Blockchain has been steadily gaining popularity in the fintech industry. With various sectors adopting blockchain technologies for faster and more secure operations, the BFSI industry is also moving forward.
However, the adoption of blockchain has been slow in the banking sector. Endless paperwork still troubles both consumers and banks. Therefore, blockchain's importance is rising in BFSI. In this blog, we will dive deeper into the ways blockchain in banking is both beneficial and necessary.
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How do Blockchains Work?
Before we begin, it is important to understand how blockchains work. Blockchains act as a digital ledger or database. With the help of 'blocks', they store data and assets in a way that is immutable and transparent.
It uses a code called ‘hash’ to distinguish itself from other data present in the block. These blocks form a chronological chain, thus storing accurate and authentic data.
Although primarily linked with cryptocurrency like Bitcoin, the use of blockchain has spread across different sectors such as BFSI (Banking, Finance and Insurance). Let us see how and why is blockchain important in this sector.
Why Blockchain Matters in Banking?
Blockchain has the potential to solve the various challenges the banking sector faces. Let us look at them below:
Smart Contracts
These contracts monitor the blockchain network for certain triggers or conditions. When these predetermined conditions are met, the contract automatically moves to the next step. For instance; a condition for a smart contract could be a date reached or a payment is completed.
Therefore, these self-executing contracts simplify a lot of complex banking processes. From loan approvals to transaction settlements, the risk of human error is eliminated with smart contracts, saving time as well as resources.
KYC (Know Your Customer)
It takes banks up to three months or more to conduct KYC verifications. This includes verifying address, photo and biometrics. Not only is it a hassle for customers, but also costs banks significant resources.
Blockchain simplifies this time-consuming process. There is no need for third-party verification in this network, saving time, money and resources while aiding the customer as well.
Cross Border Payments
Currently, international payments involve multiple intermediary nodes and banks. As a result of this, every step incurs significant cost and time.
However, blockchain technologies revolutionize cross-border payments and settlements. The cost is negligible and currency conversion is easy.
Also Read: Blockchain and Cryptocurrency
5 Benefits of Blockchain in Banking Sector
Now that you know the several ways blockchain revolutionizes the banking industry, let’s look at the benefits of blockchain in banking:
Strengthens Regulatory Compliance
Blockchain enables stronger regulatory compliance and adherence. By leveraging transparency and auditable records and transactions, it ensures that banks identify problem areas swiftly.
Enhances Transparency
Banks can uphold clear accountability with blockchain. As the technology ensures clear and transparent communication, any defaulters can be immediately identified.
Boost Efficiency
With complex processes getting automated, the risk of human error is reduced. Moreover, little interference from intermediaries will ensure efficient and direct communication between banks, customers and stakeholders.
Ensuring Privacy
Blockchain leverages cryptography, consensus and decentralization to ensure privacy and data integrity. Moreover, the data is end-to-end encrypted which adds another layer of protection.
Reducing Fraud
Immutability is one of the greatest advantages of blockchain in banking. The BFSI sector is riddled with fraud and scams. However, blockchain provides security by creating a permanent record of any data entered into a block. This data cannot be erased or altered unless every member of the network consents to it.
This significantly reduces the chance of fraudulent activity and protects user identity and privacy as well.
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Future of Blockchain in Banking
The biggest challenge that the banking industry faces is creating a proper infrastructure for adopting blockchain. The solutions are here, but the lack of infrastructure halts the progress. In future, the service providers will partner with banking institutions to bridge the gap between technology and them.
Several companies have already adopted blockchain to enhance their operations. For instance; HSBC has implemented an R3 blockchain platform that enables a digital vault. This digital vault ensures safe asset storage.
JP Morgan is another great example of this. The company introduced an enterprise-based blockchain platform called Quorum which facilitates interbank payment, regulatory compliance and trading.
Final Words
Blockchain introduction represents a prominent paradigm shift in the banking industry. With technology offering numerous benefits in banking, companies are moving forward to the new shift. Blockchain in banking will continue to provide robust solutions and therefore, make tedious processes easier and safer.
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