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There is tons of controversy and criticism surrounding the topic of blockchain in banking. The SEO of Goldman Sachs, Lloyd Blankfein, ridiculed that “Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.” You’ll hear many others support his opinions on blockchain technology in one of the most powerful financial sectors. But despite what people think, the question of whether distributed ledger technology can help or hinder the banking industry remains.
Today, we’ll go over some of its biggest perks and explain how banks and their customers can benefit from blockchain solutions.
Refreshing Our Memory: What Is Blockchain?
Blockchain is a distributed ledger technology that uses computing power to record transactions. Each transaction forms a “chain” of data, or “block,” connected to the one before it. This system is one of the most secure ways to store assets today. Initially, blockchain’s sole purpose was to create a secure breeding ground for Bitcoin mining. As it rose in popularity today, its uses go beyond the safe storage of digital currencies.
Can Blockchain and Banking Work Hand in Hand?
A few years after the birth of crypto, a new network was released and presented to businesses called an “enterprise” blockchain. This blockchain technology isn’t public. It allows companies to access its main benefits: safety, transparency and efficiency. To keep matters private, it puts control in the hands of a single entity or notary. Yes, this certainly means the blockchain is more centralised than its originator, but that’s not exactly a bad thing.
In this way, many businesses may benefit from it while still maintaining better data security and safety.
Even though Bitcoin’s original intent was to replace fiat currency, the incredible innovation that came with it can be repurposed to aid other financial operations. Crypto launched in the middle of the 2008 financial crisis – a time when people’s faith in central banks and centralised financial services was shaken.
Many decided to buy digital assets from crypto exchanges like Binance or reliable broker-matching sites like Yuan Pay Group. But as we can see, not all hope was lost for central banks – many have still kept their clients. However, they can further improve their services if they adopt blockchain technology. Below are several ways that can benefit the banking industry, all with the help of distributed ledger technology.
Examples of Blockchain in Banking
There are numerous ways to upgrade financial institutions with the use of blockchain technology. Here are several ways the banking industry can benefit:
New Transaction Settlement
Perhaps the biggest difference we notice when we send digital currency is the speed. It takes about ten minutes for a person in Australia to receive their money sent from Scotland. If this was fiat currency, senders would need to go through a bank and process their payment before it reaches the recipient. And God forbid they sent the money on the weekend.
Next, the recipient’s bank would need time to process that money into the account. This could take from several days to over a week. Here, blockchain technology could prove most beneficial, shortening transaction times. Blockchain technology could give users and banks a new and improved transaction settlement system.
P2P Transactions
If you haven’t heard of P2P before, it basically means you can send money from person to person. No need for a middleman to approve the transaction. Blockchain technology already uses this method.
You only need a web app or mobile application to try it. And since blockchain already uses this network to send digital assets, the cornerstone for this method in banking is pretty much established. This approach can also benefit trade finance and plenty of other industries, getting rid of business models.
Identity Verification
We know that banks and similar financial services provide some identity verification methods. For example, biometric or 2FA authentication, which every one of us has enabled (and if not, you really should). Unfortunately, modern-day hackers are finding new and clever ways of bypassing even these security measures. But if banks were to embrace blockchain technology, they could modernise identity verification.
For instance, banking services could use tokens. Either proof of identity tokens or NFTs, which can connect to a special app for identification. That way, they have the upgrade of blockchain’s security measures, which can be a huge security perk for the banking sector and its services.
Lending and Borrowing Money
For those who are unaware, the crypto business has shown to be a formidable competitor for banks and other financial service providers. One of the biggest reasons for this is that customers can now loan and borrow crypto. That’s right. Plenty of companies allow you to use crypto as collateral for your loan nowadays. Of course, we’re not saying that the banking system should consider giving out crypto loans.
Instead, the loan and credit industry can use the same blockchain technology for their loans. For example, paired with the authentication technology in the previous section, banks can easily identify their loan candidates. That’s especially true if they’ve already recorded customer information on their employer’s distributed ledger.
This makes them easy to identify, and approval for a loan can be much faster! Not to mention that this technology can help prevent money laundering and improve KYC processes.
Transaction Costs
Using blockchain in banking can also lower the costs of cross-border transactions in users’ bank accounts. This works as both a benefit for the financial services sector and customers. High prices and huge costs can be off-putting for customers and equally harmful for financial institutions.
After all, you can’t be a lead in the financial services industry and offer steep prices for your transactions. Clients will quickly look for more cost-effective solutions. Crypto offers the same service – international payments (in the form of Bitcoin transactions) but for a lower price.
The banking industry can enjoy saving money and reducing internal fees with the help of blockchain technology. In-person and online services could then be accessed with ease.
The Major Perks of Using Blockchain in Banking
The banking industry can benefit from blockchain in a few ways:
- Upgraded Security: Blockchain is ultra-safe due to its cryptographic features, which lowers the possibility of fraud and cyberattacks.
- Less Expensive: Blockchain can drastically lower transaction fees for both banks and customers by doing away with middlemen.
- Speed: Users can complete transactions faster, which improves the user experience.
- Error Reduction: Smart contracts and their automation reduce human errors.
- Transparency: Banks will still be able to track each transaction easily and verify it because there is a record of it in a public ledger.
The Major Issues of Blockchain in Banking
Blockchain adoption in banking also has some issues. Of course, we want you to have the full picture, so here are some of the downsides of using this technology in the banking sector:
- Difficulty to Adapt: Indeed, the banking sector is not well-known for embracing change. It may be a while before the traditional banking industry uses a blockchain network.
- Legal Ambiguity: There still isn’t a unified framework for blockchain technology. Still, governments are making steps towards regulating the sector. So far, however, blockchain technology has brought more uncertainty to the financial industry, and it will take a while to see an adjustment.
- Lack of Privacy: Although blockchain promotes transparency, it can also leak personal information. Since everyone can see transactions on a public blockchain, not all banking processes may be appropriate. Banks must find ways to balance the need for privacy and openness.
- Scalability Issues: Networks like Bitcoin and Ethereum struggle with growth. So imagine if an entire country the size of the US moves its banking services to a blockchain network. It would certainly become slower and less efficient as more transactions occur on the blockchain.
Final Thoughts
Blockchain in banking has the power to completely transform the financial sector. It offers financial institutions a compelling alternative. It has huge benefits, which include great security, quick transactions, and reduced costs. However, banks must also deal with scalability issues and regulation. Blockchain technology is likely to enter the financial industry in the future, but it’s still uncertain when that will be. We do know one thing – it has the power to dramatically change how we handle money, and we can’t deny it has some incredible perks.
