10 Use Cases of Blockchain in Banking in 2022
Blockchain is already influencing the worldwide banking network, from making cross-border transfers speedier to eliminating costly middlemen. Let's dive into details.
Finance is likely the most significant use case for blockchain among the many others. The 2008 financial crisis, which had wreaked havoc on the world economy, served as the impetus for the invention of the technology, which took the form of Bitcoin. Because of the collapse of the old banking system, governments were forced to enact effective stimulus programs to support their economies and save failing banks.
Many of the flaws that the global financial crisis exposed are what blockchain intends to fix. In this article, we'll look at the use cases for blockchain in banking and explain why this emerging technology can assist in solving some of the industry's most significant problems.
Blockchain in Banking
Traditional financial transactions entail numerous manual operations. The mediators must carry out the necessary role. This complicates and increases the cost of the system. It increases the likelihood of errors and fraudulent conduct.
However, Blockchain technology converts every minus in the traditional method into a plus. It contributes to increased productivity by allowing for the speedier processing of digital documents and accelerating data development while improving security and transparency. Because blockchain employs a distributed ledger, it records all business transactions in a permanent, unbreakable chain. This aids in identifying and blocking unwanted interventions. It also decreases the possibility of data errors.
Blockchain technology is beneficial to more than just banks. However, it also benefits clients who use banking services. It offers excellent identity protection and document management. It also ensures the consistency of published customer papers. It also allows them to modernize and maximize their interactions with their customers.
How Banking Can Be Improved with Blockchain Technology?
The overall advantages of blockchain technology make it evident that the banking sector should ultimately be the first to adopt it. Almost every part of the banking sector may be enhanced by blockchain to increase its security and transparency.
Blockchain technology has global implications and can streamline trade by doing away with processes that rely on documentation. A public blockchain can be beneficial because any person does not own it, and all parties can access the data. Blockchain technology was only known to be used concerning digital currencies like Bitcoin or Ethereum. That has changed now that blockchain technology can improve several elements of banking.
10 Use Cases of Blockchain in Banking
Following are some use cases of blockchain technology in the banking sector.
It isn't easy to transmit money from one bank to another or from one country to another. Banks can utilize cutting-edge technologies to enable quicker payments by building a decentralized channel (cryptocurrencies).
Blockchain technology can potentially speed up payment processes while also lowering costs. Banks can minimize the demand for third-party verification by utilizing blockchain. In 2016, 90% of the European Payments Council members said blockchain technology might revolutionize the banking sector within the next ten years.
Clearance and Settlement Systems
Banks can use blockchain to settle transactions and track them more effectively than existing protocols like SWIFT.
Even the biggest banks in the world have numerous difficulties while transporting money. Even something as straightforward as a bank transfer must pass through multiple middlemen and adhere to regulatory requirements before it can be delivered.
Only payment orders are processed via the centralized "SWIFT" payment processing technique. Several middlemen are used to transfer the funds. These transactions are all expensive and time-consuming. Banks may be able to track all global transactions thanks to blockchain technology. To process and settle transactions promptly, banks can do without intermediaries and regulatory organizations.
Buying and Selling Assets
Blockchain technology reduces the asset exchange charge by removing middlemen and transferring asset rights. Studies and analyses claim that adopting blockchain to move securities can save global trade process expenses by more than $20 million yearly.
Buying and selling digital assets like stocks is difficult since it involves a lot of tracking which entity owns what. Asset sales and purchases in the past involved a complex network of exchanges and mediators. These transactions were all based on paper records.
It isn't easy to accomplish the same task electronically. Therefore, most of the time, buyers and sellers must rely on a third party to manage their paperwork. By preserving decentralized records on digital assets, blockchain technology has the potential to transform the financial sector.
Blockchain for Accounting and Auditing
Accounting is one area of internet banking that has advanced toward digitization more slowly than any other. Several regulatory standards affecting data validity and integrity must be addressed to digitize the accounting process. The accounting and auditing industry may undergo significant changes due to blockchain technology.
Blockchain technology, according to experts in the field, has the potential to streamline compliance procedures and improve bookkeeping processes. Businesses can add the data to an ordinary book rather than keeping separate records of transaction receipts. Every entry will be decentralized and open to all parties concerned.
As a result, the records will be safer and more accessible. Blockchain technology will serve as the virtual notary that authenticates every transaction.
Digital Identity Verification
Most businesses, banks, and financial institutions still use antiquated, manual document verification processes based on paper for customer ID verification. Customers are forced to switch to another company through a slow, complex process.
Thanks to blockchain integration, customers and businesses will benefit from a quicker, more secure, and effective customer verification procedure. The usage of client data for customer verification in other services by other firms will be made possible by blockchain technology.
Another area where blockchain development is poised to transform is the trade finance sector. Trade finance encompasses all financial activities associated with international trade and business. Did you realize that many trade finance activities still rely on paperwork like invoices, letters of credit, or bills today? Many order management systems allow you to accomplish this task online, which is time-consuming.
