Blockchain technology is not limited to crypto exchange platforms, and it’ll be adopted in other industries including the banking sector. Experts suggest this world-class technology can decentralize the banking industry, ensuring safer, faster, more affordable, and more efficient financial solutions for all and sundry in the future. But how does this technology? What are the potential transformations the banking sector can experience?
Let’s examine how blockchain technology is set to transform the future of banking.
What does blockchain technology entail?
Blockchain technology refers to a distributed ledger or database that allows several parties to host and record copies of transactions. The main advantage of blockchain technology over traditional databases is that a single party doesn’t control the network. In other words, it doesn’t require a central entity to maintain the database.
Each party involved in the transactions can keep their copies in a block. The blocks are interconnected and cannot be altered, deleted, or reversed. As a result of the irreversibility of the records, block technology boosts the transparency, reliability, and integrity of data. Since various parties have copies of the transactions, the technology reduces the security risks.
Here are some of the ways blockchain technology will transform the future of banking:
More secured banking
Traditionally, the banking industry relies on the use of a centralized database for storing transactions. The database usually has a single point of access. While this system can be effective, it leaves room for hackers to compromise the record when they access the data. This often leads to financial fraud and other problems.
Fortunately, blockchain technology mitigates this issue by introducing a decentralized network. Financial institutions can set up their database to have multiple access points available to a handful of trusted parties. If a party is compromised, other parties can still access and protect the database. Consequently, transactions are more secure.
Time and cost reduction
Today, most financial institutions depend on custodians, clearinghouses, and other intermediaries to complete various transactions. Banks pay these intermediaries for every transaction; thus, putting more burdens on the end users. However, blockchain technology can bring a change into this system by cutting out or reducing the need for third parties. By implementing blockchain technology, banks can get rid of transaction charges from intermediaries. They may also reduce the time required to complete each process. This makes transactions faster and more affordable for both banks and their clients.
Improved transparency
Due to its centralized database, the traditional banking system is less transparent as only limited parties can access information on all transactions. Nevertheless, blockchain technology can enhance the transparency of this sector. Basically, this state-of-the-art technology features a series of blocks of transactions linked together. Every block has data about previous blocks, allowing authorized participants to see all sets of information. Therefore, blockchain technology improves the transparency of the banking sector, ensuring that no party can hide the data of any transaction.
Streamlined financial processes
Loan origination, trade finance, identity verification, and many other banking processes are complex. Blockchain technology can simplify them through automation, making sure humans don’t have to execute these processes manually. As a result of this technology, banks can enjoy lower transaction costs, reduced paperwork, and better efficiency of their processes.
Better access to and control over assets
With the traditional banking system, it can be difficult for financial institutions to keep track of certain assets, especially when they move from one party to another. Luckily, blockchain technology has the potential to change this situation due to its transparency. The technology ensures that each party can monitor their assets as they move from one participant to another. This benefit extends to fraud mitigation as participants can confirm any changes before proceeding with the transactions.
Improved IPOs
Financial institutions are the backbones of initial public offerings (IPOs) across different industries. Blockchain technology can help these institutions to improve the processes involved in IPOs. Foremost, the technology can streamline the whole process, allowing brokers, investment bankers, and other stakeholders can carry out their roles quickly and easily. By improving the transparency of the process, blockchain technology can also encourage global investors to invest in the offerings.
Another potential benefit of blockchain technology in IPOs is increasing the speed of settlement and clearing. Unlike conventional IPOs that require many days for settlement, blockchain-powered IPOs can be completed within a few minutes.
Better user experience on banking apps
The integration of blockchain technology into banking apps can bring a massive transformation into the industry. This technology allows users to track their transactions in real time, providing up-to-date transaction status. Blockchain technology may also change login methods. With the aid of a decentralized login process, users enjoy more intuitive and appealing navigation. Blockchain technology can also improve privacy controls.
Smart contracts
Many transactions in the banking industry require various parties to sign contracts. However, manual processes and human disputes often cause an array of challenges in these contracts. Blockchain technology can take care of these problems through the use of smart contracts, which are self-executing agreements directly crafted into code. Different authorized parties can automate and start the contracts. The technology doesn’t only lower the need for manual processes but also reduces the risk of human errors.
Financial service inclusion
Although the banking sector is one of the widespread industries in many countries around the world, innumerable individuals are still underbanked or unbanked. This problem comes from lack of access to financial institutions, high banking charges, mistrust of financial institutions, lack of documentation, and lots more. Regardless of the reasons, blockchain technology can help to deal with these issues. Powered by blockchain technology, peer-to-peer transactions make banking accessible and available to several people without requiring the services of a traditional financial institution.
Despite the huge potential of the use of blockchain technology in the banking industry, many uncertainties still exist. Regulations, security, and implementation still pose huge challenges for several businesses. Regardless of these issues, blockchain technology will play a role in taking the banking sector to the next level.
