It seems that people still associate blockchain mainly with BitCoin and other cryptocurrencies, while the potential of this technology goes far beyond that. We have already written about the opportunities it brings to logistics, healthcare, gambling, and the public sector. In this blog post, we want to speak about the advantages of blockchain in banking.
Blockchain in Various Industries – Key Stats
What Is Blockchain in Banking?
Blockchain is a distributed ledger technology that holds encrypted blocks of records with all the digital transactions performed by blockchain users. When blockchain is used as a business network, it allows its participants to record their transactions and track them in the system. The recorded transactions can’t be removed from the block or modified. This way, blockchain helps its users to make banking processes more secure, reliable, transparent, and efficient.
This technology enhances data protection, making it immutable and easy to verify. It can drive data security across various industries to a brand new level, eliminating fraud and mistakes. Since the banking industry suffers the most from scammer attacks, implementing blockchain in financial services may save the day. Here are the core pros of blockchain in banking:
Use of blockchain in banking allows businesses to cover a range of security issues. The technology can be implemented at different levels from protecting sensitive records to enhanced user authentication. Here is how blockchain can improve security in digital banking systems:
- User authentication – blockchain eliminates the necessity to protect user and bank accounts and devices with passwords. Instead, the technology combines blockchain security with biometrics, encrypting users’ unique identifiers e.g. iris scans, fingerprints, voice, etc. into a block in blockchain. The technology uses the encrypted block with user identifiers as an access key to apps and gadgets or as a key to sign the data the user sends to others.
- Data protection – due to the decentralized nature of blockchain, cyber criminals have to work with an entire blockchain system rather than a central node to hack it. Since the data is spread across multiple nodes, there is no particular server or another place to attack. For this reason, some banking institutions use blockchain for data storage and securing transactions.
- Secure communication – blockchain can be used for securing internal communication, preventing any data leakages or cyber espionage. The technology spreads the metadata utilized for communications around the distributed ledger, making it impossible for hackers to collect it at one centralized point.
Today, many banking operations and financial transactions are rather slow and can take much time for their management, approval, and logging, moreover, some actions are still performed manually. Fintech blockchain easily solves that issue allowing instantaneous authentication and verification which helps to streamline banking processes e.g. performing quick cross-border payments, finance trading, KYC verification, etc., and reduce paperwork.
What’s more, with a unified blockchain-based platform across banking institutions, banks can provide an uninterrupted operation of finance services. Therefore, making their work more efficient and improving their customers’ digital banking experiences.
Blockchain technology in banking increases transaction transparency, making it easy to detect and prevent fraud. As banks use a shared digital ledger for recording each transaction, it increases their visibility for the blockchain participants. Therefore, banks can easily track the history of each transaction and verify it. This way, blockchain banking leaves no place for money laundering, scam, and other fake operations.
Another outstanding blockchain feature important for the financial sphere is decentralization. Decentralization leads to a more democratic relationship in the market between individuals and institutions. Instead of relying on a central authority that controls every transaction, buyers and sellers can directly communicate with each other. This results in lower operational costs, increased trust between transactors, and the inability of individuals or separate organizations to control the market.
For example, international payments in decentralized digital currencies are cheaper in comparison to transnational fiat payments as they eliminate any bank fees and don’t conform to any bank policies. Moreover, decentralized currencies are more resistant to destabilized currency rates as they aren’t regulated by any national monetary policies, representing a more stable alternative.
Smart contracts are blockchain programs that self-execute once certain conditions are met. This blockchain technology can facilitate many processes in banks and financial institutions. Here is how banks can use smart contracts in their work:
- automate insurance claims – smart contracts can automatically validate the claims indicated in the contracts and execute them once all or certain requirements are met;
- reduce operational costs – as smart contracts are self-regulatory they don’t require much manual intervention, as a result, financial institutions can lower their transaction costs in the long term;
- automate money transfers – with smart contracts financial institutions can process payments and transfer funds in real-time;
- perform simple auditing – traditional contracts require manual processing, meaning additional workforce and lengthy audit process; smart contracts, in their turn, support diverse bookkeeping tools which facilitate contract processing.
With blockchain-based smart contracts, banking and financial institutions can significantly reduce the level of bureaucracy, ensure trust between partners, accelerate processes as well as decrease the need for third-party intermediaries.
Blockchain in Finance: Use Cases
Now let us take a look at more specific cases of how blockchain can change the banking and finance industry.
KYC (Know Your Customer) is a procedure of identity verification performed by banks each time they get a new customer. Today it might take over a month as there is a need for getting reviews and approvals from third-party organizations and other banking institutions. Each year banks spend up to $ 160 million on KYC compliance.
The implementation of fintech blockchain is an effective solution that accelerates the verificati