Blockchain : Will It Disrupt Banking & Finance Industry
Many of us are familiar with Bitcoin, a type of digital currency also known as crypto-currency that operates independently from a Central Bank. But this is also a fact that most people are not familiar to the tech behind that system. It is called Blockchain.
There are many different blockchains, can be broadly summerized in two categories :
1.Public
2.Private
They allow anyone to send value anywhere in the world where the blockchain file can be accessed. Think of each chain as an online database stored in a distributed, peer-to-peer fashion. The storage devices for the database are not all connected to a common processor and each block—ordered records—has a timestamp and a link to a previous block.
The technique called Cryptography ensures that users can only edit the parts of the blockchain that they “own” —by possessing the private keys necessary to write to the file. It also ensures that everyone’s copy of the distributed blockchain is kept in sync.
A recent World Economic Forum Report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain-related technology.
Blockchain offers series of features which makes it the most sought-after technology of the future, here are a few notable ones:
Well, the use of Blockchain for the transaction has gained momentum as more and more companies are now focusing on using this technology to aid the financial transaction process, settlements of claims, etc. Some of the big names making their way to the Blockchain technology use in the transaction include Some Hyperledger Fabric project by IBM, and R3’s Blockchain consortium.
These projects emphasize the use of Blockchain to become a part of mainstream business processes. It has the potential to reduce the settlement times as they make use of a digital signature which ensures timely processing of the operations.
Use of Blockchain In Financial and Banking Industry
Blockchain technology is capable to disrupt the financial industry that we know and use today. Here are just a few of the top ways will transform finance and banking:
Fraud Reduction
Even though blockchain is new technology, its potential to reduce fraud in the financial world is getting a lot of attention since 45% for financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Most banking systems around the world are built on a centralized database that is more vulnerable to cyberattack because it has one point of failure rather than many—once hackers breach the one system they have full access. The blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our financial institutions.
Know your Customer (KYC)
Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomason Reuters Survey. These regulations are intended to help reduce money laundering and terrorism activities by having requirements for businesses to verify and identify their clients. Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant.
Smart Contracts
Because blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved—delivery of products could signal an invoice to be paid for example.
Payment Solution
Blockchain disruption could be highly transformative in the payments process. It would enable higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves. In the current reality, there are a lot of intermediaries in the payment processing system, but blockchain would eliminate the need for a lot of them.
Trading Platforms
It’s exciting to contemplate the changes that might occur with our trading platforms if they relied on blockchain-based technology. There’s no doubt that the risk of operational errors and fraud would be dramatically reduced. NASDAQ and the Australian Securities Exchange are already exploring blockchain solutions to reduce costs and improve efficiencies.
The blockchains that would be used by financial institutions would need to comply with privacy laws of today and the future and need to ensure the safety of the data. There are many questions regarding regulatory oversight for this new technology that need to be sorted out. And, any blockchain used in this sector would need to handle an extraordinarily large data set, therefore scalability is incredibly important.
There are many different blockchains, can be broadly summerized in two categories :
1.Public
2.Private
They allow anyone to send value anywhere in the world where the blockchain file can be accessed. Think of each chain as an online database stored in a distributed, peer-to-peer fashion. The storage devices for the database are not all connected to a common processor and each block—ordered records—has a timestamp and a link to a previous block.
The technique called Cryptography ensures that users can only edit the parts of the blockchain that they “own” —by possessing the private keys necessary to write to the file. It also ensures that everyone’s copy of the distributed blockchain is kept in sync.
A recent World Economic Forum Report predicts that by 2025 10% of GDP will be stored on blockchains or blockchain-related technology.
Key features of Blockchain
Blockchain offers series of features which makes it the most sought-after technology of the future, here are a few notable ones:
Decentralization- This is the most important feature of Blockchain technology which means that all the information is spread across the network thus making is easily accessible and less pervasive to hacking.
Immutability– The information once entered in the edger cannot be altered or changed. Thus the security of data becomes a key feature of Distributed Ledger Technology (DLT).
Security- Data security is the key feature of the Blockchain. All the data and information in the ledger is encrypted. Thus it cannot be altered or changed.
No third party interference– one of the key features that Blockchain offers is peer-to-peer interaction which means, the two parties can directly interact with each other. It saves time as there is no need for the third party to approve the transaction.
Cost saving- The primary objective of any new technology is to offer quick service which saves time and money. Thankfully, Blockchain fits in both these parameters. As mentioned above the absence of third-party saves time, similarly, it also reduces the cost of the transaction by minimizing transaction or processing fees.
Blockchain Aids Transactions
When we talk about Blockchain, then its role in the financial transaction is the most conventional use which many companies are trying to tap on. You would have noticed the surge of many cryptocurrencies that enable you to transact in digital currency, and at the same time, you can also exchange them for fiat currencies.
The story doesn’t end here; many companies are finding alternative ways to use Blockchain based cryptocurrency. They are developing apps and other modes wherein you can exchange your coins for buying products, making payments, etc.
Immutability– The information once entered in the edger cannot be altered or changed. Thus the security of data becomes a key feature of Distributed Ledger Technology (DLT).
Security- Data security is the key feature of the Blockchain. All the data and information in the ledger is encrypted. Thus it cannot be altered or changed.
