What is the most important thing for humans? Well, nobody knows for sure but money is definitely one of those! And that’s the reason that the banking sector is one of the most important sectors in the world. This sector includes different institutions such as banks, finance companies, investment firms, insurance companies, etc. All of these are various pillars that sustain the economy of the world. Normally, there is very little influence of the latest cutting-edge technologies in the banking sector but Blockchain is definitely an exception. In fact, Blockchain is a technology that may even change the future of banking!
But how would it do that? And for that matter, what even is Blockchain? It is a fancy tech word that is thrown around a lot but there are very few people who actually understand what Blockchain truly is. That’s why let’s understand the basic definition of Blockchain first and then get to know its various applications in the banking sector and how it may change this sector for the better.
What is Blockchain?
Blockchain is a chain of blocks where these “blocks” constitute digital information that is connected using cryptography. These blocks contain a cryptographic hash function linking to the previous block, a timestamp, and the digital information in the block. The chain part in blockchain symbolizes that these blocks are strung together to form a chain.
Blockchain is distributed which means everyone obtains a copy in the case of a public blockchain. Hence, it is quite difficult to modify the data in the blockchain because to do so every copy in every location would need to be changed. This makes blockchain both distributed and immutable along with maintaining transparency as the data in the block is not hidden in any way. All of these properties of blockchain ensure the highest levels of security which is why Blockchain is so popular in the banking sector where security is a must!
Applications of Blockchain in Banking
1. Person to Person Transactions
Most people are familiar with person-to-person transactions as they are quite common. They involve a person paying another person from their bank account or credit card. There are many person-to-person apps available in different countries. Paytm in India is just one example. However, a disadvantage of these apps is that they are only relevant in a particular country or geographical region and cannot be used to pay money to people in other countries. This problem can be resolved using blockchain as it has no geographical limitations. So crypto coins can be used for person-to-person transactions all over the world. The only important thing to keep in mind is exchange rates and that people may lose some money in this process.
2. International Money Transfers
Blockchain is being increasingly used for international money transfers by many banks. This is because international payments are much cheaper using blockchain as compared to traditional methods. How much cheap you ask? Well, overhead costs with blockchain are around 2-3% of the total amount while these costs using traditional methods like Western Union, Swift, etc. can be as much as 5-20%. Another advantage of blockchain is that international payments do not require a third-party authorization, which makes it a much faster process than traditional money transfer methods.
3. Online Identity Verification
It is not possible to complete any financial transactions online without online verification and identification. And this is true for all the possible service providers any user might have in the financial and banking industry. However, blockchain can centralize the online identity verification process so that users only need to verify their identity once using blockchain, and then they can share this identity with whichever service provider they want. Users also have the option to choose their identity verification method such as user authentication, facial recognition, etc.
4. Share Trading
Buying and selling stocks or shares in share trading is a long process as there are many third-parties including the stock exchange, personal brokers, etc. However, blockchain can make share trading a much faster process that can be completed instantly across the world rather than taking around 3 days (which is normal in the traditional model). Blockchain can speed up the share market by removing all the intermediate steps and reducing the information redundancy in the system.
5. Transaction Tracking
Transaction tracking is an absolutely critical part of banking and blockchain is very helpful here as well. Financial companies and banks can use blockchain to create a centralized joint register of transactions that is extremely secure. This means there would be no data redundancies and chances of forging would also be reduced as all the transactions are available centrally. However, some banking professionals believe that blockchain would not be suitable for centralizing all types of transactions but useful for niche areas such as interbank transfers.
6. Credit Reports
Individual people and organizations need to provide their credit reports in order to get a loan sanctioned from a bank. There are also third-party credit companies that can provide these credit reports for businesses but these are not available for smaller businesses or individuals. Also, it can take banks a long time to assess these credit reports and sanction or cancel a loan. Blockchain provides an excellent way to streamline and speed up this process. Blockchain can also help in making sure that the credit reports are transparent, accurate, and shareable with the bank securely.
There are many people that use crowdfunding to build their businesses and also for other reasons. This involves asking money from the general population online using donations or by providing shares of the company in exchange. Blockchain can be a useful asset in crowdfunding using Initial Coin Offerings start are a Cryptocurrency equivalent of an initial public offering for companies. But one disadvantage of Initial Coin Offerings is that they are very risky because there is currently no proper laws and regulations on this venture.
So what is the future of Blockchain in Banking?
Blockchain is not yet widespread in the banking industry but it is slowly getting there. There are many streamlining processes that financial institutions including banks need to keep in mind while adopting blockchain. For one, banks should have the required infrastructure for blockchain and ensure that each they follow the worldwide standards for this technology. It is only possible to implement blockchain all over the world when this happens. And there are significant advantages once blockchain becomes a global standard, It will lead to more transparent banking systems, faster processing of transactions, and reduced processing costs. All in all, the future of blockchain in banking seems very bright indeed!