How blockchain transforms banking and financial services
Bitcoin brought about a slew of technological disruptions since its arrival in 2009. It inspired the hundreds of cryptocurrencies we hear about today, and the financial sector is undergoing a serious upheaval.
But it’s not just the cryptos themselves that are driving this revolution. Rather, it’s blockchain, the underlying technology behind Bitcoin, that seems to be garnering much more attention. This tech takes record keeping to a radical new level that can improve industries left and right.
And one of the industries that could especially benefit from blockchain is the financial world. This industry faces a range of problems that this technological innovation could mend to a great degree.
So, what are these problems plaguing banking and the financial sector? And how could blockchain help to solve said issues? Furthermore, who is adopting this technology and what’s in store down the line for it?
How blockchain fixes banking
For those not in the know, blockchain is a digital ledger that distributes all data across its members. It makes all of its information transparent and immutable, and it makes use of encryption technology to authenticate everyone’s identity, as well as deter hackers.
Blockchain could be particularly effective in solving the most prominent issues faced by the banking and financial services. We’ll list these issues, as well as the ways blockchain can help, below:
- KYC (Know Your Client) expenses
KYC, although a viable identity verification solution, does drain a lot of money from companies. A Thomson Reuters survey from 2017 saw the number of KYC specialists employed by over ten-billion-dollar companies swell from an average of 68 in 2016 to 307 in 2017.
You can imagine the costliness that results in. Constant updates are time-consuming, and banks need to turn to a single database to access existing information about other banks’ customers, so they can’t update their info before that database is updated as well.
But with blockchain, all changes in customer data are automatically refreshed for all system members. Therefore, financial institutions wouldn’t have to restart the KYC protocol when someone registers as their client. And the update would be practically instantaneous, which would reduce waiting time even further.
- Plenty of complicated paperwork
A lot of red tape is involved in most financial affairs. And keeping up with contracts, bills, and invoices is responsible for much of that time consumption. Time, as the adage goes, is money, and too much of both goes out the window because of paperwork.
This is where the concept of smart contracts comes into play. Smart contracts leverage blockchain technology to create contracts that automatically update, terminate, and determine stipulations values. This kind of tech can smooth out the bulk of the bureaucracy that bogs down all financial transactions.
- Fraud protection
The banking industry, though formidable in terms of security, still suffers from quite a bit of fraud. This fraud mostly boils down to acts like hacking and a denial-of-service (DDOS) attacks. But both of these are nigh impossible on a blockchain network.
Hackers rely on breaking into a single data hub from which they can just snatch anything they please. But blockchain has no singular hub, meaning that a hacker would have to enact the same changes to every single block in the system, which is practically undoable. Furthermore, identifying the hacker is easy on the blockchain thanks to encryption IDs.
- Direct payments
Transferring money from one place to another (especially internationally) is ripe with intermediaries. This line of middlemen goes through banks, credit card processors, and more. And all of them add to delivery cost and time.
By implementing blockchain, this third-party chain would basically disappear. And in its place there would be a purely peer-to-peer system. Both banks and the individuals would benefit from faster processing and reduced costs.
Current adoption of blockchain
Blockchain is quickly gaining more enthusiasts. As many as 84% of executives from fifteen territories stated that they already implemented the ledger in some capacity. The United States, in particular, is seeing impressive amounts of adoption, with very big names displaying interest.
Three particular examples stand out among the rest, which we will examine below:
- The Quorum division is a part of JP Morgan Chase. It works as a smart contract facilitator and a distributed ledger. Quorum’s central concern is developing blockchain solutions, as well as researching innovative ways to implement it.
- The Bank of America is also showing interest in the potential behind this technology. The institution has filed a blockchain-related patent to the US Patent and Trademark Office. Their vision is to create a ledger that secures records and provides authentication of data.
- Goldman Sachs is piling heavy investments into a project of its called Circle. The objective of Circle is to solve the volatility problem that haunts cryptocurrencies to this day. The project is actually among the most funded startups in blockchain history, which is promising to say the least.
The future for blockchain in banking
Looking at current trends, we can only predict even further adoption and development to iron out any bumps in implementation. A whopping 77% of fintech businesses plan to use blockchain by 2020, showing that a lot of people feel good about what it can do.
Furthermore, with the aforementioned projects (Quorum and Circle) coming from such major institutions, people will likely gain both more awareness of and faith in blockchain as a viable method of platforming their financial activities.
As it currently stands, this tech does require some work in order to integrate effectively. Scalability, interoperability, and energy consumption are just some examples of the roadblocks fintech institutions must overcome to see effective results from blockchain.
Blockchain has gone incredibly far in a startlingly short amount of time. In that time, it has reached remarkable milestones and, as it seems, the only way for it now is forward.
By Ilija Acimovic, content specialist, Fortunly