Blockchain in Banking – Concept, Impact, Development, Potential & moreLast Updated Date: Nov 16, 2022
Know everything about the impact of Blockchain in Banking Industry. Technology is one of the biggest threats in the banking sector today.
Traditional banks start noticing some of the technological changes from Google, Apple, eBay, Amazon.com, and from new financial technology including (FinTech) start-ups.
Today, a disruption for the financial industry comes from applications featuring Blockchain technology.
It includes tamper-proof systems of distributed ledgers, which comprise of cryptocurrencies, including Bitcoins.
Almost all large financial institutions, including investment banks, stock exchanges, and central banks begin to accept and work on their Blockchain technology.
In order remain competitive in the industry. Besides the challenges to increase profitability, continuous innovation in Blockchain technology is most likely to offer investment banks a lifeline.
No doubt the new technologies sound quite exciting. But some analysts criticize the potential of the internet as they say there some loopholes hidden.
A catchphrase for disrupted ledger technology is Blockchain. The new technology allows multiple parties to share access to the same data virtually and simultaneously.
Introduction to Blockchain Technology in Banking Sector
As of now, data reconciliation is at the heart of almost all types of business models. It is mainly because everyone maintains their own data.
The components of Blockchain technology, including cryptographic hashes and consensus building, when combined tend to create a new potent form of data.
Barely there are any days when we don’t hear about a recent announcement. Stating how Blockchain technology is changing the face of the banking sector.
When shared databases and cryptography are combined under the Blockchain technology it allows multiple parties to have simultaneous access.
And the access allows users to update the digital ledger under the technology. Users don’t have access to change it later on.
Initially, the technology was treated as skepticism by banks as Blockchain features cryptocurrencies, including bitcoin.
One of the hottest buzzwords in the sector is Blockchain. Back in 2017, Blockchain technology raised at least $240m of venture capital money in the first six months. And most of it was from Banks.
Almost all new ventures by banks include setting up the consensus of the like-minded companies, or they also have proof of concept feature to test the potential of modern technology.
In the majority of the cases, it is relatively little to show when it comes to commercial significance.
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Impact of Blockchain in Banking
All we can say is that retail banks are working hard to develop digital banking businesses by introducing mobile banking apps.
They also strive to become expert providers of data-based services. Almost all banks have become sidelined in terms of Blockchain technology.
The hesitation shown by retail banks on Blockchain technology is seen contrasted with efforts put elsewhere.
Nearly all government banks, infrastructure providers, and investment banks today are experimenting with the technology.
It is because they feel the financial ledger being shared will help in minimizing the costs and in enhancing transparency.
For example, the investment banks envisage various features, including post-trade processing, execution, and settlement are quick.
It also removes several middle offices and back-office processes. The technology also focuses on the potential of smart contracts to enhance automation.
In the Blockchain technology niche, large investments are made. Recently, across almost all industries, venture capital funding has crossed $1 billion.
With fintech, wholesale banks have also incorporated collaborations, hackathons, and innovation labs.
No doubt, caution is still understandable as none of the financial industry’s initiatives have rolled out at a grand scale.
And the barrier still prevails as there are strict regulatory requirements in the banking sector.
Besides all the concerns, some of the retail banks are even taking some chances and dipping their toes in the Blockchain technology ocean.
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Potential of Blockchain in Retail Banking
The enthusiasm for blockchain technology among the capital markets, wholesale banks, and infrastructure firms is not same in the retail banking sector.
Yet experts trust that retail uses could be deployed at least as they offer the most in key strengths. It includes data handling, disintermediation, and trust.
The areas which are most likely to see an effect under the Blockchain technology are:
Clearing and Settlement
Though it is not the sexiest area of banking but the tangled web that records transactions of loans and securities.
But experts have suggested that some of the largest investment banks could save at least 10 billion. To enhance the efficiency of settlement and clearing.
Currently, the depositary trust is managed through a plethora of messages besides manual reconciliation.
Above all we can there is a considerable opportunity laying out there for Blockchain to revamp the entire banking industry.
Australian Securities Exchange is one of the finest examples of updating. As it aims to restructure the majority of post-trade clearing and settlement areas under the blockchain system.
No doubt, there are a plethora of designs available. Still, one thing experts believe in is that the industry is most likely to coalesce around one solution that few years down the line.
The winning tool will become quite clear, and you will see the real niche behind it. Well, bureaucracy and inefficiencies are out of sight as of now.
Almost all central banks across the globe are looking forward to exploring the shifting part’s potential with regards to blockchain technology. Or they might even consider using Cryptocurrencies.
It is mainly a response to a challenge that digital currencies, including cryptocurrencies like bitcoins, can pose some problems to control of monetary policy.
Additionally, central banks are also starting to see the fantastic benefits of blockchain technology.
On the other hand, commercial banks are not showing great enthusiasm as they are waiting for the central banks to take the lead first.
No doubt it might take some years, but a few years down the line, central banks would be rolling out their digital currencies.
Yet, trade finance is based on paper mostly, and it includes letters of credit or bills of lading. One can use fax or post to send it across the world.
The majority of the people today believe that Blockchain technology is one of the most common solutions, as many parties need access to similar functions.
Above all, if banks choose to act alone, then they won’t be able to achieve the benefits of Blockchain technology.
A prominent area for blockchain technology is the trade chain. Thus, if you want to digitize the bill of lading process, then all the parties need to come together to make it successful.
It is essential for banking to verify its customers and counterparties. If you fail to do so, then the lender could quickly lose their roles as people wouldn’t trust them as guardians of their money.
For years now, banks have been striving hard to setup shared digital utility. It is done to keep a record of the client’s identities, and also keep them updated.
The banks are responsible for checking if the clients hold any criminal records, and regulators Offine the banks if they find it wrong.
Generally, consumers use banks to hold deposits in both checking and saving accounts. The Blockchain plays a crucial role here as it is a ledger that mostly represents the accounting entries.
Hence bank accounts using technology are both more accountable and sensible.
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Conclusion – Impact of Blockchain in Banking
Thus, financial sectors need to take Blockchain technology more seriously as it is most likely to disrupt the traditional banking industry.
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