Blockchain for Banking Industry
Blockchain is disrupting financial services industry by making transactions faster, cheaper, more secure and transparent.
What blockchain can do for the financial and banking industry?
Applications of Blockchain in banking and financial services are leveraging the industry by making the financial transactions faster, cheaper, transparent and more secure. Blockchain technology would disrupt these industries in an unprecedented manner. The underlying principles of Blockchain technology make it very flexible and as a result, it can offer solutions to make business operations more efficient, secure and reliable. The technology, which underpins cryptocurrencies such as bitcoin, was initially treated with skepticism by banks. However, this has changed dramatically. This peer to peer technology allows us to do cross-border remittances flowing from one country to another with very cheap transaction fees and tremendously reducing the time required for it. On the other hand, one of the most highly anticipated applications of the Blockchain, Smart contracts makes the share trading more secure than traditional contract law. Moreover, it can cut out the middleman in transactions and thus reduce the number of transaction costs associated with contracting. The rules of the smart contract are recorded in computer code and cannot be freely interpreted according to ‘the intent of the contract, but only according to the literal meaning. Let us see in detail about the different use cases of Blockchain in Banking and Finance sector.
Faster and simpler cross border payments
Cross-border payments is now a critical part of millions of lives as we moved towards a globalized world. Cross border transfer of money, value has always been a slow process as well as expensive. As large, cross-border payments become more common, B2B merchants are looking for the more convenient and cost-efficient methods. This has attracted more of these transactions to the Web and mobile channels as compared to traditional banks and agents based channels Blockchain based solution for doing cryptocurrency transactions is able to speed up and simplify the payment process, cutting out many of the traditional middlemen and also reduces the costs significantly. In this solution,a digital distributed transaction ledger with identical copies is maintained on each of the network’s members’ computers. All parties can review previous entries and record new ones. Transactions are grouped in blocks, recorded one after the other in a chain of blocks . The links between blocks and their content are protected by cryptography, so previous transactions cannot be destroyed or forged. This means that the ledger and the transaction network are trusted without a central authority.
Middleman-free share trading
Buying and selling stocks and shares has always involved many middlemen, such as brokers. These processes involve complex procedures which are time consuming, cost inefficient, and prone to risks. One of the most highly anticipated applications of the blockchain, Smart contracts is a computer program that facilitate and enforce the negotiation and execution of an agreement. Many kinds of contractual clauses can be made self-executing and/or self-enforcing using smart contracts since these emulates the logic of regular contractual clauses. Smart contract based solution for share trading is more secure than traditional contract law. Moreover, they can cut out middleman in transactions and thus reduce a number of transaction costs associated with contracting. The rules of the smart contract are recorded in computer code and cannot be freely interpreted according to ‘the intent of the contract’, but only according to literal meaning.
Identity management solution
Managing customer identity online is an expensive and time consuming process. The user has to register online for the service which may require additional steps like a face to face interaction as might be the case with financial institutions. The user should also authenticate their log in thereby proving that they are authorized to access that portal. It becomes repetitive when the user has to go through these same steps with each new service provider. In addition to being repetitive, it also raises privacy concerns as these service providers store huge amounts of identity information with them. Blockchain based identity management solution solves this problem by cutting out all the third parties. The user would register on the Blockchain and, as required, authorized parties can simply access that information on the network. This eliminates the need for the user to register with every new service provider. While best practices for this application are still being developed, it shows potential. But privacy still remains a concern as once information is stored on Blockchain, it is accessible to everyone in the network. That opens up a new avenue for research.
Crypto Loyalty Tokens
Conventional loyalty and reward programs are not realizing its full potential due to several factors like inactivity of customer account, low redemption rates, time delays in delivering rewards and points, high transaction cost, high customer acquisition costs and low client retention etc. Blockchain as a trustless distributed ledger allows loyalty reward program providers, administrators, system managers, customers, etc. to intersect and interact in one system without any intermediaries and without compromising privacy or competitiveness. This solution optimise the execution and administration of reward programs with near real time transparency, resulting in cost savings. In this blockchain based loyalty program, on initiation of a loyalty transaction such as the issuance, redemption, or exchange of a reward the system creates a computer-generated loyalty token, which is a base for all types of rewards, including points. The loyalty token’s unique identiﬁers can be updated on each participant’s ledger and made available across the network. Several online protocol rules govern the way the points behind these tokens function. Moreover, the system can be connected to social media and digital wallets and can interact with loyalty rewards program platforms through “smart contracts” to provide hassle free delivery of loyalty points.
Distributed ledger architecture of blockchain can help banks to spread out tasks like KYC ,AML and local compliance and link it to a single customer block. Each bank in the syndicate can easily access the customer data through the blockchain network irrespective of the local regulations on data and privacy. This in turn reduces the cost of meeting regulatory requirements for syndicated lending since banks can take advantage of compliance already completed by others in the syndicate. Moreover, data duplication is avoided since all syndicate banks have access to the customer’s digital documentation. Banks can significantly reduce the complexity and efforts required to comply with local taxation and regulatory rules since local disbursements are accounted for in the distributed ledger.
Efficient private securities
Private securities market is facing high settlement risk caused by longer settlement cycle, limited audit trail, multiple version of master book across issuers, syndicate members and investors. Moreover, processes associated with this is lengthy and has to be handled manually, resulting in operational inefficiency. Blockchain based solution for private securities enables issuers and investors to record private securities transactions in a distributed digital ledger representing a record of ownership. This in turn enables easy access of information and significantly reducing settlement time to better compete with traditional firms. The solution enables issuers, syndicate members and investors to successfully complete and record a private securities transaction by digitally representing a record of ownership. The digital securities in form of smart contracts are evidenced by entry into a publicly distributed ledger and transfers of the digital securities can only be effected on that ledger. These smart contracts can be programmed to automate issuance and asset servicing, which in turn eliminates manual, lengthy and operationally inefficient processes.
Know Your Customer
KYC or Know Your Customer compliance is one of the most critical components of today’s service oriented businesses in sectors such as Banking, Insurance, Government Benefit Schemes and much more. A simple KYC system for a bank would comprise of a form for customer identification details and their basic economic background. It also serves as a record of other financial commitments that the customer may have including information about bank accounts and other investments, personal assets lists, preference and priority lists for financial and related services etc. Knowing your customers as well as your own family is the success recipe for businesses today. KYC plays an important part in making that information accessible to enterprises.
Efficient Procurement Process
Blockchain could act as a game changer in the field of procurement and supply chain. It is the best tool against corruption and enables a transparent tamper proof management of data. Invoice management is one sector that would benefit from Blockchain, as it can ensure that an invoice doesn’t change from the point that a supplier submits it to when a buyer processes it. Transactions would have to be verified by all participants. No individual will be able to change the invoice for their own gain without all other users of the system validating it. Identification of desired suppliers, compliance monitoring , managing contracts and writing smart contracts for better transactions are added advantages. Procurement done on top of blockchain will provide an easy track and trace tool for the procurement and legal team, all in one purchase order for the accounting department and work order for suppliers