Initially, blockchain technology was considered to be a rival to the banking system, since it was believed to only be a means through which anonymous transactions could be conducted. But, all that has changed with the discovery of multiple applications of the technology across various sectors. Even governments across the globe are working to implement blockchain in their services. Still, the one key area where blockchain has the maximum potential is the financial services industry, just like Uber revolutionised public transportation and Facebook revolutionised social media.
Over 40 banks across the globe are investing huge amounts of time and resources to incorporate blockchain technology into their systems. Blockchain will bring transparency, reliability, decentralisation, faster and more cost-effective transactions and data security, among many other advantages to the financial services industry.
Here’s a look at where banks are using blockchain technology to their advantage.
1. Data Security
Records indicate that a major share of economic transactions suffer from fraud and economic crime. Millions of dollars have been lost worldwide due to cyber attacks. A centralised server, like those used in the banking world, are more prone to hacking. This is because once the central server is breached, data can be accessed easily. Data on a blockchain, however, is stored on several decentralised servers, making it next to impossible to hack such a system.
2. Customer Verification
Customer verification is a slow and complex process in institutions with a centralised database. Teams are required to manually carry out this task, making it expensive and time consuming. Blockchain technology simplifies this complex process by providing one digital source ID, which can be used by banks and other financial institutions for authentication of the customer. This will reduce administrative costs, while providing foolproof data security. Startups like Cambridge Blockchain, Credits and Blockstack have been working on building customer identification-based on blockchain.
Blockchain is already revolutionising payment systems. Traditional payment systems are filled with middleman or intermediary institutions. During financial transactions, there are fees at both ends for the parties involved, and sometimes there are fees at other stages of the transaction process as well. But with blockchain, the need for a third party through which transactions must travel is eliminated, resulting in lower fees. It also saves time and complications of paperwork and other legalities. MasterCard, American Express and VISA have already started using blockchain in their payment systems.
4. Smart Contracts
In the banking industry, it is compulsory to have a contract for everything with clear cut rules and regulations. The usual paper contracts are time consuming and can be manipulated or even destroyed.
Blockchain-based smart contracts provide a solution to all problems associated with traditional contracts. The transactions are automatically executed, making the contract incorruptible, while reducing costs. It can be only altered by persons with authorised access to it, increasing authenticity.
It has turned out to be very handy in insurance claims, since it provides transparency and traceability to every claim that leads to a pay-out.
Applications of Blockchain by Banks
- Santander became the first bank to use blockchain to create One Pay FX, an international payment service system. It has also developed a blockchain system with JPMorgan Chase, Northern Trust and Broadridge for shareholder voting.
- HSBC tested the use of blockchain in trade finance by carrying out a shipment of soybeans in partnership with ING, a Dutch bank. Blockchain consortium R3 was used to carry out the transaction. It took around 24 hours to complete, a process that would have traditionally taken around 10 days.
- The Quorum blockchain unit of JPMorgan Chase has tested a new system based on blockchain to handle financial instruments.
- Infosys, an Indian IT giant, is developing a trade network based on blockchain technology, called India Trade Connect. It aims to increase transparency and automation to enhance efficiency and accountability in the banking sector.
- Bank of America already has around 50 patents for applications of blockchain technology.
- Bank of Montreal is developing a blockchain-based trade finance platform, Batavia, with Spain’s Caixa Bank, Germany’s Commerzbank, Erste Group, IBM and Switzerland’s UBS.
Blockchain will revolutionise the financial services industry just as the internet revolutionised the global market. It offers great opportunities for innovation in this industry. According to a report by Accenture, “Banks across the globe will save up to $20 billion by 2022 via implementation of blockchain in various sectors.” No other technology today offers the same potential that blockchain does in influencing the way the world functions.