From an extremely humble beginning in 2018, with 0.28 bn USD market size in 2018, blockchain banking and financial solutions is projected to hit the 22.5 bn USD by 2026!
Despite reservations, myths, and a lot of negative reception since its entry, blockchain has revolutionized a number of sectors and is all set to spur major disruptions in banking, investment, trading, and the overall financial ecosystem.
Further, there are many countries in the world that are using practical applications of blockchain for banking and financial services, of which USA and China are the leading examples.
Blockchain is garnering such attention and adoption because of its core strengths that lie in its architecture and the endless number of opportunities it offers. It is entirely transparent, incorruptible ledger, and is extremely resistant to hacking because of its intensely distributed nature.
But does it have any other and more powerful applications to offer in banking and How blockchain can transform the banking sector?
Below, we explore the answers to these and many other questions all the while discussing the various use cases and benefits the technology has to offer.
Let us begin by identifying the needs of blockchain applications in the banking sector.
Why Does the Backing Sector Need Blockchain Technology?
Use cases apart, there are many reasons the banking sector must undergo a blockchain revolution, and some of the most crucial ones are mentioned below.
1. Susceptibility for Cybercrimes
While the banking industry has been adopting the best practices for authentication, verification, validation, and facilitating online and mobile services, the more channels they have for transactions, the more points of infection they create. Integrating with lots of mobiles and internet-based payment gateways always come with security overburdens and managing every single thread of process in the entire ecosystem becomes tough.
On the other hand, Blockchain comes with built-in security because of its decentralized and incorruptible ledger characteristics. Hence, it is one reliable option for banks.
2. Global Connections for Commerce and Trade Facilitation
Banks started with an ethos to facilitate community trade and commerce but over the years, this ethos has limited itself to specific regions, people, and industries. The lack of proper supportive infrastructure, reliable and robust security, and measures to ensure global standardization of banking processes have always been major constraints.
Blockchain is a powerful tool that can be used on a global scale, has built-in security, and comes with irrefutable credibility.
Hence, banks can use it for establishing, promoting, and facilitating trading and commerce on a global scale.
3. Global Operations
When it comes to facilitating global operations for a single organization or a group of organizations, the current banking system comes with a slew of documents and mountains of paperwork. Sitting above that is the entire verification, transaction rates, and difference in banking regulations across the different countries.
Adding blockchain to the banking ecosystem will not only facilitate easy and effortless global operations management, but it will also allow the partner organizations to view, monitor, and conduct all kinds of banking-related tasks via smart contracts.
4. Asset Trading
As of now, the entire concept of asset trading in banking is either dormant or redundant or still in nascent stages. There are many banks that don’t offer this service, while the ones that do offer asset trading have limited offerings.
Security, verification, and involvement of cross-industry entities are some of the major reasons behind the same.
Adopting blockchain can lower the asset exchange fees, stabilize the traditional securities market, and can also help the banks save on the entire process because of transparent operations.
5. Accelerated Verification Process
There are many organizations and persons that are high-priority customers and because of their banking and investment portfolios, they have to pass through a number of security and authentication checks. Some common examples include facial recognition, retina scans, biometrics, specific user codes, etc.
All these security checks are essential to ensure proper authentication and user validation. However, they are lengthy.
Blockchain will empower banks and their customers with an accelerated verification process all the while allowing the customers to use the banking services more securely. A very recent example in this regard is the ZKP or Zero-Knowledge Proof that is being used by many financial institutions these days.
The users can choose the means of authentication, identification, and even the person with whom they agree to share their identities during the security checks if required.
Now that we have explored the various ways blockchain can benefit the banking industry, let us move on to discuss its top use cases.
10 Ways Through Which Blockchain Can Revolutionize the Banking Sector
Adopting blockchain technology in banking can spur a number of positive impacts, such as effortless and more affordable peer-to-peer transactions and collaborative innovation. The technology will also facilitate open access to all kinds of documents, regulations, and contracts, for all the people in a group, irrespective of their location and the type of device they are using.
As blockchain is a decentralized technology, it can be a great collaborative tool and not just an underlying technology for cryptocurrencies.
