7 Ways Blockchain Will Transform Financial and Banking Services

Digicode
7 min readMar 9, 2022
Source: freepik.com

Blockchain is no longer associated only with cryptocurrency. Global companies are testing it in a wide variety of applications, from identity management and anonymous communication to international payments and the Internet of Things. The basic principle of blockchain lies in cryptographic encryption, which helps to hide information in the distribution ledger from unauthorized users. Due to the fact that each user has a copy of such a register on his computer, it cannot be faked or edited.

Worldwide, the financial services market is the largest industry sector by market capitalization. However, the global financial system is rife with inefficient processes such as paper transactions, asymmetric information and vulnerable centralized systems, which ultimately increase costs and delays for the consumer. Every year 45% of financial intermediaries, such as payment systems and stock exchanges, suffer from fraud. If blockchain technology replaces only a small fraction of such transactions by enabling peer-to-peer transactions in other sectors, it could dramatically improve the efficiency of the financial sector.

Payments

Internal and external transfers of customer funds are the main share of any bank’s operations. Blockchain will help provide a completely different level of service to customers.

How the transfer system is built: the recipient bank and the sender bank always appear in it, sometimes banks also use intermediate accounts, which slow down the processing speed and increase the service cost.

At this point, when a Bank of America customer wants to send money to a JPMorgan Chase account, they must pay an additional commission. This money will be used to pay for banking services to ensure the security of the transaction and guarantee the authenticity of the money.

In this case, the transfer may take up to 3 banking days. In the case of cross-border transactions, you need to pay even more. So, if you work in New York and want to send part of your salary to your family in London or Paris, you will pay the same 1–10% commission (the payment system does not matter) plus another 5–7% additional fees for converting dollars into pounds sterling or euro. This operation will take 3 to 5 banking days.

According to research by the consulting company Accenture, the use of blockchain in payment transactions will allow banks to save up to $12 billion a year. In particular, they can implement Lightning Network technology, use a cryptocurrency with low fees, or develop a payment system with free transactions.

New approaches will help reduce costs: for large money transfers, the commission on the blockchain is much lower than using traditional banking mechanisms. It is expected that the main role will be played by the “cryptocurrency for banks” Ripple, and the RippleNet payment platform, which has more than 100 large financial institutions among its participants and is actively developing.

Micropayments

One of the most promising areas of blockchain use in FinTech. For example, sub-cent payments are too difficult for Internet users. The development of appropriate blockchain-based applications will make such payments possible and practical. It will allow users to effectively monetize their social networks, as well as make them an alternative way to pay for small jobs, such as filling out surveys or freelance editing for different clients. Financial market analysts also believe that micropayments can be a very profitable and promising project in the business world. Thus, the financial company Wedbush Securities predicts the size of the bitcoin-micropayment market at $925 billion by 2025.

Increase Transparency

Lack of transparency in the banking sector leads to various frauds, which can lead to financial losses of customers and full-scale economic crises. The most striking example is the case of the American investment bank Lehman Brothers.

In 2007, the bank boasted of $19 billion in revenues and a record net profit of $4.3 billion, which did not stop its management from declaring bankruptcy a year later due to the inability to pay creditors $613 billion. Another example is the Wells Fargo case. Over the years, its employees have opened more than 2 million fake accounts in the names of the bank’s customers in order to improve their reporting and thus receive bonuses. Clients whose data were used suffered damage in the form of millions of dollars in illegal fees and damaged credit history.

To avoid such situations, the bank needs technology that will provide transparency and traceability of funds, as well as increase the protection of personal data.

Blockchain can be used to create a system that is both open and reliable. As, for example, in Bitcoin cryptocurrency wallets, where anyone can check the transaction history of any user, but at the same time, no one has the opportunity to find out someone’s personal data — they simply are not in the Bitcoin blockchain.

Digital Identity Verification

Online financial transactions are impossible without identity verification, which must be repeated with each operation or authorization in the payment system. Sometimes this procedure is difficult due to the large amount of different information stored in individual organizations. Also, there is no single form of storage and provision of information so that all interested organizations can use it for its intended purpose.

If blockchain is used for identification by banks, then it will be possible to simplify this procedure, and the approach itself will become universal. Ideally, the data of each client in a unified form will be in a single register, which can be viewed by all banks. Naturally, it will not be possible to make arbitrary changes to the registry, and the data itself will be simultaneously held by all users.

Fintech startups such as Tradle, Cambridge Blockchain and ID2020 are working on personal identification. The first two projects were created to store proof of identity verification and provide full ownership of the data created during identification. ID2020 is focused on issuing digital IDs to people who do not have paper IDs. It is supported by Accenture, Microsoft and the Rockefeller Foundation.

Smart Contracts

A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. Such agreements can be between two people, in other words, peer-to-peer (P2P), person and organization (P2O), or person and machine (P2M). Smart contracts allow to automate payments and transfers of currency or other assets as agreed terms

One of the goals of blockchain was to get rid of a third party when making deals. The implementation of the project directly leads to an increase in speed and a decrease in transaction fees. The pioneers in this area were members of the crypto community and traders. But now, government agencies and banks have also started using blockchain to keep up with speed and quality of services. The security of the protocol is also of great value. The blockchain is perfectly protected by community members, since every transaction must be confirmed by more than one users. Strong decentralization ensures security and fairness. Another plus is the elimination of the factor of human error during a transaction or data entry. All information is verified by an electronic protocol.

Automation of funds transfers, making lending decisions and servicing loans, compliance work, insurance, wills, issuing securities. Basically, all of this can be done using smart contracts.

Combating Money Laundering (AML) and Terrorist Financing (CTF)

In 2012, HSBC was fined $ 1.9 billion after it was found to have laundered $ 881 million for drug cartels. In 2017, Deutsche Bank was fined $ 630 million for facilitating the laundering and withdrawal of $ 10 billion from Russia.

The CBAUF paid out $ 530 million after admitting that it did not comply with anti-money laundering and terrorist financing laws. This list can be continued for a very, very long time.

The implementation of blockchain-based ledgers will facilitate AML / CTF compliance for honest banks, as well as speed up and reduce the cost of investigating potentially corrupt individuals and institutions.

And since data in the blockchain is distributed over hundreds and even thousands of nodes, it is almost impossible to delete or correct it.

Investments and Financing

Many trading transactions in financial markets are completed in a day, then documented for another week. Bunch of invoices, credit letters, and lading bills. Plus the need for simultaneous multilateral access to information. All this creates a promising environment for the implementation of solutions based on new methods. In this field, blockchain and banks can evolve to a very high level.

But there are not enough projects for individual organizations. The defining task of effective implementation is the use of technology by a critical part of the participants in the trade chain. In addition to banks, suppliers and buyers, compatible algorithms will need to be integrated into the work of the customs service, ports and forklifts, shipping, insurance, and logistics companies.

The banking industry continues to digitize, and that has already become a necessity for survival. Financial companies are constantly working to improve the user experience by AI and machine learning to help better define customer needs. It can improve the security of international transactions and personal identification by using blockchain technologies. The years of the pandemic have shown the need for speedy digitalization, and soon we will see how this will improve our user experience at all levels.

Wish to use blockchain technologies and achieve improved outcomes?

Get in touch with our team at Digicode. Our experienced blockchain development experts make financial and banking services more safe and user-friendly. From design to delivery, our strategists and engineers work hand-in-hand with clients to guide where, when and how to develop the best blockchain strategy for their businesses.

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