If there’s one sector that’d make the most from ground-breaking blockchain technology, it’d surely be financial institutions. Banking and blockchain together are slowly becoming inseparable and an undefeatable combination. The major reason for blockchain’s success in FinTech is its transparency and the ability to provide increased functionality. The elimination of the need of administrator, and the replacement with the distributed ledger has made it the long-awaited revolutionary change in the financial market. So why is it so disruptive…read on to find out more.
What Does Blockchain Technology Mean?
The term blockchain arises from the term ‘block’. A thread of digital transactions recorded in an electronic ledger. These records are unchangeable and are linked to the previous record thus making a whole thread of transactions i.e. a ‘chain’. Every block has a link to a specific participant.
You can say it to be a peer-to-peer network. This means that the transactions made are one-on-one and there’s no middle person or middle service provider involved. It’s a transparent form of making a transaction amongst various distinctive parties.
Banking and Blockchain – A Great Combination
Financial institutions are becoming the leading users of blockchain technology. Banking and blockchain coordinate effectively to provide outstanding outcomes to their users – transparency is king.
When banking and blockchain are combined, third parties are eliminated for the complete equation of a transaction. This, in turn, abolishes the extra third-party transaction charges also.
The use of blockchain has also the potential to speed up many functions of banks which usually take almost 5 days to settle transactions.
The Impact of Blockchain in Banking
The positive impact on the banking sector was observed statistically in a report generated by Accenture. There has been a 30% reduction in the investment costs of the ten biggest investments banks of the entire world. Their savings have increased from $8 billion to $12 billion. According to Accenture,
Blockchain and distributed ledgers have a bright future. As real-time, open-source and trusted platforms that securely transmit data and value, they can help banks not only reduce the cost of processing payments, but also create new products and services that can generate important new revenue streams.
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.
Not just this, foreign transactions are witnessing improvements. Blockchain technology has eliminated the time-lapse which occurred in the payment and settlement process involved in foreign transactions. This has been possible because of the inbuilt feature of blockchain technology which enables incredibly fast sharing of data.
As soon as the data is shared amongst parties, the necessity of revaluation and corroboration is eliminated. This, in return, results in a transparent, as well as, efficient system of payments and clearance.
The Development Curve of Banks with Blockchain
Criticism is a part of development. When banking and blockchain began treading this brave new territory, it raised many concerns regarding the security and authenticity of the transactions.
Experience is teaching us that it is increasingly evident that the banks using blockchain technology are inching ahead of the curve. For example, JPMorgan Chase believes in the future of blockchain so much that they have assigned a separate enterprise, the Quorum division, to study and implement this technology. The bank is testing applications for financial processes and has already issued an annual deposit certificate with a floating rate based on a distributed registry.
The following are a few points which make banking better when hooked up with blockchain technology:
· The Identification and Authorization Process:
With matters concerning financial involvement, it is must that the identification and authenticity of both the parties are certain. Banks have to keep a track of the identity update of all the participants involved in transactions.
For banks and financial institutions, ensuring Know Your Customer (KYC) compliance is an important step in preventing inappropriate or criminal use of funds and services. Blockchain technology automatically updates the identity of the participants with speed and ease – perhaps being the ultimate transparent scaling solution.
· Processing of Payments:
Numerous banks are taking the lead to facilitate banking and blockchain to give a better payment platform to the users. Simple and quick payments and settlements locally and overseas as well have been a major success of the technology. It has cut short the unnecessary paperwork and long communication channels. A great example of this (in the case of India) has been recently reported in Bloomberg:
Banks responsible for about half of India’s internal trade have joined a consortium that aims to introduce blockchain technology in order to speed up processes and reduce hurdles to approving new loans.
Fourteen local banks have signed up for the India Trade Connect consortium, which hired the Bengaluru-based software firm Infosys Ltd. to develop a blockchain platform for loans that back trade transactions within India, according to Abhijit Singh, head of technology at ICICI Bank Ltd., one of the consortium’s founders.
· Simplified Clearing and Settlement Options:
The introduction of banking and blockchain has brought in a huge impact in the process of clearing and settlements. You can estimate the propensity for financial gain by the fact that with blockchain technology, the process can save billions annually by merely eliminating the handling charges.
In a recent press release, IBM, KlickEx Group and Stellar.org unveiled a new blockchain payments solution that uses IBM Blockchain technology to provide both clearing and settlement of financial transactions on a single network in near real time. Read this blog post to learn more.
This is a brief overview of the disruptive potential of blockchain technology. The evolution of banking and blockchain has already begun and we can expect to grow it over the time. Banking and blockchain together give rise to highly-efficiency applications for financial institutions and its users. A truly exciting blockchain frontier. If you enjoyed this post, feel free to share on your favourite social media channels below.