Below, we discuss the top 10 use cases of blockchain technology in banking.
1. Enhanced Security & Fraud Reduction
The banking sector is vulnerable to many different types of security issues, such as customer data breaches, credit or debit card details, and malicious account activities. The Heartland Payment Systems’ data breach in 2008 was a classic security fiasco that is still the subject of many case studies. 100 million debit and credit card numbers were stolen by hackers right from the database of Heartland’s payment processor.
The situation resulted in a huge loss of reputation for the brand and 145 mn USD in fraudulent payments.
Using blockchain in banking will come with verified transactions and network protection against data manipulation and hacking. As all the transactions are recorded transparently on a ledger that is distributed, the stakeholders enjoy a higher trust level as well.
Some other benefits of using blockchain in banking for enhanced security and fraud combat are outlined in the following image:
As evident from the image, when it comes to adopting blockchain technology in banking India is also joining the league of futuristic banks.
2. Improved Credit and Loans Services
The credit and loan management process in a traditional banking scenario is a time and effort-consuming task. The banks offer loans based on a customer’s credit rating that is provided by third-party companies. This type of rating sometimes proves extremely unfavorable to clients and also affects their capacity to get loans to a significant extent.
In a blockchain environment, the loans are processed faster and more securely in a peer-to-peer manner even when it comes to complex programmed loans or mortgages.
Take a look at the following image that shows a basic loan scenario in blockchain-enabled banking:
As all the terms and conditions of a loan agreement are recorded via smart contracts that are extremely hassle-free and incorruptible, taking loans and getting paid back become more secure.
In 2019, Equifax, a credit risk evaluation firm, fell prey to hacking and exposed the credit information of more than 145 million American people.
This is another benefit of using blockchain technology in banking – it keeps the loan applications safe, secure, and free of errors.
3. Reduced Expenses
A recent report from Accenture talked about the various ways blockchain technology can benefit banking institutions, and reduced costs were one of them.
Blockchain can reduce operational costs in many ways, such as:
- Cost savings on central finance reporting
- Cost savings on compliances and regulations
- Reduced costs of centralized processes and operations
- Cost savings on business operations
The following visual shows the details of cost savings in all these areas and how this entire cost-saving happens:
This is another epitome of how blockchain can transform the banking sector with its impeccable benefits.
4. Less Paperwork
Documentation and paperwork, and that too in typical banking language, is one of the most critical challenges for consumers, especially the ones that have no expertise in this regard. Some documents are so tough to process that many customers either opt for a different bank or end up getting help from banking and financial consultation.
The situation becomes more serious in the trade finance sector, where documentation and paperwork among the various parties are mountainous, critical, and extremely consequential.
However, blockchain offers decentralized ledger technology that uses tokens instead of documents, smart contracts to ensure fulfillment of all the terms and conditions; and transparency to ensure a single source of truth for all the parties involved, as shown below:
Stats report that 80-90% of global trade relies on trade finance, and with its decentralized architecture, distributed ledger technology, smart contracts, and resilience towards hacking, blockchain can facilitate cross-border trade transactions with minimum paperwork. The majority of transactions are mediated via tokens that reduce paper use and shorten the delivery times.
Hence, when it comes to blockchain vs traditional banking blockchain not only reduces the reliance and mandatory obligations of mountainous paperwork but also facilitates cross-border trading in a seamless and more streamlined manner.
5. More Affordable KYC
KYC, or know your customer is a reliable and popular ID verification process followed by all the banking and financial institutions. Despite being helpful in customer authorization and verification, KYC is a costly process as the banks have to update consistently.
Also, the banks have to access a specific database for accessing KYC data, and updating the KYC details in the bank is not possible unless that specific database is updated as well.
Now, this is where blockchain technology in banking proves to be a brilliant option.
On a blockchain, all the parties or members have the most updated, true, and transparent view of all the changes and refreshes done in any data resource.
So, just when a KYC is updated, the banks don’t have to initiate the KYC protocol when a new customer joins them, as shown below:
Further, all the updates and changes are immediate and immune to hacking or manipulation. Hence, the waiting time is lowered and the bank is able to improve the CX as well.
