Blockchain is a technology that has revolutionized the financial industry. The features and advantages of blockchain give a tremendous boost to the finance sector. Let us have a look at how:
Blockchain is one of the fastest-growing technologies in recent times. Technology has taken quite a turn in the tech industry and has become the talk of the town.
Banks are primarily responsible for keeping the money of customers secure and providing them whenever they are needed. To be able to do this successfully, they require several processes, along with intermediaries.
It makes the whole financial process a little slower and a bit more expensive. Additionally, the involvement of human intermediaries, along with many manual processes makes the financial industry prone to fraud.
Blockchain technology ensures safe and secure online transactions. It is highly transparent, which makes it a reliable technique to solve the problems faced by traditional banks. The traditional banking industry is adopting this technology gradually.
Blockchain technology has attracted a lot of attention and is changing everything from payment transactions to the way money is raised in the private market.
It is clear that blockchain is the future of data warehousing and computing as a technology. Every industry be it education, healthcare, and finance is about to find itself sooner or later using this technology.
However, it is one of the most discussed techniques in the financial services sector. Let’s take a look at why banks are thinking to use blockchain technology.
Reasons for Using Blockchain Technology in the Financial Industry
The financial sector is extensively adopting blockchain technology because blockchain-based transactions are much faster, more secure, and less expensive than the methods that the financial industry use for their functioning.
Cross-border payments, which are taking from two to five days to clear, are an example of this problem.
The cross-border payments processed using blockchain-based solutions take place much faster than in the traditional financial system. Also, it ensures high levels of security. Transparency of transactions is yet another advantage of blockchain.
Moreover, the technology also allows all operations and balances to be viewed by the users on the network. Thus, making it almost impossible to manipulate. All of this makes blockchain-based payment systems attractive to the financial industry which results in saving their operating costs.
According to the BlockData research, the remittances on the blockchain are 388 times faster and 127 times less costly than traditional financial systems.
As per the World Bank report, the volume of global remittances increased to $ 613 billion in 2017, and it has set a new historical record in the financial sector.
Advantages of Blockchain Technology in the Financial Industry
Now, let’s see the various benefits of using blockchain in the financial sector. So here we go!
Global networks are essential because it helps the financial industry to use blockchain with large payments and reduce the risk of failure. The active network must possess these attributes:
- It must comprise requisite defined rights, obligations, controls, and standards.
- It should offer a quick and systematic onboarding process that facilitates the financial industries to necessarily “plug and play” in the network for current and future passage.
Eminently, it is also noted that the network should be open to banks and non-banks.
Blockchain in Reducing Fraud
Blockchain is recognized in the financial and banking sector as new technology to reduce fraud. With 45% of financial and banking intermediaries, such as money transfer services and foreign exchange, it can minimize financial crime.
Most of the global financial systems based on central databases are prone to cyber-attacks as when hackers attack the system, they gain full access. According to a recent web development stat, unauthorized access to applications is possible on 39 % of websites.
This technology has enabled banks to get rid of some of the current financial crimes committed against financial institutions on the Internet. That’s why many commercial companies opt for blockchain services.
For Know Your Customer (KYC)
According to a Thomson Reuters poll, various financial institutions spend $ 60 million to $ 500 million annually on KYC ( know your customer) initiatives.
These regulations are designed to help reduce money laundering and unethical activities that require companies to authenticate and identify their customers.
The blockchain will allow companies to obtain verification information from customers of other companies, thus avoiding repeated KYC processes. Reducing administrative costs will be necessary for compliance departments.
Safe Storage with Smart Contracts
Blockchain also helps in smart contracts as it facilitates the storage of any digital information, including computer code, which can only be completed by typing two or more keys.
As your identity is stored on a blockchain, this facilitates lenders to make decisions about credit quickly. Then, a smart contract will be created between your bank, the dealer, and the lender.
The transfer of ownership will be automatic as the transaction is entered into a blockchain, shared between participants, and can be checked at any time.
Moreover, Blockchain technology not only fulfills the requirement of third parties but also ensures that all the members are aware of the contract details. And the agreement conditions are enforced automatically upon the completion of the terms.
One can make use of smart contracts for all kinds of scenarios, including financial by-products, property laws, and also for making commercial contracts.
Faulty lending networks and securities require billions of dollars to operate investment banks. Nowadays, it is controlled via various reports and manual adjustments.
The Australian Stock Exchange is amongst the popular examples of restructuring, which is migrating many clearing and post-trade solutions to blockchain-based systems.
Ripple, which is an enterprise blockchain service provider, is an essential participant working on clearance and settlement. Whereas the company is best known for its respective cryptocurrency XRP, Ripple is building blockchain-based solutions for the financial industry to use for withdrawals and settlements.
With blockchain technology, settlement time takes only a few minutes, whereas it can take up to a week in traditional financial systems. Also, there is a remarkable saving in money transfers.
Blockchain in Trade Finance
Trade finance still depends on paper, such as a credit letter sent globally via fax or email in recent times. Blockchain as a technology is an effective solution, mainly since most of the parties require access to similar information.
Blockchain technology can create greater transparency, security, and trust among business parties globally, replacing the cumbersome, paper-heavy bills of the loading process in the trade finance industry.
It is a very crucial component of supply chain management, and blockchain offers an array of elements in this area. The head of innovation for commercial banks at HSBC Ramachandran anticipates that it will take nearly five years to calculate all industrial ecosystems. Blockchain technology holds the capability to change the game completely.
To Syndicate the Loans
When any American company raises funds via syndicated loans, banks take an average of 19 days to finish the transaction. Most of the communications are still faxed when a loan is exchanged between a bank and lender to pay off the initial investment.
However, in all systems, it is a significant challenge to find substantial ways for individual blocks to communicate with each other in a rapidly changing way to lend reflective assets. Although blockchain technology cannot resolve all the drawbacks of the syndication market.
For Reliable Payment Process
Blockchain technology can transform the payment system. This will facilitate excellent financial industry protection at a lower cost to process payments between the organization, users, and the banks as well. Blockchain helps in eliminating all the middlemen in the payment processing system.
Future of Blockchain Technology in the Financial Sector
Blockchain has a bright future in the financial sector. It is an open-source and reliable platform that communicates data and securely helps financial industries to reduce the cost of processing payments.
Additionally, it also creates new products and services that help in generating significant new revenue streams. The most important factor in turning blockchain capability into reality is to build the necessary network between the financial industry to support global payments.
Looking at the current trend, we can expect more usage and development of blockchain in the financial industry to eliminate the implementation trap. About 77% of fintech organizations are planning to use blockchain by the year 2020.
Also, people will gain more awareness and trust in the block as a viable business method. Currently, some work is required to integrate this technology effectively. Blockchain technology has come a long way in a shorter duration of time.
Banks have to look at the big picture and work together – along with non-banks to help define the backbone that can transform a universally accepted global payment system that can change the way banks execute the transaction.
So, by now, you must have got an idea about why banks are switching toward blockchain technology. The importance of blockchain in the financial industry is increasing with each passing day as it offers many advantages to this sector.
ABOU THE AUTHOR: I’m Varun Bhagat, a technical consultant & blogger working for PixelCrayons which is a software development company in India. I like to impart my knowledge gained through 10+ yrs of experience with like-minded people.