terms and conditions of the agreement are met. In the banking system, smart contracts will play the role of instilling trust in the system with minimal risks of breaches or other major problems related to agreements.
- Rapid Funds Settlement
In the present banking system, sending money is time-consuming and involves various fees, administration, and verification. With technology advancing at a rapid pace touching all industry verticals, the banking system has been lagging in keeping up with the pace. Blockchain, being a decentralized, distributed ledger, eliminates the need for additional verification and administration, thereby, expediting the transactions and significantly reducing fees. Additionally, it ensures that the transactions are highly secured as would be through the current banking system.
- Asset Tokenization
Asset tokenization is a complex process that requires coordination between brokers, banks, exchanges, and clearinghouses. Therefore, buying or selling stocks, securities, commodities, currencies, bonds, etc involves a lot of time and cost. Assets are usually bought and sold online through brokers, therefore blockchain seems to be the best solution for tokenizing assets. The technology streamlines this process with a technological base layer for easy tokenization of assets.
- Better Lending Terms
In the current system, banks hold a monopoly over the lending sector, and therefore, have their own terms of lending capital. Banks charge high interest rates on loans and check credit scores before providing access to capital, making borrowing money from banks a lengthy and complicated process. Blockchain can help create a new lending ecosystem and a financial system that is accessible by anyone through decentralized finance that brings all applications on the blockchain. Through this peer-to-peer lending ecosystem, the lending and borrowing process becomes secure, cost-efficient, and quick. This would impact banks in the sense that banks will have to provide better lending terms to their customers.
- Cost Reduction & Data Security
Banking transactions are prone to risks of data being compromised when sharing data. Moreover, banks and financial institutions use paper-based records which not only increases recordkeeping costs but also poses a risk of losing confidential records. With blockchain, documents can be authenticated in real-time, the process of data verification and reporting is automated, and KYC/AML data & transaction history is digitized. Overall, blockchain will help banks reduce data handling costs, risk of fraud and operational risks.
- Secure Payments
In the current banking system, there is always a risk of errors in payments and transactions. The blockchain technology facilitates security, privacy, and lower processing fees. Since blockchain eliminates intermediaries during the exchange of data, it is considered to facilitate highly secure payments.
Although there are many use cases of blockchain in the banking industry, we are yet to experience the full potential of disruptive technology. The above points are just a few examples of how blockchain will impact banks in 2020. However, the benefits of blockchain, if the full potential is realized, are immense. The banking industry is set to experience major impacts by blockchain in the coming years, to make the system better and more efficient altogether. A transparent, borderless, and trustless banking system with the implementation of blockchain is what will facilitate an interconnected economy.