Blockchain is one of the most innovative technologies of recent times, which is an open, immutable ledger that can record all the transactions between any two parties. It can process transactions much more quicker and easier than traditional systems. Even though blockchain technology is still nascent, it can play a significant role across industries. However, the one industry it can potentially transform to a great extent is the banking sector.
Why Should Blockchain Be Used in the Banking Industry?
- The current day’s banking system is highly reliable on documentation and paperwork which can result in errors, fraud, and scalability issues.
- Cross-border transactions are always a problem to solve due to their time-consuming process.
- The process through traditional banking requires more manual effort.
Applications of Blockchain in the Banking Sector
By embracing blockchain, banks can offer their services bringing more innovative products to the market. Some of the prominent applications of blockchain include:
Processing faster payments:
One of the primary use cases of blockchain in banking is processing payments and remittances.
Blockchain can provide an infrastructure to make transactions securely. Since no third-party verification is required, it can also fasten the process of bank transfers. As a result, it can lower the processing fees improving customer satisfaction.
Buying and selling assets becomes faster:
Generally, it takes a lot of time to buy and sell any asset. The process involves many third parties such as the stock exchange, custodian banks, and personal brokers. With blockchain, the process of buying and selling has become much faster as it eliminates the third party and reduces the redundancy.
Facilitates peer-to-peer lending:
Technology can solve most of the lending challenges that we face with the transitional banking systems. Unlike banks using credit scores to lend, blockchain takes a peer-to-peer lending approach. Here the lender and borrower can enter an agreement without any intermediary with the help of smart contracts. This could reduce loan processing rates by saving time.
Makes cross-border payments easy:
Most traditional banks face challenges while processing international payments. The process goes through a complex chain of intermediaries before the money reaches the destination. However, with the help of blockchain, banks can settle payments more transparently and efficiently.
Credit reporting becomes easy:
With the traditional banking system, it takes a lot of time to evaluate the credit reports for giving out a loan. The level of centralization not only increases the risk of errors in credit scores, but also the potential for information leaks. But, blockchain offers a way to ensure a speedy process accurately and securely.
Since traditional banking involves a lot of double-entry book records, there is an opportunity for blockchain to revolutionize the field. Blockchain can maintain an immutable record of all the transactions to which all market participants have access in real time. It also reduces risks such as fraud and theft to a great extent.
KYC does not take a lot of time now
These days as most people are opting for online banking, verification and identification are essential. Know your customer is a process where banks onboard new customers by verifying their identity. This can be a time-consuming task as banks need to check through the information provided by the customer. Through blockchain, banks can allow customers to use digital fingerprints as unique identifiers to be stored on all the distributed ledgers. It can let customers avoid going through the entire KYC process as the data is stored and any bank can use it to process new applicants. Also, these days the banks and financial institutions are more concerned about the overhead costs to comply with AML and KYC procedures. With blockchain technology, banking institutions and consumers can get away with these processes in a speedy manner.
Blockchain: A Revolution for Banking
Even though there are strict regulations around the banking industry, financial institutions and the government have started to realize and adopt blockchain technology. Some giant banks have already started to try out their hands using blockchain technology. The use cases of this tech can be revolutionary for various areas of banking.
By adopting blockchain technology, the verification can more easily be processed. It can solve most of the problems faced in the traditional financial system thereby increasing transparency, accessibility, and reliability. Additionally, it can also dramatically improve the customer journey and facilitate a more secure mode of making transactions at ease.
Guest contributor Alankar Saxena is the CTO and Co-founder of Mudrex, a global crypto-investing platform. Any opinions expressed in this article are strictly that of the author.