- Blockchain technology will change the way banking is carried out
- Blockchain will help increase compliance, reduce costs, improve security, and reduce TAT
- It will enable data storage with better security, thus reducing cases of fraud and cyber attacks
Blockchain technology has enormous potential across systems and processes. There is no doubt that the technology will revolutionise the banking industry. Harvard Business Review says that blockchain will have the same effect on banks that the Internet had on media.
Leaders in the financial services industry are well aware of the disruption and are preparing for the change. As per Harvard Business Review, 60% of financial organisations are looking at blockchain for international money transfers. 23% of the organisations are using it for security clearing and settlement, and 20% for KYC regulations and anti-money laundering services.
These are a few ways in which blockchain will impact the banking industry.
Know Your Customer
Know your customer process is the bank’s way of verifying customer details. These regulations also help prevent activities like money laundering, terrorism funding, etc. According to a global survey by Thomson Reuters, financial firms are spending anything from US$60 million to US$500 million on KYC and due diligence compliance.
Blockchain will help reduce these administrative costs of compliance by allowing independent verification done by one organisation to be accessed by another, thereby enhancing convenience and reducing duplication.
Blockchains also holds tremendous potential for disrupting payment processing. Currently, the payments process is a cumbersome, paper-intensive, expensive, and time-consuming due to intermediaries. By adopting blockchain technology, the process will be more secure, cost-effective and reliable. Not only for payments between banks and their clients, but also between banks themselves.
Fraud and cybersecurity are a big concern for the banking world. Intermediaries such as money transfer services are a lucrative target for fraudsters, as is evident in a report by PwC. The report states that 45% of financial intermediaries suffer from a financial crime every year.
Hacking of financial data is mostly caused by breaching into a centralized database.
Once the vulnerabilities of this system have been exploited, the hackers get full and unfettered access. Blockchain holds great promise against cyber-attacks as the data is not stored centrally but is decentralized in the form of a distributed ledger where data is stored in blocks with a timestamp having links to the previous block.
Smart contracts are essentially a computer code that facilitates, verifies or enforces a credible contract between two or parties, without the need for a third party. Smart contracts are developed to provide better security than traditional contracts with a reduced cost factor.
Blockchain enables this kind of transaction by including a computer code that is executed once the concerned parties enter their respective keys. These codes can be programmed in a way that they execute financial transactions once a certain criterion is met.
Of late, several PSU and private banks in India have started conducting pilot transactions using blockchain. Beta launches of blockchain-enabled smart contracts have been rolled out and it’s expected that soon banks will come with blockchain-enabled KYC. Also, several leading Indian banks, both in the public and private sector, are part of the BankChain Community, whose objective is to explore and implement blockchain solutions in banking operations.
Hence, the applications and potential for blockchains are tremendous and most forward-looking businesses most consider leveraging it.