How blockchain technology can improve the banking industry
With the emergence of the Internet in the 1980s and 1990s, the banking industry was transformed into the financial behemoth we know today. Banking grew in importance and eventually became a vital cog in the global economy and a necessity.
However, the recent financial crisis has made it mandatory for the banking industry to usher in a new era of transparency and accountability. While financial experts and academicians pondered over addressing this problem, a reasonable solution was not found. Until now.
A blockchain can be described as an encrypted, decentralized, electronic ledger that stores data and records transactions which are verified and managed by a peer-to-peer network. Hence, blockchain technology facilitates new and innovative processes that cannot be modified retroactively without being verified by the majority of the network. This leads to a high grade of transparency and operational efficiency. It also eliminates the need for intermediaries who charge high transaction fees, thereby increasing the time it takes to execute transactions. This also makes forging documents, information or transactions virtually impossible.
Implementing blockchain technology can prove to be far cheaper than the current platforms used by the financial services industry. A layer of overheads solely dedicated to confirming authenticity can be removed, thus streamlining the execution process.
The key areas where blockchain could disrupt are:-
Clearing and Settlement
Recording loans and securities cost banks billions of dollars and reduce the efficiency of the financial system. This can be rectified with the adoption of Ethereum.
Ethereum is an open-source, blockchain based computing platform that is built on the concept of self-executing contracts. Ethereum serves to store and secure data, track agreements and facilitate complex financial transactions. The ability for two parties to reach an agreement is embedded in its code. Upon fulfillment of the contract, Ethereum tokens are automatically transferred from one party to the other, in what is effectively a credible system. This streamlines the process and could serve as a way to reduce banking costs.
According to the estimates by consultancy firm Accenture, large banks could save as much as $10 billion by implementing blockchain technology to improve the efficiency of the clearing and settlement process.
Trade Finance
Trade finance is one of the most critical areas that could stand to be revolutionized by the implementation of blockchain technology. Despite the booming business of trade finance, the current system is outdated and requires a massive upgrade. Transactions such as bills of lading and letters of credit are either based on paper or sent globally through fax or posts.
Implementing blockchain can reduce processing time by eliminating the need for unnecessary steps and outdated mechanisms. This ensures a reduction in costs along with transparency, efficiency, auditability, and security. According to the reports issued by trade finance platform Marco Polo, major financial companies such as BNP Paribas, Commerzbank, ING and the Royal Bank of Scotland are already stepping up their efforts to implement blockchain technology in trade finance.
Customer Identification
Customer identification can prove to be extremely expensive and detrimental to both consumers and banks if handled incorrectly or inappropriately. Millions of individuals are impacted by identity theft every year and often suffer dire consequences. A case in point is the recent Equifax hack which compromised the information of millions of consumers.
Blockchain, being a decentralized ledger, eliminates the risk of a central server traditionally required to store and maintain records. Hence, there is no central point of failure of individual data. The ledger’s incorrigible record also empowers individuals to take charge of all information tied to their identity. The user defines segmentation and permission for third parties to access his data.
Want to find out where else the blockchain could disrupt? Continue reading here.
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This article was written by our Guest Writer, Noah Adrien Burges.
