How Blockchain is Transforming the Banking Industry

Blockchain technology is making its presence felt in nearly every industry. From cryptocurrencies to smart contracts, the potential uses of blockchain are endless. Now, businesses are taking notice of how blockchain is changing the banking industry, how it is used in finance, the benefits of blockchain in banking, and understanding its potential to streamline processes and improve security. 

Blockchain is disrupting the banking sector worldwide. Inefficiencies and security concerns are plaguing the sector, and banks are struggling to keep up with the pace of innovation. 

It has the potential to solve various issues faced by the banking sector. Web and blockchain mobile apps are becoming crucial for everyone to stay ahead of today’s digitalized business landscape.

In this article, we will explore how blockchain is changing the traditional banking system and discuss some of the benefits of blockchain technology in banking.

How Blockchain is transforming traditional banking?

While blockchain was originally developed for cryptocurrencies like Bitcoin, the technology can be used for much more than that. In fact, blockchain in banking sector has the potential to revolutionize the entire finance and fintech industry.

Here are some of the ways that blockchain is changing traditional banking:

Efficient and faster transactions

One of the biggest advantages of using blockchain in banking is that transactions are faster and more efficient. With traditional banking, international payments can take days or even weeks to process.

As cryptocurrencies are developed on a public blockchain, they allow anyone to send and receive money without paying any transaction fees regardless of the country or currency. This makes blockchain for banking a more attractive option for businesses who want to speed up their payment process.

Safe and secure transactions

An application of blockchain technology in banking and financial sector is improved security. In traditional banking, there are many middlemen involved like banks, credit card companies, and payment processors.

Each of these middlemen takes some share of the transaction, which not only slows down the process but also makes it more expensive. With blockchain, transactions are verified and approved by a network of computers, rather than by a single central authority.

McKinsey estimates that blockchain-powered cross-border payments could save approximately $4 billion a year.

This decentralized network makes it very difficult for hackers to tamper with the data or steal sensitive information because there is no single point of failure.

Smart contracts

Another way that blockchain is changing traditional banking is through the use of smart contracts. A smart contract is a digital agreement between two parties that is stored on the blockchain. Smart contracts are enforceable by code, which means that they can be executed automatically. This can help to streamline the process of approving and executing contracts between banks and their customers.

In addition, smart contracts can verify credit scores, verify identities, and confirm compliance with regulations. This can help to reduce the risk of fraud and improve the accuracy of loan approvals. For example, a smart contract could be used to release funds from a bank account to a customer when they make a purchase.

Smart contracts are more secure than traditional contracts because they cannot be altered or tampered with.

Know your customer

In the traditional banking system, Know Your Customer (KYC) processes can be very time-consuming and expensive because they require a lot of manual work.

In its report, a global identification provider, Veriff, stated that there had been a 61% growth in fraudulent activity in 2021 as compared to 2020.

Moreover, after knowing the blockchain applications in banking and finance, banks can verify customer identities more quickly and securely. For KYC compliance, blockchain could be used to create a digital identity for each customer that could be verified by multiple parties. This application of blockchain in KYC has multiple benefits.

It would make it more difficult for criminals to open fake accounts. By availing blockchain development services, banks could reduce the need for manual reconciliations and shorten settlement times.

Trade finance

This basically includes everything from domestic and international payments to trade financing, supply chain financing, and more. Trade finance exists to ensure that buyers and sellers have the money they need to complete a trade, whether domestic or international, and it's one of the most critical aspects of banking.

Currently, trade finance is slow, outdated, and paper-based. It can take weeks or even months to process a single transaction.

Blockchain technology in banking aims to enhance and streamline the entire trade finance process by digitizing all the documents and making them tamper-proof. Moreover, digitization will help banks save a lot of money that is currently being spent on paper documents.

Improved lending

Blockchain-powered lending allows a safe and secure way of providing personal loans to a large user base. Moreover, lending is one of the revenue platforms for the banks where they generate a good amount of money.

With blockchain, banks can connect with borrowers directly without the need for intermediaries. This would not only save time but also reduce the cost of lending.

Currently, when a bank provides a loan to a borrower, it has to go through many intermediaries such as credit rating agencies, brokers, and so on. Also, letters of credit, credit scores, invoices, and other documents have to be verified manually, which is a time-consuming process.

With blockchain, the entire process can be streamlined because all the data related to the borrower would be stored on the blockchain. This would allow banks to get a complete picture of the borrower and make a decision accordingly.

Use cases of blockchain in banking

Blockchain technology is acquiring great support from big banking names. Many banks have started to invest in blockchain and are working on various projects related to it.

J.P Morgan stated that they are using blockchain for banking to speed up the payments process and issue digital currency called JPM coin. As per the recent announcement, they will launch a new business unit Onyx and digital currency to focus on financial services. This growth in adoption by banking giants will help blockchain to grow and mature as a technology.

Also, HSBC bank has announced that it is using the R3 blockchain platform to streamline the process of storing digital assets.

Similarly, the acquisition of Crypto Finance AG by Deutsche Borse has given them a direct entry point for investments, as well as post-trade services in the crypto world.

Moreover, other banks such as Goldman Sachs, Barclays, and so on are also experimenting with blockchain technology in order to streamline their banking operations.

Wrapping Up

Blockchain is slowly but surely making its way into the finance world. With so many blockchain applications in banking, it is sure to revolutionize the way finance is carried out in the near future.