6. Enhanced Data Security
Blockchain solves the security issues for many scenarios and assets in banking, as shown in the following image:
Blockchain is a decentralized and distributed system that is immune to data and asset manipulation and is extremely resilient to hacking and other types of cybercrimes. All the communications, queries, and transactions happening in a blockchain network are secure and resistant to snooping.
Metadata is encrypted and KYC is also extremely streamlined. As all the transactions and agreements are done via smart contracts, there is no wiggle room left for frauds as well. Hence, data, assets, and resources are safe and secure at every point in the customer journey, irrespective of the scale and type of operations.
7. Remittance and Cross-BorderTransactions
Cross-border transactions amount to 180 trillion USD per year, and the amount is going to increase with time, as the world is moving towards more open banking ecosystems and mobile money. However, sending money outside the USA alone costs $42 per transaction!
And what makes the entire situation even more of a turn-off is the waiting period of 3 to 5 days for getting the remittance through, and reflecting the amount in the recipient’s account.
While the traditional banking system relies heavily on slow authentication and verification systems, using blockchain technology will not only accomplish these goals but will also help in faster remittances.
This is because blockchain uses DLT (Bitcoin etc) and there is no actual movement of cash from one bank or one country to another. This reduces a lot of operational overhead and also facilitates faster remittances with less than 1% fees for cross-border money transactions.
8. Buying and Selling Assets
While we have already discussed how blockchain can transform the banking sector when it comes to asset trading from the beginning, let us explore another asset-based use case in this section.
Crypto banking is gathering a lot of attention and following across the globe, as more and more people are finding it a better, more transparent, and easier way to enjoy trade benefits.
As people are realizing the importance of investing and trading diversified assets, banks are also moving towards blockchain-based asset trading.
Take a look at the following image that shows how blockchain facilitates secure and streamlined trading of crypto assets:
9. Accounting and Auditing
Accounting and auditing are the core processes in banking and both of them are some of the most resource and effort-consuming tasks. Apart from being subject to the latest government norms, these processes are also subject to the changes in compliances and financial criticalities across the entire ecosystem.
What makes blockchain such an amazing tech in this regard is the fact that it offers an entirely new way to record, process, store and manage financial transaction data. All the records are stored on a distributed ledger that can be accessed transparently and reflects all the changes equally well for all the members.
Hence, blockchain can not only bring fundamental changes in the accounting and auditing landscape but reshape the entire ecosystem, leading to a huge wave of disruption in both segments.
10. Peer-to-Peer Transfer
Peer-to-peer lending or P2P lending means a scenario where one user sends money to another user via mobile devices that are linked to a bank account or card. These transactions come in handy when it comes to sharing money or splitting bills with friends and family.
While the digitization of banking has solved many challenges in the P2P segment, such as:
- Requiring both the users to use the same app or a select few that offer versatile payment options
- Robust and reliable security checks to ensure transactions that are resistant to hackers and data breaches
- Lack of flexibility in the existing P2P models
Using, blockchain technology in banking will offer many impressive benefits in this regard, as shown in the following image:
Blockchain simplifies the entire process and that too without relying on third-party security checks only. As all the banking records, auditing, KYC, and assets are readily available in the blockchain, P2P transactions become effortless and extremely flexible.
Blockchain Is a Solution, but Optimization and Business-Relevant Adoption Is the Key to Success
While there is no doubt that blockchain has many amazing benefits and use cases in banking, the fact that its adoption must be done smarty can just not be ignored. This is because the banking and financial sectors are highly crucial to the economy of a nation, as well as the consumers.
Hence, we recommend opting for optimized and business-relevant blockchain solutions that resolve the core banking pain points and focus on your growth hurdles.
Do you want to get started with your blockchain project with a team of experts that have catered to the banking sector?
At Parangat, we offer an extremely brilliant team of blockchain consultants, developers, and experts that have experience in all the major niches, including banking.
For more information and to get started with your project, please get in touch with our experts.