Blockchain in Banking and Finance Industry — Can 2020 bring the long-awaited adoption?

Blockchain has been opening up new economies with disruptive powers of cryptocurrencies over the past decade. The two terms “Blockchain” and “Cryptocurrency” have been synonymously used to represent one entity, however, in reality, they interchangeably influence each other. Blockchain is a technology empowering cryptocurrency, whereas cryptocurrencies were the ones to push blockchain mainstream. Deploying a blockchain for organizations in the banking and finance industry can bring major improvements such as cutting operational costs and reducing the time taken for different processes.

Limitations of the Banking and Finance Industry

The world has never been as dynamic as it is today. No groundbreaking technology stays the same way for a long time. There’s always something better in the making to replace it. In such a time, the finance industry still works on the systems created decades ago. The infrastructure and technology slow down operations and add up costs for the organizations as well as its consumers.

Operational Costs

Manual workforce directly translates to added operational costs. Despite the hype to automate different processes to cut down costs, the finance industry is struggling with the traditional process of carrying out transactions.

Transaction Fees

The costs levied on consumers directly relates to the cost of the same process to the organization. Hence, high operational costs mean high transaction charges for customers.

Transaction Speed

It is commonly known that the banking industry has been notoriously slow in terms of conducting international payments or sanctioning loans and carrying out bigger transactions. The main reason for this delay is the involvement of so called third parties or intermediaries which lack any streamlined system for the data verification or swift funds transfers.

Unverifiable Data

Transaction data is today stored on centralized ledgers and there is no way to verify a transaction or prove if the data was tampered with at any point of time. Hence, customers are forced to blindly trust the employees of the financial organization and themselves have no control over their transaction.

Vulnerability to Fraud and Errors

Human activity is always prone to errors. The chances of error multiply with the involvement of more intermediaries. This also opens doors for carrying out frauds. In turn, the transparency between banks and their customers is staked as they are left dependent upon the intermediaries without any way of tracking their payments live.

Blockchain Solutions for the Banking and Finance Industry

International Payments and Remittances

Current banking system is inefficient to cover the user’s demands. For a successful cross-border transaction to settle, banks employ a three to seven days processing period which is just broken. On another hand, banks charge excessive fees that go as high as 20%. This fee is applied specifically because of the prior-mentioned intermediaries.

Blockchains are global ledgers that are not bound by territories and they do not require intermediaries for one party to successfully send funds to another. And irrespective of whether the transaction is local of cross-border, the slowest of blockchains usually take as little as 15 minutes to complete a transaction; the fastest may do so within a couple of minutes or even seconds.

Also, the blockchains are cryptographically secure ledgers which means that the transaction data stored on a blockchain is resistant to hacks and alteration.

Trading Stocks

Similar to bank transfers, trading stocks is a lengthy process. Each transaction is bound to pass through a number of third parties. Financial crimes and frauds are on the rise just because these third parties can manipulate the trading process into their own advantage.

The involvement of these third parties can be significantly lessened by using a blockchain solution for trading stocks. Regulations can be embedded into smart contracts and deployed so that no party is able to defraud another one in the absence of a third party.

Syndicated Loans

Financial entities have to comply with various regulations such as Know Your Customer (KYC) and Anti Money Laundering (AML). Given the number of parties involved in sanctioning a syndicated loan, this process can be highly time-consuming.

Banks can easily comply with local and international regulations using a blockchain. On the other hand, they can prevent the unnecessary duplication of data as the data will be copied to the blockchain, which all the banks could access easily.

Trade Finance

International trade and commerce activities lag due to the immense paperwork that comes bound with each trade. Every intermediary involved in an international trade individually prepares all documentation to update their ledger. Whether on a computer system or on paper, manual documentation at each stop kills a substantial amount of time.

A blockchain system can streamline these processes and reduce the time taken for updating the information. Parties involved in a trade can maintain and view a single ledger which they can update in real-time. This would also reduce the margin for any error in the documentation process.

Loyalty Programs

Loyalty programs are a method that banks use for customer retention. By using a blockchain, they can better track and analyze their loyalty programs and thus decide on the ones that are most efficient. Banks can also ease the sign-up process by using blockchain identity for their loyalty programs, which otherwise is a major turn-off for customers.

This would not only increase the level of customer satisfaction but also make the process smoother for the banks.

How did Banking and Finance Adopt Blockchain?

Blockchain is in the initial stage of disrupting the banking and finance industry. In the next ten years, blockchain will cut down the annual costs of banks by approximately $27 billion. Using blockchain for trading and regulatory compliance along with cross border payments can save the financial entities approximately $20 billion annually by 2022.

Conclusion

Though in the early phase of its transformation through blockchain, the banking and finance industry is doing well in leveraging the potential of this technology. Many of the major financial players already have their feet wet. They are implementing the use cases that are already known while also experimenting to discover those that aren’t.

It is now only a matter of time before blockchain becomes mainstream in the banking and finance industry and brings forth a major disruption.