“Blockchain in banking and finance”
This phrase has evolved par expectations in recent times. Earlier it was seen just as a buzz about bold and unrealistic technology goals in banking and finance, but today it is the prime attention of major and minor financial industry players.
Financial entities all over the world are experimenting with blockchain. Though in the very initial phase of its implementation, blockchains have already started to make a mark on the industry.
Blockchain use cases
Most compelling blockchain applications and use cases in the financial sector circle around its potential to:
- Settle payments almost instantly
- Remove intermediaries and manual documentation
- Reduce operational costs
- Add transparency or privacy throughout the transaction process
- Store transaction and other data in an immutable ledger
- Ensure that the same data is stored everywhere
Before we delve into how the finance industry can leverage potential of blockchain for more efficient and effective functioning, let’s review what makes this industry call for disruption through blockchain.
What Calls for Blockchain in Banking and Finance?
At present, financial entities all over the world work on the technological and business cornerstones that were laid decades ago. Banking and finance organizations, and their customers deal with some major issues due to outdated infrastructure and technology.
High Operational Costs
Financial entities today are facing a rise in operational cost due to employees’ involvement in every transaction that is carried out. From fund transfers to business trade settlements, process requires involvement of multiple parties and a significant amount of manual documentation.
High Transaction Charges
High operational costs for transactions verification and execution directly translates into high fees for customers. In addition, financial intermediaries involved in processing of transactions negatively impact total transaction charge. This makes such transactions highly uneconomical.
Slow Transaction Speed
Despite the high transaction charges, any form of transaction in the finance industry may take a lot of time. This is due to the manual documentation and number of intermediaries involved in validating and processing the transaction.
Potential of Frauds and Lack of Transparency
The more the number of intermediaries involved in carrying out a transaction, the more are the chances of frauds and errors. This also reduces the transparency between the customers and the financial institutions as the real-time data about the progress of transactions is not made available to either of the transacting parties.
Data pertaining to each transaction is stored in ledgers, but there isn’t a way one can prove the authenticity of that data. There is also no way to prove if the transaction data has been tampered with. This leaves transacting parties at the mere goodwill of those in authority, which makes the system highly centralized and corruptible.
Blockchain’s Impact on Banking and Finance
Many might argue that the financial sector is working just fine even without the blockchain. And the problems mentioned above do not pose any major threats or adverse consequences on the industry.
Indeed, the financial industry is working “just fine”.
With its present method of functioning, it is highly uneconomical for both the entities and their customers. According to a report published by Juniper Research, deploying blockchain for cross-border payments alone could save banks over $27 billion annually by 2030.
If used for securities trading and regulatory compliance along with cross-border payments, blockchain implementation could reduce banks’ infrastructure costs by almost $20 billion per annum by as early as 2022.
Given the tremendous impact that blockchain could have on today’s financial industry, undivided attention needs to be given towards experimenting with blockchain to disrupt this industry. With increased experimentation will come faster implementation, and doors will open for saving billions of dollars each year for the finance industry.
Where and How Will Blockchain Help?
So far, we only discussed the potential of blockchain and the drawbacks in the current banking and finance industry. Now, let’s see how blockchain could disrupt this industry to negate all the above-mentioned issues.
The extent to which blockchains can help the world of banking and finance is yet to be seen. Both blockchain companies and financial entities are diligently experimenting with blockchain to find new and better ways to disrupt inefficient processes in the industry. Yet, we already know of quite a few things that blockchain could change for the finance industry. Let’s take a look:
Blockchain is a borderless technology. Transactions over the blockchain are done directly between the transacting parties, without the need of any authorized, centralized intermediaries. As transaction are not defined as international or domestic, this further cuts down the total transaction fees.
As compared to today’s banks’ international transaction fee of 5 to 20 percent, blockchain transactions only cost around 2 to 3 percent. Because transactions are direct, blockchains also reduce the time taken for international transactions from three to five day to just a few minutes, or maybe even seconds in some cases.
Blockchain is well recognized for its ability to crop out the enormous amount of paperwork required in every industrial process. And trade finance is no exception. Today, every activity related to commerce and international trade is slow and inefficient due to the required amount of paperwork.
Blockchain along with smart contracts can easily streamline these processes for institutions and automate them. Also, storing data on a distributed ledger that is accessible to all participants ensures that the data is not tampered with and also resistant to any form of errors.
Syndicated loans, due to the number of parties involved, becomes a massive task for financial institutes. Complying with Know Your Customer (KYC), Anti Money Laundering (AML) and other such regulations for raising a syndicated loan is a time taking process.
Blockchains can facilitate digital identities for every individual and entity and also store all their past transaction records. The presence of all required data in one ledger, that can be accessed from anywhere can make the validation of all parties involved in the loan sanction process much smoother and less time-consuming.
With numerous intermediaries involved in a stock trade, the risk of errors and frauds are pretty high. Reports suggest that almost 45 percent of the stock trading intermediaries are likely to be affected by financial crimes on a regular basis.
From reducing intermediaries by automating the trade process to enacting built-in regulations, from managing clearing and settlement to easing the asset management process, blockchains can do it all for stock trading platforms.
Accounting and Auditing
Blockchains ability to store data in an immutable manner can revolutionize the accounting and auditing process. Additionally, transparency is another feature of blockchain that would benefit the accounting and auditing process as data will be easily accessible to all verified members.
Also, data stored on blocks are timestamped, which would make the process of checking its validity almost effortless. All the benefits of blockchain for accounting and auditing can reduce the operational cost by a significant margin.
As can be easily figured out from what we just discussed, blockchain is disruptive technology with major applications and use cases in banking and finance. Most major international financial entities are already experimenting with blockchain PoC, and this is a strong sign of how powerful and effective blockchain can prove for this industry.
Some of the best-known enterprise-grade blockchains include Hyperledger Fabric, Quorum and R3 Corda.