The blockchain technology came to prominence after the emergence of Bitcoin, the first cryptocurrency. Lately, the tech has gained widespread popularity as researchers discover its many use cases in various industries from payments processing, money transfers, monitoring supply chains, managing digital identities, land records and many more. In this piece, we are going to take a look at the role of the blockchain for banks & financial institution.
Blockchain technology uses cryptography and distributed databases to record transactions in an immutable way in an ever-growing system that contains interlinked records, which are all synced with the same information. This allows it to function as an open, decentralized ledger which keeps track of all transactions that take place between two parties in a permanent and verifiable way.
There are fewer fintech technologies that have proved so disruptive to the banking industry than the blockchain. Initially developed as a database platform for cryptocurrencies, the tech has matured into a viable alternative to traditional channels that are used to conduct financial transactions.
Banks & financial institution are realizing they have to find ways to use the technology; otherwise, it will render them obsolete. Interestingly these institutions need not worry much as the blockchain can help improve them, thus ensuring they remain relevant.
According to Harvard Business Review, the blockchain will do to the banks what the internet did to media. From the standpoint of banks & financial institution, this is scary given that in the 1990s the mainstream media scoffed when it was predicted that soon people would be reading their news online rather than from newspapers. Two decades later, cryptocurrencies and the blockchain pose a similar threat to banks and other financial institutions.
However, these institutions need not worry given that the blockchain provides a solution to many of the problems they face. The tech has all the attractive characteristics that are necessary for a technology that handles money matters. It’s transparent, safe, secure, relatively cheaper and decentralized.
The tech offers optimum safety and security when it comes to exchanging data, information and most importantly money. Users can also take advantage of the transparent network infrastructure that has low operational cost aided by decentralization.
All these characteristics make the blockchain more reliable, very promising and the in-demand solution for banks and other financial institutions.
So far, we have a company like Bitpesa that is using the blockchain to improve B2B payments in developing countries. The company has managed to process over $340 million in transactions within five years of operation with over 25,000 customers.
Ripple, is another excellent example of a company that is working on offering enterprise blockchain solutions that will aid clearance and settlement for banks.
Given that SWIFT messages are one-way like emails and this means transactions cannot be settled until each party has screened the transaction, Ripple offers xCurrent, a software that integrates directly with a bank’s existing ledgers and databases.
This offers banks a faster two-way communication protocol that allows real-time messaging and settlement.
The blockchain offers banks and other financial institutions plenty of benefits including;
Reduced costs – the blockchain will provide banks with more than survival as it will pave the way for greater security, efficiency and improved customer satisfaction. The tech is projected to save these institutions around $15-20 billion in infrastructure cost alone by 2022.
For example, by utilizing smart contracts, banks will be able to reduce interactions with intermediaries and counterparties hence reducing the costs required to maintain and execute contracts.
Faster transactions – Only ledger entries are required to move assets like money using blockchain technology. Therefore, banks can use the tech to reduce the amount of time necessary to settle transactions. Rather than taking the 1-3 days it usually takes to verify fund transfers, banking customers can receive verification within minutes or hours. With time these transactions will occur in real time.
Improved security – Banks can secure transactional information through shared ledgers since the blockchain allows for faster transactions, which isn’t possible through centralized systems. This leaves less time for an intruder to intervene and divert payments or even capture transaction details.
Improved data quality – Much banking data exists in more than one place. Add the fact that different parties can change some of the information within one institution or even other parties across institutions, and you see where the problem lies.
With data living in duplicate locations and different parties being capable of changing data that is stored in their location, there is a chance the data can become outdated or incomplete.
This is a simple explanation given that the real situation is more complicated. It consists of regulatory requirements that are tough to meet when data is distributed in a disorganized manner. Even though the entire industry is devoted to data management, problems still persist.
However, thanks to the blockchain, these institutions can store their data in a manner that it can be accessed and changed only according to the predefined rules.
In conclusion, banks & financial institution will adopt the blockchain technology even though slowly for the same reasons they adapt to any change; to save money or increase their customer base, not forgetting to stay relevant.
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