Blockchain development technology is an open, distributed ledger that effectively and permanently records transactions between two parties. A blockchain is made up of discrete data blocks that are connected in a certain order by a series of related transactions. Without the aid of a central authority or middlemen, all participants can exchange a digital ledger over a computer network. Because of this, processing transactions via blockchain is quicker.
One of the many potential advantages blockchain could offer to banking is speed. Along with increased efficiency, new levels of security and transparency are also important.
How Blockchain Technology Can Help The Banking Industry?
It only makes logical sense that the financial sector will lead the way in the adoption of this technology once we take a closer look at the unique characteristics of blockchain.
Consider the primary motivations behind the establishment of banks. Institutions like banks were developed to bring people together and enable all forms of trade and commerce. A tool called a blockchain can do the same thing, but on a far larger scale. Additionally, it is clear and safe.
Blockchain may have effects on international trade as well. By replacing manual, paper-based processes with streamlined, automated ones, it might increase the efficiency of commerce. Because a public blockchain is decentralized and cannot be owned by a single company, it can be a fantastic tool for collaboration. Blockchain serves as more than simply the foundational technology for cryptocurrencies like Bitcoin and Ethereum because of this.
To help you understand how the financial services sector will be experimenting with blockchain in the near future, here are ten use cases of blockchain in banking.
10 Real Use Cases Of Blockchain In Banking
1. Faster Payments
Banking institutions can make advantage of cutting-edge technologies to speed up payments and reduce processing costs by creating a decentralized channel (like crypto) for payments. Banks may offer a new level of service, launch new products, and finally be able to compete with forward-thinking fintech firms by providing stronger security and cheaper payment transmission costs.
Additionally, by implementing blockchain, banks will be able to reduce the demand for third-party verification and speed up the processing times for conventional bank transfers. 90% of the members of the European Payments Council predicted that by 2025, blockchain would profoundly alter the sector.
2. Systems For Clearing And Settlement
Bank transactions might be settled directly using a distributed ledger technology like blockchain, which would also make it easier to follow them than with current methods like SWIFT. Because of the constraints imposed by the way our financial infrastructure was designed, an ordinary bank transfer takes a few days to settle.
For many banks, it is logistically difficult to move money across the globe. A straightforward bank transfer must get past a convoluted network of middlemen, including custodial services, before it can reach its destination. The global financial system, which consists of a vast network of funds, asset managers, dealers, and others, also needs the bank accounts to be reconciled.
For instance, if you wanted to transfer money from a bank account in Germany to one in the United States, SWIFT, or the Society for Worldwide Interbank Financial Communications, would handle the transaction. 24 million messages are sent daily by SWIFT members to about 10,000 different institutions!
Only the payment orders are processed by the central SWIFT protocol. The actual money is handled by a network of middlemen. Each one of them is extra expensive and time-consuming.
Banks might be able to keep track of all transactions in an open and transparent manner using a decentralized record of transactions like blockchain. Banks won’t have to rely on a web of custody providers and oversight organizations like SWIFT. They could easily complete transactions on a visible blockchain.
3. Purchasing And Selling Assets
Blockchain decreases asset exchange fees and lessens the volatility of the conventional securities market by cutting out the intermediary and facilitating the transfer of asset rights. One source claims that worldwide trade processing expenses might be reduced by $17 to $24 million annually by transferring securities on a blockchain.
Keeping track of who the owners are is the foundation for buying and selling assets like stocks, commodities, or loans. A sophisticated network of exchanges, brokers, clearinghouses, central security depositories, and custodian banks helps financial markets do this. The foundation of all of these various parties is an antiquated system of paper ownership. As you might have guessed, the system is not only sluggish but also rife with mistakes and vulnerable to fraud.
The majority of the time, purchasers and sellers do not rely on the same custodian banks, and these do not always rely on vetted third parties to hold onto all the paper certificates, making it difficult to execute such transactions online.
Be aware that the German government now permits banks to provide services linked to cryptocurrency. Ukraine is also moving in this direction.
The order for the purchase or sale of an asset will be sent along to various third parties. Transferring ownership is challenging because of this. Keep in mind that each participant keeps a separate ledger with their own version of the truth. The system is inaccurate in addition to being inefficient.
Blockchain’s creation of a decentralized database of digital assets will transform financial markets. A distributed ledger enables the transfer of asset rights using cryptographic tokens that can stand in for such assets off-chain. Cryptocurrencies like Bitcoin and Ethereum do this with only digital assets, but a lot of blockchain startups are now working on ways to tokenize physical assets like gold or real estate. Eliminating the middleman will also reduce the asset exchange fees and greatly speed up the procedure.
Today, raising funding through venture capital is a challenging procedure. The majority of the time, it goes like this: Entrepreneurs prepare decks, hold endless meetings with partners, engage in protracted discussions about value and equity, and ultimately seek to trade their company for money.
Blockchain businesses are quickening the process by using a variety of methods to raise money. These consist of Security Token Offerings (STOs), Equity Token Offerings (ETOs), and Initial Exchange Offerings (IEOs). The most popular choice at the moment is STO because it is protected by law. Projects must successfully complete a due diligence procedure in order to benefit from this model. Today, Neufund is the most well-known ETO trading platform.
