Blockchain is a network technology that utilizes a publicly accessible ledger to enable the secure transfer of ownership of digital units of value using cryptographic methods and decentralized consensus - meaning transfers are not under the centralized control of any individual entity.
In layman’s terms, blockchain allows two parties that don’t trust each other to agree on the state of a database, without having to resort to a trusted middleman – it enables an administrator free ledger.
In 2008, the Bitcoin network became the first successful execution of blockchain, but this revolutionary technology has vast potential for application in many industries, especially in the banking sector.
Blockchain Meets Banking
Blockchain is one of several new technologies shaking up the banking industry today. This graphic below from a recent Ernst & Young FinTech report shows how Blockchain fits into this disruptive picture:
Furthermore, as one of its top 10 predictions for 2019, the multinational professional services giant KPGM stated: “There will be a dramatic increase in levels of investment in companies dedicated to building specific products and solutions based on blockchain technology.”
Here are the top 10 ways blockchain technology will disrupt the banking industry moving forward:
Blockchain offers a faster and cheaper way to send payments, especially cross-border transactions, compared to traditional bank transfers. This is done by cutting the need for verification from third parties. Banks will be able to cut the cost of the tiresome process of communicating and coordinating with each other, balancing their accounting books every month and maintaining cash flow oversight.
2. Clearance and Settlement:
Blockchain technology (distributed ledgers in particular) have the potential to enable low-cost, real-time transactions between financial institutions better than existing protocols, the most common one being SWIFT - which stands for the Society for Worldwide Interbank Financial Telecommunication. The SWIFT network enables more than 10,000 financial institutions in over 200 different countries to exchange financial transaction information. With blockchain, banks will need to spend less on interbank transaction costs specifically the fees charged by SWIFT on clearance and settlement processes.
Initial coin offerings (ICOs) enable entrepreneurs to raise money outside conventional sources such as Venture Capital (VC) firms (and the due diligence that comes with fundraising from them) by vending tokens or coins. Banks, which often dabble in VC, will have to revise their lending conditions or risk losing out on profitable ventures to non-traditional players in the growing blockchain fundraising space.
Traditional capital markets securities i.e. stocks and bonds can be tokenized with blockchain technology, making them easier and cheaper to transfer between owners by removing the middleman. Banks have a great chance to expand their securities lending services with tokenized assets that are easier to transfer.
By eliminating the need for trusted third parties to guarantee loans in the credit industry, blockchain technology can make borrowing money not only more secure but also enable lower interest rates. This means banks will have to be more competitive in the credit market as new blockchain solutions pop up.
6. Trade Finance:
The World Trade Organization estimates that 80–90 percent of world trade relies upon trade finance. Since banks act as the guarantor of payment between seller and buyer in this arena of international commerce, blockchain technology could help them, and other financial institutions, make the process of trade finance much smoother by reducing recordkeeping costs and removing some intermediaries.
7. Smart Contracts:
Contracts offer protection but it often comes at a huge cost – from filing the suit to hiring a lawyer. Blockchain technology enables smart contracts which minimize the risk of ending up in court by holding both parties to an irreversible agreement and automatically enforcing it using a self-executing algorithm. This presents banks with a unique opportunity to expand their escrow services to aid smart contracts.
Banks store massive amounts of records because they have so many customers, and most of these records are paper-based, driving up their recordkeeping costs. The blockchain is purely digital, and thus cheaper to maintain and yet more secure and easier to access than the traditional paper-based recordkeeping. Banks can capitalize on this to reduce both their payroll and data security costs.
9. Regulatory Reporting
Nearly 40 percent of financial firms spend at least $40 million on their regulatory reporting processes and Know Your Customer (KYC) costs were $150 million in 2017 for institutions with $10 billion or more in revenue. Distributed ledgers can store verified, unchangeable data, so blockchain technology is perfect for the banking industry’s critical compliance needs such as Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) practices because it makes the sharing of accurate information between banks’ compliance departments and banking industry regulators much easier and faster.
10. Banking the Unbanked
Statistics show that 2 billion adults world over have no access to any banking services leaving them vulnerable to predatory lenders with exploitative interest rates and fees. Blockchain technology can power cheap banking platforms and decentralized lending networks to bring the unbanked into the fold. This means banks can no longer afford to think of themselves as the gatekeepers of the financial world.
Don’t Block the Blockchain, Use It to Build
The disruptive power of blockchain technology might be intimidating at first glance for many businesses in the banking industry, but it actually presents a unique opportunity for financial institutions world over to reinvent themselves and innovate new exciting banking solutions for the modern digital age.
Need help understanding blockchain and how it can transform your company as a player in the modern global banking industry? Let the professionals at ASB Resources walk hand in hand with your business as they put their knowledge and insights to work for you. Schedule a chat with one of our experts today!