No third party interference– one of the key features that Blockchain offers is peer-to-peer interaction which means, the two parties can directly interact with each other. It saves time as there is no need for the third party to approve the transaction.
Cost saving- The primary objective of any new technology is to offer quick service which saves time and money. Thankfully, Blockchain fits in both these parameters. As mentioned above the absence of third-party saves time, similarly, it also reduces the cost of the transaction by minimizing transaction or processing fees.
Blockchain Aids Transactions
When we talk about Blockchain, then its role in the financial transaction is the most conventional use which many companies are trying to tap on. You would have noticed the surge of many cryptocurrencies that enable you to transact in digital currency, and at the same time, you can also exchange them for fiat currencies.
The story doesn’t end here; many companies are finding alternative ways to use Blockchain based cryptocurrency. They are developing apps and other modes wherein you can exchange your coins for buying products, making payments, etc.
Well, the use of Blockchain for the transaction has gained momentum as more and more companies are now focusing on using this technology to aid the financial transaction process, settlements of claims, etc. Some of the big names making their way to the Blockchain technology use in the transaction include Some Hyperledger Fabric project by IBM, and R3’s Blockchain consortium.
These projects emphasize the use of Blockchain to become a part of mainstream business processes. It has the potential to reduce the settlement times as they make use of a digital signature which ensures timely processing of the operations.
The Blockchain-enabled platform provides higher security and lowers the cost of payment processes. In the current system there are many intermediaries involved in the payment transaction process, but with the surge of Blockchain based platforms, we can expect to diminish the role of intermediaries and thus saving the cost of the transaction, processing fees and time consumed during validation of transaction. Hence, we can say that Blockchain will transform the way transaction is being done.
Use of Blockchain In Financial and Banking Industry
Blockchain technology is capable to disrupt the financial industry that we know and use today. Here are just a few of the top ways will transform finance and banking:
Fraud Reduction
Even though blockchain is new technology, its potential to reduce fraud in the financial world is getting a lot of attention since 45% for financial intermediaries such as stock exchanges and money transfer services suffer from economic crime every year. Most banking systems around the world are built on a centralized database that is more vulnerable to cyberattack because it has one point of failure rather than many—once hackers breach the one system they have full access. The blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. This technology would eliminate some of the current crimes being perpetuated online today against our financial institutions.
Know your Customer (KYC)
Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations according to a Thomason Reuters Survey. These regulations are intended to help reduce money laundering and terrorism activities by having requirements for businesses to verify and identify their clients. Blockchain would allow the independent verification of one client by one organization to be accessed by other organizations so the KYC process wouldn’t have to start over again. The reduction in administrative costs for compliance departments would be significant.
Smart Contracts
Because blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys, blockchains enable us to have smart contracts. This code could be programmed to create contracts or execute financial transactions once a certain set of criteria has been achieved—delivery of products could signal an invoice to be paid for example.
Payment Solution
Blockchain disruption could be highly transformative in the payments process. It would enable higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves. In the current reality, there are a lot of intermediaries in the payment processing system, but blockchain would eliminate the need for a lot of them.
Trading Platforms
It’s exciting to contemplate the changes that might occur with our trading platforms if they relied on blockchain-based technology. There’s no doubt that the risk of operational errors and fraud would be dramatically reduced. NASDAQ and the Australian Securities Exchange are already exploring blockchain solutions to reduce costs and improve efficiencies.
Implication for financial services
Before we can realize all the extraordinary opportunities blockchain technology offers us for the banking and financial services industry, there are some hurdles we need to overcome.
Indian Banks using Blockchain Technology
There are many banks in India started adopting Bitcoin technology and others to follow, few example :
1.Reserve Bank of India (RBI) – RBI has shown an inclination towards blockchain. The IIDRBT or India’s Institute for Development and Research in Banking Technology (part of RBI), is working on the use of blockchain for the banking system.
2. YES Bank– It has also geared up to use the blockchain. The bank will bring Bajaj Electrical and other 32 vendors on board an invoice financing blockchain. The current process of invoicing consumes four days for verification, presenting, recording and reconciling the invoices before disbursing working capital loans. With the use of this technology, the bank will save time and running cost.
3. Axis Bank– Axis bank has come up with an inward remittance solution based on the blockchain. With RAKBank, it will cater to the retail customers of the Middle East, and with Standard Chartered Bank (Singapore), it will cater to the corporate trade remittance. Axis bank is using Ripple for cross-border transaction network to run its remittance blockchain products.
4. ICICI Bank– To facilitate the use of blockchain, ICICI bank is working to create a closed-loop wallet which will be used for within campus transactions. Apart from this, ICICI bank also has two blockchain-based solutions with Emirated NBD for remittance and trade finance.
5. State Bank of India– Use of blockchain for smart contracts or KYC is underway.
The crux of the matter that Banking system in India is going to use of blockchain technology for helping the customers and also for establishing a network which far more safe and secure as compared to the current systems which the banks and other NBFCs are using.
There are initial hiccups. It will be useful in third party confirmations, it can reduce the paperwork and help in accessing information instantaneously but information to make real time decisions is available without Blockchain. There is a need to change the mindset, process needs to be changed from company-centric to ecosystem-centric.
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