Initial Coin Offerings (ICOs) were more common in the past but are now viewed as fraudulent and unreliable.
5. Credit And Loans
Traditional banking organizations use a credit reporting system to evaluate loan applications. With blockchain, we may expect peer-to-peer lending to become more commonplace, loan applications to be processed more quickly and securely, and even sophisticated program loans that resemble mortgages or syndicated loans to be made.
Banks that process loan applications include variables like credit score, homeownership status, or debt to income ratio when assessing risk. They must request your credit report, which is issued by specialized credit agencies, in order to obtain all of that information. That equals three institutions in the United States.
Due to the inaccurate information they frequently contain, such centralized systems are hazardous to customers. Furthermore, it is extremely vulnerable because such sensitive information is confined to a small number of institutions. For instance, one of them, Equifax, was compromised last year, allowing the credit information of over 145 million Americans to be made public. Now that you understand why, blockchain offers a safer, quicker, and less expensive method of processing loan applications.
6. Trade Finance
The trade finance industry is slated to undergo a shift thanks to blockchain technology in another area. All financial actions connected to global trade and commerce are referred to as trade finance. Did you realize that a lot of trade finance operations still rely on paper documents like bills, invoices, and letters of credit? This work can be done online with many order management systems, but it takes a long time.
By eliminating these time-consuming manual processes, paperwork, and bureaucracy, blockchain-based trade finance will streamline the trading process.
Think of this illustration:
In conventional trade finance systems, each participant is required to keep their own database of papers pertaining to transactions. And a constant cross-checking of each of these databases is required. A single mistake in one document could occur in copies of that document stored in other databases.
How can blockchain be useful? There is no need to maintain several copies of the same document using blockchain. This is possible because the data may be combined into a single digital document that can be accessed by everyone on the network and is updated in real time.
7. Digital Identity Verification
Without identity verification, banks would not be allowed to conduct online financial transactions. However, consumers dislike the numerous procedures that make up the authentication process. It could involve in-person verification, authentication (such signing in to the service each time), or authorization. All of these actions must be completed for security reasons for any new service provider.
Consumers and businesses will gain from expedited verification procedures thanks to blockchain. Because of blockchain, identity verification can be securely reused for various services.
The innovation with the most traction in this field is Zero Knowledge Proof. Large organizations and numerous nations are now developing ZKP-based solutions.
Users will be able to select how they want to identify themselves and who they want to share their identity with thanks to blockchain. They will only need to do it once to register their identity on the blockchain. If the service providers are also blockchain-powered, there is no need to repeat that registration for each one. Naturally, the security of this type of data is also ensured by its storage on a blockchain.
8. Blockchain For Accounting And Auditing In Banking
The digitization of accounting has been rather slow. One of the causes of this is the obligation to adhere to stringent regulatory standards for data veracity and integrity. Because of this, accounting may be another industry that is altered by blockchain.
According to experts, technology will streamline conventional double-entry bookkeeping processes and simplify compliance. Businesses have the option of adding transactions directly into a shared register rather than maintaining separate records depending on transaction receipts. There will be distribution of every entry in the register.
The records will become more secure and transparent as a result. A blockchain would operate similarly to a digital notary who authenticates each transaction. Such apps could make advantage of blockchain smart contracts to automatically pay invoices.
9. Hedge Funds
An investment partnership known as a hedge fund consists of a fund management and a number of limited partners who are investors. However, these players are typically traders rather than regular investors. Hedge funds aim to reduce risks while increasing returns to investors.
According to Autonomous NEXT, between October 2017 and February 2018, there were twice as many hedge funds trading cryptocurrencies.
A decentralized cryptocurrency hedge fund offers an accessible platform that attracts more investors and strategists. Fund managers that work with one organization operate conventional hedge funds. Such decentralization is a great illustration of how blockchain technology might benefit the financial services sector.
10. P2P Transfers
Customers can send money to another individual online via P2P transfers from their bank accounts or credit cards. There are numerous P2P transfer applications on the market right now. However, they all have certain drawbacks.
One of them, for instance, only permits money transfers within a specific geographic area. Others forbid the transfer of funds while both parties are in the same nation. P2P services may also demand high commission fees and lack the security necessary to store sensitive consumer data.
Blockchain development can be used to solve all of these issues. Peer-to-peer transfer applications will become more decentralized with the use of technology. Be aware that blockchain has no regional restrictions, enabling global P2P transfer. Furthermore, blockchain-based transactions will occur instantly, saving the recipient from having to wait four days to collect their money.
Future Of Blockchain Technology In Banking!
Blockchain, according to banking experts, needs to meet a number of requirements in order to become a widely used technology in the industry. Banks must first build the infrastructure necessary to run a worldwide network using matching solutions in order to fully utilize blockchain. The industry will only be disrupted by blockchain if it is widely used.
However, the investment will yield huge rewards. Blockchain is anticipated to help banking institutions process payments more quickly and precisely while also lowering transaction processing costs once it has been completely deployed. A better client experience will be provided overall by blockchain-enabled banking applications, which will also aid traditional banking institutions to compete with fintech firms.