How Blockchain is Transforming Banking

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As the backbone of digital currency, Blockchain has already proven its potential as a disruptive force in the financial services. Its secure, transparent, decentralized ledger system minimizes costs and boosts security across various facets of financial services.

Introduction

As banks deal with hundreds of transactions, transparency, security, and cost-efficiency remain priorities. Blockchain creates a secure and tamper-proof ledger that cost effectively handles transactions.

Moreover, the banks are already experiencing the transformative impact of this technology with the growing demand for transparency and accountability in financial transactions. This has led to a surge in its adoption and is expected to increase over time.

As per a report by Business Research Company, “Blockchain in Banking and Financial Services Forecast 2024-2033,” the Blockchain in Banking and Financial Services market size is expected to grow to USD 27.69 billion in 2028. It will record a CAGR of 40.4%.

The article highlights its transformative impact, uses cases, and case studies on how it has revolutionized traditional business models and practices.

Blockchain Mechanism

Blockchain is a distributed database that stores and manages data securely. It works through a series of blocks that contain transactional data. Each block is linked to the previous one using cryptographic techniques, creating a chain of blocks- Blockchain.

While this ensures that the ledger is tamper-proof and transparent, it also prevents fraud and increases trust among parties in the network. The technology relies on a consensus mechanism to validate transactions.

Overall, it is designed to create a secure and transparent system for managing and recording transactions, reducing the need for intermediaries and increasing efficiency and trust.

Pain Points in the Current Banking System

Banks have been around for centuries, facilitating many financial and economic activities like trading, lending, and transaction processing. Despite this, some banks could not adapt to the rapidly changing realities of the digital age.

While these banks move steadily, they are too uncomfortable to navigate. For instance, many banking operations still rely on paperwork, which is expensive and time consuming, creating security gaps.

All these transactions may require extensive manual processing and documentation involving costly intermediaries. Additionally, these transactions need to be validated by various participants at different points in time, causing delays.

What Must Banks Do?

Banks must strengthen their security systems to protect their customers’ data effectively. They must explore new ways to improve transaction speed, enhance customer service, reduce operational costs, and ensure transparency.

They need robust solutions to track credit history, improve regulatory compliance, and overcome other challenges. A reliable solution like Blockchain will help eliminate intermediaries, maintain an immutable log of transactions, and facilitate real time execution of transactions.

This could reduce the time required for banking transactions, decrease manual work costs, and increase customer satisfaction. However, banks need to choose the right use case for Blockchain to use its value entirely.

What Banks Need to Implement Blockchain?

Banks are continuously experimenting with multiple use cases on Blockchain. Selecting the right use case to implement a Blockchain-based solution is essential when validating a solution.

Deloitte, a provider of audit, consulting, tax, and advisory services, has developed a Blockchain Assessment Framework. This helps evaluate whether a particular process or use case is ideal for a Blockchain-based solution.

The company suggests that for a use case or process to qualify as Blockchain-fit, the majority of the questions in the framework must be answered affirmatively.

Here are some examples of the questions in the Blockchain assessment framework designed by Deloitte that align with the pain points.

Also Read: Reasons and Strategies to Leverage Blockchain Technology for Anti-Money Laundering (AML)

Intermediaries

  • High fees for intermediaries?
  • Latency due to processing through an intermediary?
  • Does the intermediary exist due to a lack of trust?

Transparency

  • Are multiple participants involved?
  • Does an increase in transparency in the transaction help the participants?

Trust

  • Is there trust among participants?
  • Do multiple participants have the right to modify transactions?
  • Is there a risk of fraudulent transactions?

After analyzing the framework, each evaluation factor highlights a specific issue in the current process that can be resolved with Blockchain.

The use cases of a full-fledged Blockchain solution are summarized below.

Use Cases of Blockchain in Banking

  • Payment Transfer and Investment Management

Added fees and slow payments are one of the challenges in payment transfer. Cryptocurrencies like Ether developed on public Blockchains eliminate such issues allows anyone to send and receive money without transaction fees and in real-time.

As the payment happens on a decentralized network, there is no need to verify the transaction. While this makes the process faster, it can significantly reduce transaction costs and increase efficiency.

Moreover, Blockchain enables fractional ownership and tokenization of assets. This means it allows individuals to invest in previously illiquid assets, such as real estate or art.

Doing so expands investment opportunities and makes buying, selling, and trading assets easier. Additionally, it provides increased transparency in ownership, which is beneficial for all parties involved.

  • Settlement and Clearance

An average bank transfer can take up to three days to settle. The process involves a complex system of intermediaries, such as custodial services, before the recipient finally receives the funds. This can be unsettling for both consumers and banks.

Blockchain transparently and publicly tracks all transactions. This means that transactions can be settled directly on the public Blockchain instead of relying on intermediaries. This makes transactions faster and simple.

  • Tokenized Security

Banks must track who owns stocks, commodities, or debt to buy or sell them. They rely on brokers, clearing houses, and custodian banks to seek such information. However, this process is slow and prone to inaccuracies and fraud due to an obsolete paper ownership system.

Blockchain revolutionizes the banking system by creating a decentralized database of unique digital assets. A distributed ledger makes transferring assets through tokens easier. Tokenized security is one of the benefits of Blockchain in banking, which eliminates the need for intermediaries and reduce asset exchange fees.

