The global financial system is one of the most popular sectors that could be benefited through the application of blockchain technology. Operating on the basis of highly dependent manual networks, the banking and finance sector is prone to errors and frauds that could lead to a crippled money-management system. According to Global Fintech Report 2017, 77% of fintech institutes expect to adopt blockchain technology as part of their production system or process by 2020.
According to a claim by the Harvard Business Review, blockchain technology will do to banks what the internet did to media. When it comes to banks and financial organizations of this day, blockchain technology has the potential to solve a lot of problems. Blockchain technology possesses all the attractive characteristics needed by a reliable technology involving money matters. It is safe, secure, decentralized, transparent as well as relatively cheaper.
Blockchain technology provides a very high level of safety and security when it comes to exchanging data, information, and money. It also allows users to take advantage of the transparent network infrastructure along with low operational costs with the aid of decentralization. These characteristics make blockchain technology reliable, promising and in-demand solution for the banking and finance industry.
Applications of Blockchain Technology
A centralized database system is vulnerable and highly prone to cyber attacks as the single point of failure, such systems can be exploited by hackers. Once a hacker gets access to such a system, it is a child’s play for him/her to take the money. This leads to the need for more secure systems that are strong enough to avoid such attacks.
Enter blockchain technology, a secure, non-corruptible technology operating on a distributed database system. Since blockchain technology is distributed, there is no chance of a single point of failure. Each transaction is stored in the form of a block with a cryptographic mechanism which is extremely difficult to corrupt.
Know Your Customer (KYC)
According to a Thomson Reuters Survey, the overall estimated expenditure of AML and KYC processes ranges from $60 million to $500 million yearly. These customers due diligence regulations are performed in order to reduce the money laundering as well as terrorist activities.
With the adoption of blockchain technology, the duplication of efforts would be eliminated. Moreover, all the updates of clients’ will be to all financial institutions in near real-time. This would result in the reduction of administrative efforts as well as costs for compliance departments.
A smart asset tracking system for the banks and financial institutes competing in the current times holds a lot of scope in the competition. A bank with a rich data set can turn this data into valuable information for its clients with the aid of blockchain technology.
A smart contract is a self-executable piece of code that runs when certain conditions written on it are completed. It is helpful in increasing the speed and simplifying complex processes. Smart contracts will also ensure the transfer of accurate information as the transaction will be approved only if all the written conditions of the code are met. Moreover, as these terms are visible to all the parties involved in the transactions, the chances of error at the time of execution are dropped drastically.
Trade finance is considered one of the most useful applications of blockchain technology in the banking sector. All the involved parties such as a complex transaction can be on-boarded on a blockchain network and the information can be shared by exporters, importers, and banks on one common distributed ledger. Once certain specified conditions of the deal are met, the smart contracts will automatically execute themselves and the respective parties can view all the actions performed.
According to sources, an Israel-based start-up along with Barclays have successfully executed a trade transaction that would normally take 7 to 10 days in just 4 hours using blockchain technology. When compared to the existing infrastructure, the use of blockchain technology can reduce costs dramatically relating to licensing, ticketing as well as other overhead charges.
Despite the strict jurisdictions around the banking sector, the financial institutions have started to realise the potential of blockchain technology seeing the popularity of cryptocurrencies in the current markets. The big giants in the banking sector have started conducting the tests for finding out the possible use cases of this decentralized technology for their business processes.
Moreover, some of the organizations are also investing heavily in such researches and tests conducted by startups to develop blockchain technology-based solutions. With blockchain technology entering the current scenario, a lot of problems could be solved while making the system more transparent, easy to access and reliable.
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