Blockchain technology can revolutionize the Fintech space. Banks can also leverage this technology in their tech stack to make the most out of their operations.
In a nutshell, Blockchain is digital data stored in a public domain. With this technology, banks can save more data about their transactions and make the entire process more efficient, transparent, and quick.
The Mechanism of Blockchain
Blockchain technology is a distributed ledger of databases comprising blocks that store transactions cryptographically linked to each other. These blocks also store data about the parties involved in a transaction. For instance, the Blockchain records transactions without determining data and will leverage a digital signature instead. The data stored on every block is unique, distinguishing it from others. Every block will have a unique code called a hash to segment each data set.
For instance, if the users buy the same product twice on the website, each transaction will have a unique code to segment each transaction. Blockchain technology can store approximately up to 1 MB of data per block. Each block is capable of storing up to a few thousand transactions.
The Impact of Blockchain on the Banking Industry
With the surge in the adoption of Blockchain, there have been significant changes in the Fintech space. This technology enables untrusted parties to agree on the predecided database’s state and does not need an intermediary to execute any transaction. Blockchain is a decentralized technology that can help banking institutions to concentrate on other tasks rather than monitoring payment transactions. Banks that have leveraged Blockchain technology in their Fintech stack have revolutionized their processes in multiple ways.
Implementing this technology in any bank’s IT infrastructure will help streamline payments, settlement processes, securities management, credit, and trade finance. Blockchain impacts the clearance and settlement procedures because these distributed ledgers can minimize the operations costs.
Ways that Banks can Benefit from Implementing Blockchain in Fintech
1. Security
Integrating Blockchain in the FinTech stack allows banks to overcome various security issues. IT decision-makers can implement this technology at multiple layers to secure sensitive information from unauthorized user access. Following are a few ways implementing Blockchain can strengthen security in digital banking systems:
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User validation
Embracing Blockchain technology will minimize the need to secure user and bank accounts and devices with passwords. Instead, banks can enhance Blockchain security by combining it with biometrics and encrypting users’ unique identifiers. IT teams can integrate tools that can help the bank applications to verify iris scans, fingerprints, and voice recognition to a block in Blockchain to strengthen the security. Blockchain technology leverages encrypted blocks with user identifiers to offer access to applications and gadgets.
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Data Security
One of Blockchain’s essential characteristics is its decentralized nature; cybercriminals must work with the complete Blockchain system instead of a central node to hack it. The data on blocks are spread across various nodes; hence, no specific server or device can execute an attack. As a result, a few banking institutions have already embraced Blockchain in tech stack to store data and secure transactions.
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Secure communication
Banking businesses can leverage Blockchain to secure internal communication, mitigating data leakage opportunities or cyber espionage. This technology distributes the communications metadata throughout the ledger, making it challenging for malicious actors to gather it at one centralized point.
2. Speed
Banks with legacy approaches have slower financial approval, transactions, and management processes. Most firms still have manual processes to accomplish various daily operational tasks. Embracing Blockchain into the Fintech stack allows businesses to authenticate and verify transactions or users in real-time to simplify the banking process. This technology enables banking institutions to execute quick cross-border payments, finance trading decisions, verify Know Your Customer (KYC), and minimize paperwork.
A unified Blockchain-based system across multiple banking institutions will enable them to offer uninterrupted operation of finance services. Embracing Blockchain into the banking Fintech stack enables them to offer their customers an enhanced digital banking experience.
3. Transparency
Banking institutions that leverage Blockchain technology will have better transaction transparency. It is one of the easiest ways to identify and mitigate fraud. Once banks start leveraging a distributed digital ledger to record each transaction, it will help to increase visibility. Banks can efficiently monitor and authenticate every transaction’s history with this technology. As a result, banks that leverage Blockchain will have no opportunities for money laundering, scam, and other fake operations.
Also Read: Six Digital Banking Myths Financial Organizations Must Be Aware Of
Use cases of Blockchain in banks
Some of the use cases of Blockchain in banks include:
Payment and Remittances:
This technology can facilitate faster, cheaper, and more secure cross-border payments and remittances. Blockchain can streamline the payment process, reduce transaction costs, and enhance transparency by eliminating intermediaries and utilizing smart contracts.
Trade Finance:
Blockchain can digitize trade finance processes, including the letter of credit issuance, invoice financing, and supply chain financing. By providing a decentralized and transparent platform, Blockchain can reduce the risk of fraud and disputes, lower costs, and improve efficiency in trade finance operations.
Digital Identity and Credit Scoring:
Banking institutions that leverage Blockchain can enable the creation of secure, transparent, and decentralized digital identities and credit scoring systems. This can help banks assess credit risk more accurately and provide financial services to unbanked or underbanked populations.
Smart Contracts:
Blockchain-based smart contracts can automate and streamline various banking processes, such as loan agreements, insurance claims, and asset management. Smart contracts can improve operational efficiency, reduce transaction costs, and enhance transparency and accuracy in contract execution.
Overall, Blockchain technology has the capability to offer significant benefits to the banking industry by improving security, transparency, and efficiency in various financial processes. However, it is important to consider the regulatory, technical, and operational challenges associated with implementing Blockchain solutions in banks.