By eliminating time-consuming manual processes, paperwork, and bureaucracy, blockchain-based trade finance will streamline the trading process.
Consider the following example:
In traditional trade finance systems, each participant is responsible for maintaining their database of transaction-related documents. And all of these databases must be constantly reconciled with one another. A single error in one document may be replicated in other databases' copies of that document.
How does blockchain assist? There is no need to store several versions of the same document using blockchain. This is because the information can be combined into a single digital copy that is updated in real-time and accessible to all network participants.
Customers can use P2P transfers to send money online from their bank accounts or credit cards to another individual. There are numerous P2P transfer applications available on the market right now. However, they all have limitations.
Some, for example, only enable you to transfer money within a specific geographical region. Others prohibit money transfers if both parties are in the same nation. Furthermore, P2P services may demand high commissions and may not be secure enough to store critical consumer data.
Blockchain development can address all these issues. The technology will aid in the decentralization of peer-to-peer transfer applications. It is worth noting that blockchain has no geographical constraints, allowing for peer-to-peer transfers worldwide.
A hedge fund is a sort of investment partnership that includes fund management and several limited partners who are investors. However, such players are typically traders rather than ordinary investors. Hedge funds seek to maximize investor rewards while minimizing risk.
A decentralized crypto hedge fund provides an open platform for participation by additional investors and strategists. Traditional hedge funds are managed by fund managers who work for a single company. Such decentralization exemplifies blockchain's promise in the financial services industry.
Share Trading and Stock Exchange
Buying and selling stocks and shares has always entailed a slew of middlemen, including brokers and the stock market.
The traditional stock exchange process has many stages and bureaucracy, which can take up to three days. However, because blockchain technology is decentralized, it can eliminate all superfluous intermediaries and allow trading to take place on computers all over the world. There will be no more dedicated servers linked together in a network.
Trading transactions in blockchain eliminate information redundancy and hence enhance performance. As a result, minor transactions between traders can be conducted swiftly outside the blockchain, and only the final transactions are recorded on the blockchain, with no intermediary steps.
Borrowing and Lending
DeFi (decentralized finance), one of the biggest blockchain and banking ideas in recent years, aspires to alter several facets of conventional finance, including borrowing and lending. DeFi's objective is to increase the accessibility of financial services for retail customers, not to enhance the banking sector.
Blockchain technology in banking, however, can also be utilized to improve the lending and borrowing operations that banks support. Strong verification capabilities provided by the technology may lower the risk of defaulted loans. Blockchain can also verify that prospective customers are not dishonest or dishonest actors, strengthening banks' know-your-customer (KYC) and anti-money-laundering (AML) defenses.
Benefits of Blockchain Technology in Banking
The industry's increasing interest in blockchain and financial institutions is centered on the technology's fundamental advantages.
The financial sector is notoriously vulnerable to hacking. Its attack surfaces are broad, owing to proprietary banks managing centralized systems where a single point of failure can expose the entire system.
On the other hand, banks eliminate single points of failure using the blockchain's dispersed network. Every transaction in a blockchain ledger is subjected to a complex set of encryptions interconnected with the next. As a result, an immutable series of coded data "blocks" is dependent on the rest of the ledger's serial. It offers one of the most effective cyber-defenses against hacking and fraud in today's IT ecosystem.
Any transaction may be managed, approved, and logged instantly through the blockchain. This technology contrasts with today's typically laborious authentication, verification, and data-sharing finance workflows used by banking and finance professionals to provide services.
Transparency and Traceability
Blockchain, at its heart, is a digital recording mechanism. It provides unprecedented visibility into the whole life cycle of a transaction or value exchange within a bank's operations. It reduces the need for costly and time-consuming third-party verifications along the payment process or funds transfer.
Risk and Cost Management
Together, a secure, decentralized data infrastructure that streamlines transactions alleviates several of the leading security concerns for banks. Error and fraud rates fall, administrative costs fall, and the necessity for redundant storage of customers' sensitive financial data is nearly eliminated.
Future of Blockchain in Banking
According to banking experts, blockchain needs to meet several requirements to become a widely used technology in the industry. Banks must first build the infrastructure necessary to run a worldwide network using matching solutions to utilize blockchain fully. The industry will only be disrupted by blockchain if it is widely used.
However, the investment will yield tremendous rewards. Blockchain is anticipated to help banking institutions process payments more quickly and precisely while lowering transaction processing costs once deployed. Blockchain-enabled banking applications will provide a better client experience and aid traditional banking institutions in competing with fintech firms.
While blockchain was intended to be an alternative to traditional finance, it is now attracting interest from the financial organizations it was designed to compete with. After years of dismissing and mocking the technology, banks finally understand that blockchain's benefits cannot be ignored.
Many blockchain applications in banking provide opportunities to improve the sector's current processes and procedures. However, it is also conceivable that banks will employ blockchain solutions designed to live outside of the existing system in the future. If this occurs, the blockchain challenge to the sector will be a success.