  • Customer KYC

KYC is slow and expensive for banks because it requires checking photos, addresses, and biometrics. With Blockchain, banks can access information related to KYC, leading to a reduction in personnel costs. It also helps address the delays and costs associated with customer KYC.

Also Read: Fintech KYC: Importance and Challenges

  • Invoice and Billing Supervision

Blockchain can streamline the invoicing and billing processes by using smart contracts. These contracts can be programmed to execute payments automatically based on predefined conditions, significantly reducing disputes and delays. This feature is especially useful for supply chain financing and trade finance.

  • Regulatory Compliance

Banks must respect laws, rules, and regulations applicable to their activities. But, it is a challenge for firms to keep up with the pace and complexity of regulatory change— mainly when operating across borders.

Not keeping up with the rules and regulations can expose them to multiple regulatory regimes. Blockchain can be programmed to align with unique governance and compliance attributes. The technology streamlines the processes with automated data verification and reporting. Moreover, it helps facilitate regulatory oversight, reduce operational friction, and eliminate errors associated with manual auditing in real-time.

  • Insurance

Property and casualty insurance claims are often subject to fraudulent activities, which can prolong the claim assessment process. Blockchain can securely streamline data verification, claims processing, and disbursement, significantly reducing processing time.

This technology allows for authenticated documentation and KYC/ Anti-Money Laundering (AML) data, reducing fraud risk and claim assessments.

Read more about how Blockchain can be used for AML.

Automated claims processing can be achieved via smart contracts. Parameterized contracts can be set up to pay out upon the occurrence of specific risks. This means that insurance payments can be automatically disbursed with the use of this technology.

Tokenized reinsurance markets can also facilitate policy reinsurance in open marketplaces, moving away from traditional broker and relationship-based systems.

Case Studies of Blockchain in Banking

  • J.P Morgan

As per a global research by J.P Morgan, “The next step for Blockchain,”

  • In 2017, J.P. Morgan announced the Interbank Information Network (IIN), powered by Quorum®, a permissioned variant of the Ethereum Blockchain. IIN allows member banks to exchange information in real-time to verify that a payment has been approved.
  • In February 2019, J.P. Morgan tested JPM Coin based on Blockchain-based technology, enabling the instantaneous transfer of payments between institutional accounts.

Moreover, a 2021 press release states that the company uses Blockchain to improve global fund transfers between banking institutions. This also includes payments from Taiwan banks to beneficiary banks in other markets.

With improved information exchange related to such payments, the new solution called “Confirm” will help reduce the number of rejected or returned transactions caused by mismatched payment details. This lowers the costs for both the sending and receiving banks.

After validation of information, the payment may be sent through J.P. Morgan’s global clearing solution, “PayDirect,” to route the payment most efficiently.

Find more insights here. 

  • HSBC

HSBC uses Blockchain, AI, and ML to make their customer’s lives easier through digital banking. They use Blockchain to cut transaction times to less than 24 hours from 10 days.

A press release by HSBC, “Harnessing the benefits of Blockchain,” states they are investing and developing Blockchain as it helps improve efficiency, transparency, and security across established networks.

Global trade is decentralized by nature, and Blockchain is well-suited to joining disparate partners across the trade ecosystem. So, HSBC is focusing on using it for the vital, previously paper-driven process for letters of credit.

The technology offers a fast and secure alternative, helping reduce letters of credit processing time from five to ten days to a matter of hours.

Furthermore, HSBC’s Digital Vault is a Blockchain-based custody platform. It enables global custody clients to access details of their private assets – equity, debt, and real estate.

Find more insights here.

2023 press release by Bloomberg states that HSBC aims to revolutionize the London gold market using Blockchain. The bank has unveiled a platform that uses distributed ledger technology to tokenize ownership of physical gold stored in its London vault.

The new system creates digital tokens representing gold bars, which can be traded through the bank’s single-dealer platform.

Conclusion

Blockchain is an intriguing development that has recently made waves in the financial services industry. Unlike the internet, it does not rely on a single central authority but instead uses a decentralized system shared across user networks.

This powerful tool transforms how banks conduct financial transactions, from banking to asset management and insurance. Its secure, decentralized ledger system is revolutionizing the way financial transactions are conducted.

Blockchain can help banks with customer KYC and reduce disputes and delays with invoicing and billing. It also helps facilitate regulatory compliance and streamline insurance claims processing while reducing fraud risks.

With its potential to enhance efficiency, reduce costs, and improve security, Blockchain is poised to disrupt traditional business models and practices. It impact is far-reaching and has paved the way for a future where trust, transparency, and innovation reign supreme.

Apoorva Kasam
Apoorva Kasamhttps://talkfintech.com/
Apoorva Kasam is a Global News Correspondent with TalkCMO. She has done her master's in Bioinformatics and has 18 months of experience in clinical and preclinical data management. She is a content-writing enthusiast, and this is her first stint writing articles on business technology. She specializes in marketing technology, data-driven marketing. Her ideal and digestible writing style displays the current trends, efficiencies, challenges, and relevant mitigation strategies businesses can look forward to. She is looking forward to exploring more technology insights in-depth.

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