Blockchain in Banking Industry – A Complete Guide for 2020
The blockchain technology is an open, distributed ledger that records transactions between two parties efficiently and permanently.
A blockchain consists of individual blocks of data that involve a series of transactions in a specific order.
This can be done without involving intermediaries or centralized authority.
That’s why processing transactions through Blockchain in Banking is faster.
The speed is just one of the many potential benefits blockchain brings to banking.
It’s not only about greater efficiency but also a new level of transparency and security.
Essential use cases of blockchain in banking
Here are some use cases of blockchain in banking to help you understand how the financial services industry will be attempting blockchain in the near future.
1. Clearance and settlement systems –
DLT like blockchain is able to settle transactions directly and keep records of them better than existing protocols such as SWIFT.
An average bank transfer takes almost 3 days to transfer and it is because the infrastructure was built that way.
Securing money around the world and moving them is a challenge faced by banks.
Transferring money from one account to another involves the intermediaries such as custodial services before it reaches its destination.
Moreover, the bank balances need to be reconciled across the global financial system, which comprises a broad network of funds, asset managers, traders, and more.
For example, if you’d like to send money from an account in a German bank to one in the United States, that transfer will be executed through the Society for Worldwide Interbank Financial Communications (in short, SWIFT).
Every day, SWIFT members send 24 million messages to some 10,000 different institutions.
The centralized SWIFT protocol processes only the payment orders.
The actual money is processed through a system of intermediaries.
Each of them comes at an additional cost and takes a lot of time.
Blockchain being a decentralized public ledger keeps the track of all the transactions permanently and publicly.
This is the biggest advantage of blockchain in banking industry.
Banks don’t have to rely on networks like SWIFT as they can simply settle transactions on a public blockchain.
2. Faster payments
Faster payments, enabling the use of technology like crypto provides help in keeping faster payments and lowers the fees of processing them.
Banks involve complicated systems like intermediaries or third parties for one to one transactions, so blockchain technology offers higher security and low cost of sending services.
By adopting Blockchain in Banking , banks will be able to cut down on the need for verification from third parties and accelerate the processing times for traditional bank transfers.
Already in 2016, 90% of the European Payments Council members believed that blockchain would change the industry fundamentally by 2025.
3. Buying and Selling assets or Securities
Buying and Selling assets or Securities, by removing the intermediaries and asset rights transfer, blockchain lowers the asset exchange fees and reduces the instability of the traditional securities market.
Moving securities on a blockchain could save from $17 to $24 million each year in global trade processing costs.
Buying and selling assets would mean keeping the record of commodities, stocks, or debts and this is done with the help of a network of exchanges, brokers, clearinghouses, central security depositories, and custodian banks.
If you are relayed through third parties then the system is prone to make errors.
Transferring ownership is a difficult process.
For example, If a person wants to buy a share of Apple stock, he or she buys it with the stock exchange and it matches with a seller.
In the old days, that meant you’d spend cash in exchange for a certificate of ownership for the share.
Blockchain companies are accelerating the process by raising funds with several alternatives.
These include Initial Exchange Offerings (IEOs), Equity Token Offerings (ETO), and Security Token Offerings (STOs).
STO is currently the most popular option because it’s legally protected.
To benefit from this model, projects need to pass a due diligence process.
Pioneers of STOs include Switzerland and Malta where companies like Scerri & Concise Ltd offer such services.
The most prominent ETO trading platform today is Neufund.
5. Credits and Loans
Blockchain in Banking is working as a financial institution in the world of consumers today and slowly is converging into another space which has the potential to completely upend the way finance operates today is lending and credit.
Blockchain technology opens up the possibility of peer-to-peer loans, complex programmed loans that can approximate a mortgage or syndicated loan structure, and a faster and more secure loan process in general.
When you fill out an application for a bank loan, the bank has to evaluate the risk that you won’t pay them back.
They do this by looking at factors like your credit score, debt-to-income ratio, and homeownership status.
In lending, blockchain technology offers cheaper, secure, and more efficient use making personal loans to a large number of consumers.
With decentralized and secured payments, consumers can apply for loans based on a global credit score.
For example, last year, one of them, Equifax, got hacked and exposed the credit information of over 145 million Americans.
Now you can see why blockchain offers a more secure, efficient, and cheaper way of processing loan applications.
6. Trade Finance
Trade finance in Blockchain in Banking exists to reduce the risks, extend credit, and ensure that exporters and importers can engage in international trade and commerce.
It is a major part of the global financial system still it relies on paperwork or written documentation.
Blockchain represents the opportunity to streamline and simplify the complex world of trade finance, saving importers, exporters, and their financiers billions of dollars every year.
Blockchain has its involvement in trading for a while now but its important role in lending and credit loans has just begun.
Many companies have faced financial setbacks due to uneconomical manual documentation.
Physical letters of credit, given by one party’s bank to the other party’s bank, are still often used to ensure that payment will be received.
Blockchain technology enables companies to securely and digitally prove country of origin, product, and transaction details (and any other documentation), could help exporters and importers provide each other with more visibility into the shipments moving through their pipelines and more assurance of delivery.
One of the major risks to experience is the threat of fraud because of a lack of confidentiality and having a look over documentation.
Through blockchain technology, payments between importers and exporters could take place in a tokenized form contingent upon delivery or receipt of goods.
Through smart contracts, importers and exporters could set up rules that would ensure automatic payments and cut out the possibility of missing, lapsed, or repeatedly mortgaged shipments.
Read Also – Application of Blockchain in Education
7. Digital identity verification
Banks wouldn’t be able to verify online financial transactions without identity proofs.
However, the verification process consists of many different steps.
It can be face-to-face checking, a form of authentication, for example, every time you log into the service or authorization.
For security reasons, all of these steps need to be taken for every new service provider.
With Blockchain in Banking , consumers and companies will benefit from accelerated verification processes.
That’s because blockchain will make it possible to reuse identity verification for other services securely.
The most popular innovation in this area is Zero-Knowledge Proof.
Several countries and large corporations are now working on solutions based on ZKP.
Thanks to blockchain, users will be able to choose how they wish to identify themselves and with whom they agree to share their identity.
They will need to register their identity on the blockchain only once.
There’s no need for repeating that registration for every service provider – as long as those providers are also powered by the blockchain.
8. Accounting and Auditing
Accounting is slow area to digitize.
Data integrity and validity are needed to match the strict regualtory requirments.
Thats why accounting is potentially another area that could be transformed with blockchain.
A blockchain would work like a digital notary who verifies all the transactions.
Blockchain smart contracts could be used in such applications to pay for invoices automatically.
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Our goal is to help companies adopt new technologies and simplify complicated issues that arise during technology evolution.
Contact us for the best solutions about the use of blockchain technology to solve the toughest challenges faced by the world today.
Why is Blockchain important for banks?
With blockchain in the banking industry, customers can access transparent and verified transactions.
This helps financially to know who is reliable with such transactions.
Which banks are using Blockchain technology?
Société Generale, Standard Chartered, The Bank of England, Deutsche Bank, DBS Bank, BBVA (BBVA), LHV Bank, BNY Mellon (BK), CBW Bank, Westpac (WBK) and the Commonwealth Bank of Australia are all in the race to research and deploy this technology.
Is Blockchain a threat to banks?
Blockchain technology is a threat to banks in one way where it could be tampering of the proof system of distributed ledgers which underlie cryptocurrency such as bitcoin.
How can banks benefit from Blockchain?
Banks can use blockchain technology to reduce the time required to settle transactions.
Banks would also be benefited in better compliance.
Blockchain also resists DDoS attacks and other forms of fraud in the financial industry.
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