With every passing day, the banking sector is becoming highly sophisticated. Emerging technological trends such as Artificial Intelligence, machine learning, and cloud technology is reshaping the industry rapidly. Because of these technological innovations, banks have become highly advanced, practical, and serviceable. In today’s modern age, where banks are an important part of the business world, performing different kinds of transactions have become a little less complex. One such technology that has the potential to completely reinvent the banking sector is Blockchain Technology.
It is predicted to be the future of financial institutions. In the era of “Digital India” and cryptocurrency, banks are fast adopters of Blockchain. Though in its nascent stage, it is a revolutionary innovation that has become the buzzword in the banking and financial sector across the globe. The technology has a great potential for making transactions fast and easy. Though in its nascent stage, the industry has benefited from the technology’s ability to transform payments. Now, efforts are being made to create mainstream banking services that rely on blockchain technology. This post sheds light on the role of blockchain technology in the banking sector and how it is transforming the industry.
What is Blockchain?
Are you familiar with the term bitcoin and cryptocurrencies? The blockchain is an important component of cryptocurrencies. Without this technology, cryptocurrencies may not even be operational.
Nevertheless, the technology has great potential when it comes to financial institutions. It is expected to become the basis of facilitating trust between the trading partners. With this Blockchain mechanism in place, one can feel secure about making transfers and having them completed without any breach or modification.
Blockchain is a decentralized ledger technology that has the potential of revolutionizing elements of the banking system remains. In simple words, it is a data structure that uses blocks to record transactions. The blocks containing the information cannot be altered, modified, or destroyed. Therefore, it ensures security, transparency, and decentralization of the data that is open to everyone on the network. This means it is a ledger system that does not have a single authority controlling it or a central administrator. Hence, it is considered highly secure by design.
As a concept, blockchain finds its origin in the field of computer science, cryptography, and data structures. In 2008, the first-ever blockchain was invented by Satoshi Nakamoto to serve as the public transaction ledger system for bitcoins. Since then, it has received a lot of attention from top global industries.
Blockchain Technology in Banks
Initially, blockchain was looked at with a lot of skepticism. However, more research in the field has only opened new avenues. It is forecasted to take over the traditional banking models and replace them with a blockchain-based model.
Banking is a data-intensive industry that witnesses tons of transactions every day. With blockchain in the scene, it is expected to simplify the problems related to recording, validating, securing, and processing these heaps of transactions. When blockchain is deployed, the computers will process the transaction as soon as the request is made. When it the processing is completed, the technology will verify and create a new block of information permanently. It is then chained to the next block with the help of cryptographic technology. This ledge will only be accessible to those who have permission to do so.
Benefits of Blockchain in Banking Sector
Blockchain will eradicate the need of the middleman and make way for untrusted parties to come to an agreement. Additionally, it will automate the manual processes such as compliance. Here are some of the key aspects of banking services that will be impacted by blockchain technology.
1) Payments: This ledger technology will establish a system that facilitates faster payment process at much lower fees. Since it cuts down on the need for verification from a third party and processing times, one can expect swift transfers. Also, this will force banks to bring down the added fees on wire transfers. This will give people access to fast, economical, and borderless payments.
2) Clearance and Settlement: Distributed ledger system will solve many issues related to settlement systems. Through this system not only the operational cost will be reducing, but it will be easier to track transactions and maintaining transparency.
3) Fraud prevention: Blockchain technology is highly safe and secure and sensitive to resistant to frauds, hacking, and other kinds of economic crime. The banks and other financial institutions can instantly identify individuals breaking through the system by using blockchain-enabled digital ID. It will resolve one of the greatest concerns for banks and decrease the number of criminal activities that take place in banks and other financial services yearly.
4) Loan approval and Credits: Loan through banks take a few days to get approved and processed. With blockchain, the process will be faster without the chances of error or inaccuracy. It will be easier to establish the applicant’s creditworthiness and history.
5) Financial Inclusion: Blockchain-based startups are expected to become the next big thing. They might become a mainstream serviceable institution in the financial sector. To hold an account in a bank, there are a few pre-requisites such as minimum balance, high transaction fees. However, most of the Fintech starts up only require a mobile device.
6) Smart Contracts: These are self-executing contracts between buyer and seller and using blockchain the terms and conditions are written into lines of code that exist across distributed, decentralized blockchain network. So, this reduces the chances of error and fraud. The transaction will only happen when the written conditions of the code are met.
These are just a few ways blockchain technology is reshaping the banking sector. Some other elements that are expected to experience the impact include fundraising, trade finance, bookkeeping, stock exchange, and share market.
Despite initial reluctance and several challenges, blockchain has emerged as a trending technology. It is deemed efficient in providing banks the security and efficiency that they have always struggled for. The methodical strategy is definitely going to benefit the businesses as well.