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How will Blockchain Revolutionize the Banking Industry? 25 September, 2020   

Since its creation in 2008, the understanding of Blockchain technology and how it can be used has steadily grown. This came to a peak last year when cryptocurrency became an object of popular culture as much as an investment option.

With that understanding and its continuous development, it’s becoming clear that there could be a place for blockchain in the banking sector.

 

How Does Blockchain Work?

Before we can assess how well blockchain will work in the banking sector; we should first get back to basics. A quick summary for those of you who don’t quite get blockchain technology yet.

Blockchain starts with a transaction requested by a user. This, more often than not, will be using a cryptocurrency. The trade gets processed by “nodes,” or computers that are connected to the blockchain network. Once it’s processed, the blockchain technology gets to work verifying and finalizing the transaction. It involves giving the transaction a unique “address,” which gets placed in a “block,” the equivalent of a page in a ledger in real-world banking. These pages or “blocks” make up a full ledger: the blockchain.

 

What Could Specifically Change with Blockchain in The Banking Sector?

So, with the basics of blockchain technology in mind, we can now look into how blockchain technology will change the banking industry for its users and customers.

First of all, blockchain in the banking sector can enable financial institutions to operate on a far less expensive basis. This is primarily down to the additional security provided by transaction records in the blockchain. This, in turn, removes an otherwise-necessary the verification process and Know Your Customer policies that cost banks millions of dollars to maintain.

This added security comes by way of the unique addresses the blockchain technology produces for each transaction. These transactions can only be accessed, changed, or further acted upon by the user who holds these unique addresses.

However, before a change like this can be implemented, significant developments and research need to be carried out on cybersecurity. If the the world is going to use blockchain in the banking sector, getting rid of a layer of security for the sake of reducing costs and improving efficiency, in turn, further measures to protect customers’ information and money need to be put in place.

Between identity fraud, data protection breaches, and money laundering banking the sector already cost millions of dollars every year. While using blockchain in the banking sector will reduce the costs of meeting Know Your Customer regulations, those savings need to be used wisely to ensure security does not deteriorate.

Costs in the banking sector would be further reduced regarding processing payments and transactions. Purely by the peer-to-peer nature of blockchain technology, the need for the number of intermediaries currently used in banking today would be eliminated. This, in turn, improves the overall efficiency of payment processing, since the presence and (often) interference of third parties are a common cause of delays. No intermediaries mean faster transactions.


Another important thing about blockchain in the banking sector regarding payment processing is how it will revolutionize the audit trails and record keeping. Again, this comes from the nature of the technology itself. Each block, containing a unique transaction address, is directly linked to the block for the previous transaction from that user (hence the name “blockchain”). Better record-keeping is another way to improve efficiency and reduce costs.

Let’s have a look at some of the other areas of banking that blockchain could help revolutionize. Savings, for example.

Think about how you already use banks to save your money. Most individuals will probably use a savings account, while businesses and corporations will tend towards large-scale investments with Treasury bills and money market funds.

Once again, the peer-to-peer nature of blockchain technology eliminates the need for these. In the same way as payment processing, blockchain takes out the necessity for intermediaries and provides more evident audit trails.

 

Blockchain has further demonstrated its usefulness in checking credit scores and credit ratings. It works both ways. Due to the transparent nature of the blockchain technology, a bank issuing a loan could assess a client’s credit score without the need for an intermediary. These will reduce costs and also a lot of time otherwise spent interviewing and, in many cases, arguing with clients over failed credit ratings and declined loans.

 

For the customer, they can use blockchain to provide their assessment of their credit rating. Companies have already jumped on this, like the Bloom Protocol. This service, running purely on the blockchain, assigns a customer three unique identification numbers that mean nothing elsewhere, eliminating the possibility of identity theft. One of these numbers is the equivalent of a credit score, resulting from a credit assessment conducted across the blockchain.

Blockchain-based credit scoring systems like the Bloom Protocol can give customers far smoother experiences in trying to secure loans. If they are already aware of inadequacies in their credit ratings, this will save stress, time, and money going through the loan application process.

 

It’s Happening as We Speak

Blockchain technology may not be ancient, but the banking industry has not been blind to it. Blockchain in the banking sector is already happening. The blockchains from pre-existing cryptocurrencies are already being taken on board by some of the largest banks in the world.

 

Take Ripple, for example. As we speak, some of the world’s biggest financial bullies are using Ripple’s blockchain to coordinate and process transactions. They have already acknowledged the benefits – the improved speed and efficiency of transfers, particularly international ones, have already met high praise.

 

Furthermore, something called the Global Payments Steering Group was launched last year. The Global Payments Steering Group is the first of its kind – an interbank group processing global payment, all over a blockchain network. Some of the world’s top financial institutions are among the Global Payments Steering Group’s founders. These include the Royal Bank of Canada and Banco Santander. Since its establishment in September, many more banks and financial institutions have signed up.

 

Blockchain’s presence in banking has extended far beyond improving efficiency and speed for customers. They are looking to get in the cryptocurrency game full swing.

Many banks are coming together to create and produce a whole new digital currency of their own based to operate on the blockchain network. This new cryptocurrency is intended for launch later this year.

That’s not all. Some of the top lending companies in the world, such as Barclays, Credit Suisse and HSBC have become involved in a project masterminded by UBS, the Swiss banking kingpin.

These six lenders join UBS, as well as several other big bullies in the financial world, including Deutsche Bank and Bank of New York Mellon, in creating a brand-new the cryptocurrency of their own. They plan to call these Utility Settlement Coins. This new digital currency, again using blockchain, will have the primary purpose of clearing and settling transactions with better speed and efficiency. It will eliminate the otherwise necessary long waits and potential delays in carrying out these transactions with the traditional banking system.

 

The utility settlement coins can after that be converted into fiat currencies and traded for securities across the globe, just like pre-existing cryptocurrency giants.

 

Conclusion

All this goes to show there is a definite place for blockchain in the banking sector. As we’ve just discussed, it’s already happening whether we like it or not!

Working with customers, money is dividable into two priorities – security and efficiency. Blockchain has the means to improve both from their present states. However, it will only work permanently if the right precautions and research are put in place to ensure blockchain doesn’t open up a load of new holes in financial security.

 

 Read More: Join the Crypto ladder: Top Tips for trading Crypto

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