How Blockchain is Transforming Banking
The invention of blockchain technology is one of the most significant innovations in the past several years. It is poised to change industries worldwide, including the banking industry. With blockchain's ability to conduct business entirely digitally, in real-time, publicly, and securely it is easy to see how blockchain is transforming banking.
Appeal of Blockchain
By 2026 blockchain technology is estimated to account for over $67 billion in business. Blockchain technology allows two parties to come to an agreement and follow through on it without the involvement of a third party, such as a bank. Fulfilling the role of the intermediary is central to the operation of many of the world's banks.
With decentralized ledgers such as Bitcoin, blockchain can conduct payments at lower fees than banks. Blockchain also disrupts traditional banking by providing a more efficient tool for financing, settlement systems, and securities markets. Previously these fields were primarily dominated by conventional banks.
Blockchain is transforming banking by allowing routing transfers and transactions to occur much faster. In addition, as transactions occur within a public and transparent network, there is no need for third parties to get involved and slow down the transaction.
Blockchain's Impacts on Banking
Blockchain is transforming banking by offering a wide variety of benefits that fundamentally change the way banks can approach financial services.
The most obvious use case for blockchain in banking is its potential to revolutionize international money transfers. Diving deeper into payments, it is easy to see how blockchain is transforming banking. For example, the average cross-border bank transfer takes several days. In contrast, the average Bitcoin transaction, whether domestic or international, takes about half an hour.
Additionally, due to the independence of blockchain networks from government regulators and other monitoring third parties, Bitcoin transactions are much more accessible than regular bank transfers. This is just one example of how blockchain can fundamentally change the nature of modern banking.
Blockchain additionally allows banks to speed up and automate their operations dramatically. This reduces the costs for both banks and their customers. In addition, with increased automation, the likelihood of costly human error decreases, further reducing operations costs.
Fraud reduction is more easily accomplished as its decentralized nature prevents hackers from having one easy point of access, and many layers of redundancy are built into the network. Blockchain networks also allow for clear lines for auditing out potential fraud in the system.
Blockchain networks can collect high-quality data. This allows banks to track and verify activity easily and gives them and their customers unprecedented transparency. Such transparency allows government agencies and regulators access to the data they need to meet compliance standards.
Additionally, banks now have the opportunity to accept digital currency for transactions. This allows banks to further reduce costs and transaction processing times, along with providing their customers with more options when it comes to currency.
Cryptocurrencies allow users to conduct international transactions without transaction fees, unlike traditional bank-based solutions that charge hefty fees on both ends of the transaction.
Trade finance is another critical function that can be entirely changed by blockchain. Despite trade finance's crucial role in the global economy, much of it relies on slow written documentation. Blockchain networks allow critical information such as origin and transaction details to be exchanged in real-time.
Furthermore, transactions can be set up, so funds become available once the other party receives goods. This is another example of how blockchain is transforming banking by having the potential to save vast amounts of time and billions of dollars of costs in global trade.
Customer verification is a very long process with traditional banking methods. But blockchain is transforming banking by providing banks with a tool to speed up the customer verification process dramatically. In addition, blockchain networks allow banks to quickly see information necessary for KYC, saving banks both time and money.
Banks spend hundreds of millions every year on KYC protocols. By cutting these huge costs, banks can offer more affordable financial services to their customers.
Blockchain can also change how banks approach securities by providing a decentralized database to collect all the necessary information without having to source information from multiple sources. This reduces the likelihood of error and dramatically speeds up the securities acquisition process.
Lending, a cornerstone of banking, can be made much more efficient with blockchain. With the instant settlement of transactions, both banks and their customers can complete loans much more quickly. Blockchain also allows financial institutions to provide credit and offer lower interest rates more securely.
Driving International Business
As mentioned before, blockchain enables much faster and more direct international payments. This makes it much easier for customers and companies to conduct business internationally. Combined with improvements to trade finance, blockchain is transforming banking by allowing banks to support international business like never before.
Challenges to Adopting Blockchain
Blockchain is slowly being adopted by banks that are just now realizing the potential of this technology. One of the critical issues with banks is that they are typically slow to embrace changes in technology such as blockchain. Compared to other industries and companies, banks usually use more out-of-date or legacy technologies rather than cutting-edge ones.
This is problematic as more and more consumers expect the companies they work with to use the most up-to-date technologies. Additionally, regulation hurdles make it more difficult for blockchain to transform banking.
Use Cases of Blockchain in Banking
Despite these challenges, many banks are exploring how to make the most of blockchain. Banks such as JP Morgan, the Swedish Central Bank, and HSBC have already begun experimenting with blockchain. They have used it to assist with financial services like money transfers and storing digital assets or even to launch their own cryptocurrencies.
Blockchain is transforming banking by changing how banks approach almost every aspect of the banking industry. Unprecedented transparency and speed with blockchain networks allow banks to offer financial services at much lower costs and faster speeds. As a result, both banks and their customers will benefit significantly from adopting blockchain in banking. This adoption of blockchain could easily be the most significant development in banking in decades.