Blockchain, the technology which was invented in late 2008, is taking the internet, technology and even banking by storm at present time. Barely a day passes when there are no updates we receive on the implementation of blockchain in different industries. The banking is the first and most prominent industry to adopt this advanced technology.
A blockchain is a combination of shared database and cryptography which allows multiple parties to have a transaction simultaneously through a constantly updated digital shared ledger. This is a kind of technology where transactions happen in a peer to peer system. A transaction over a blockchain eliminates the role of a financial institution which presently act as a mediator for a transaction. Blockchain eliminates the chances of fraud, even though there is no third party (bank) to authenticate the transaction still no frauds can happen as the transaction process is going through a distributed ledger and innumerable eyes are witnessing the transaction at any point of time.
Transaction of money is definitely the prime function of a financial institution but it is not the only function which a financial institution has to perform. The implementation of the blockchain will not only make the transaction easier, it will make banking faster and safer in different ways. There are many other advantages of implementing blockchain in banking. Here is how bringing blockchain to banking can be advantageous for both banks and its customers.
The best about a blockchain is that it is a decentralised database. Unlike the present centralised banking database, the data in the blockchain is saved in a distributed ledger. In the present banking system, the data is saved in a central database which is easy to hack. Hackers and cyber-criminals are well aware of evolving digital technology and have been able to bypass these security systems and make a data leakage. Contradictory to the present system of storing data, a blockchain is decentralised and it is less prone to this type of fraud. A complete implementation of blockchain in banking industry will make a real-time execution of payments and hence a complete transparency which would enable real-time fraud analysis along with prevention of the same.
Know Your Customer (KYC) has become an inseparable part of a banking. For any successful transaction, you need to prove your KYC. Know Your Customer (KYC) processes require banks to validate and verify primary documents as part of the due diligence protocol which is done as a part of AML. It has been suggested by the blockchain experts that once a bank receives a new customer and authenticates his identity, the bank can save the KYC document in a blockchain. In this way, the same KYC documents can be used by other authorities and the person will not be needed to repeat the same process of KYC for a new authority. As we know that the data or the blocks added in a chain can never be tempered, so the authenticity of the data is an assured thing.
Cheaper and Secure Payments
Blockchain is a safer, faster and cheaper alternative to bank payments. Blockchain eliminates the need to rely on an intermediary like bank to approve the transaction. When a third party like a bank comes to the picture, it takes a transaction fee from both the sender and the receiver. In this way, one needs to pay a high charge for the transaction. Along with a high processing fee, you need to follow the rules and regulations set by the financial institution. A transaction through blockchain makes you get rid of all those issues. Blockchain makes peer-to-peer (P2P) payments for which no intermediaries are required hence one will have to bear a low transaction fee. This advanced technology can provide fast, cheap, and borderless payments across the world.
Trade finance, in the current banking system is mostly based on paperwork such as bills or letters of credit. Such pieces of papers are sent through fax or post. If banks start using a blockchain for trading, the whole process will become much secured as well as faster. A blockchain offers a new medium to exchange assets without centralised trusts or intermediaries which is free from the risk of double spending. A trade over a blockchain will minimise the operational risk as all the transactions will be transparent and immutable. The transaction record over a blockchain will be there for permanently and can be used for any future reference.
A blockchain can be used for loans and credits in two different ways. The first use of a blockchain in the lending industry is that- a lender can check the creditworthiness of a potential borrower through a blockchain. Prior to any lending, a lender checks the credit score, income to debt ratio etc for which they need to depend on the credit bureaus like CIBIL or Transunion. Such credit bureaus save data in a centralised database which is vulnerable to get hacked and this will have a direct effect on the creditworthiness of an individual. To resolve the issue, banks can use blockchain to avail the authenticate data about a potential borrower.
The second use of blockchain is that with the help of a blockchain a loan seeker can avail a loan through peer to peer lending. In this type of lending, the lender is just another person instead of a lending institution who can check the creditworthiness of the loan seeker through the blockchain and provide a loan.
It is undeniable that banking industry is appreciating this technology but implementing the same in day to day functions of a bank is a matter of serious concern. Changing the whole banking system is not an easy task especially when changing requires the overhaul of existing systems. All the major functions of banks can be performed through blockchain at a more convenient and better way. It is no more a question if blockchain can be used in banking, the only question that remains is when would banks start implementing blockchain technology?
Susmita is a self-driven individual and strongly believes that managing personal finance is an essential element for a satisfied present and secured future. Balancing life of a professional writer and a home maker, she has learnt many life lessons which she likes to pen down. Her ambition is to attain financial freedom and feels that her audience are her co-travelers who share the same dream and want to reach same destination!