Why are Banks Adopting Blockchain Technology?

Banking institutions across the globe have taken several moves towards digitalization-driven business models like mobile banking. However, when it comes to blockchain in banking, the efforts have been fairly sidelined. The hesitation that banks are showing contrasts the interest that the blockchain technology is getting across other industries. A sign of which can be seen in the fact that the technology is poised to grow from $4.9 Billion in 2021 to over $67.4 Billion by 2026. 

However, when you look at things from a bank’s angle, the hesitation makes sense. There are very few use cases of blockchain in banking and finance that have rolled out at a mass scale. There are also constant regulatory roadblocks that have been creating a barrier to entry for blockchain.

In spite of these challenges banks have started adopting the technology at a small scale. In this article, we are going to explore the growing role of blockchain technology in banking and the real-world use cases of the technology. 

Now, while we will spend this entire article exploring the benefits of blockchain in banking, it is important to know the issues in the current banking system. 

What is the problem with the present day banking system?

Banks have been in the picture for centuries and have been acting as the facilitator to multiple economic, financial activities which include lending, trading, transaction settlement, payment processing, etc. However, the longevity of the industry has made it stagnant leading to it becoming slow in terms of adopting change. 

In its current form, the industry is advancing at a constant speed due to the constant demand it has been witnessing, however it is too slow to innovate. For example, they still need a lot of paperwork, face security vulnerabilities, and have multiple time-consuming and expensive processes in place. 

Now that it has been established how banking systems require a change, it is time to dive into the blockchain applications in the banking industry. 

What are the different blockchain use cases in banking?

The use of blockchain in banking can be seen across a range of processes. Uses that make the industry decentralized. 

Payment transfer

Presently, trillions of dollars get made and wasted because of added fees and slow payments, respectively. For example, if you are in San Francisco and you send money to London, a $25 flat fee will be charged by both your and the receiving bank. 

Cryptocurrencies like Ether and Bitcoin are developed on public blockchains which anyone can use to send and receive money without any transaction fees and in real-time. Moreover, since the payment happens on a decentralized network, there is no need to verify the transaction, making the payment transfer faster and cheaper through blockchain in banking and finance. 

Settlement and clearance systems

An average bank transfer takes up to 3 days to settle. This is not just problematic for the consumers but also logistically difficult for the banks. A simple bank transfer today bypasses a complex system of intermediaries from bank to custodial service before reaching the recipient. Here is where blockchain in banking comes into the picture. 

Blockchain acts as a decentralized ledger that keeps a track of the transactions transparently and publicly. It means that instead of relying on custodial services, the transactions can be settled in the public blockchain. This is one of the key ways blockchain applications in banking make transactions speedy and simplified. 

Securities 

In order to buy or sell debt, stocks, or commodities, banks will have to keep a track of who owns what. To get this information, they connect with multiple exchanges, brokers, clearing houses, and the custodian banks, etc. The involvement of these parties added with the fact that there is a presence of an outdated paper ownership system makes the process slow and prone to inaccuracy and fraud. 

Blockchain technology in banking revolutionizes the system by building a decentralized database of digital and unique assets. Through a distributed ledger, it becomes easier to transfer the assets through tokens that represent the assets “off-chain”. The benefits of blockchain in banking work around the creation of tokenized security that carries the potential of cutting out the middlemen altogether and lowering the asset exchange fees.

Loans and credits 

Banks tend to underwrite loans on the basis of a credit reporting system. Blockchain in consumer banking opens up the scope of peer to peer loans – one of the most investment-friendly fintech sectors. 

Moreover, when a consumer has to apply for a loan, the banks evaluate the risk they will have to suffer in case of non-payment. They take this decision by looking at the credit score, ownership status, and the debt to income ratio. Information they get through credit reports – a centralized system which can be hostile to the customers. 

Blockchain in banking comes with an alternate lending system that provides an efficient, cheap, and secure mode of giving personal loans to the customers. With a decentralized registry of payment history, it becomes easier for consumers to apply for loans. 

Customer KYC 

The answer to how blockchain works is also the answer to the customer KYC lags in the banking domain. 

Banks, in several scenarios, can take up to 3 months to execute all the KYC proceedings that consist of photo verification, address proof checks, and biometrics verification. In addition to the time it takes to verify the customers, it also costs banks a lot to perform KYC. Blockchain technology in retail banking helps ease the KYC process. 

Now the use of blockchain in banking can be seen in how it stores the customers’ information on the blockchain. This enables the banks to access information related to KYC. An event that leads to personnel cost lowering by 10% that equates to $160 million annually. 

So here were the multiple roles of blockchain technology in retail banking. Now, as we mentioned in the beginning of the article, the adoption of blockchain in banking has been slow. But, there is an evident rise in the inclusion of technology in the sector. Let us look at some of the real world use cases proving it. 

[Also Read: Blockchain in FinTech: A Catalyst for Disruption in Finance World]

What are the different blockchain in banking case studies?

Blockchain is fast acquiring more support with big banking names showcasing interest in the technology.  Let us examine some of them below. 

J.P. Morgan 

On 12th April, 2021, J.P. Morgan stated that they are using blockchain for improving money transfers. They are using the technology for lowering the payment processing and the verification time needed for large payments. 

Swedish Central Bank 

The bank is experimenting with a release of its own digital currency known as e-krona. Based on R3 Corda distributed technology, the bank has taken a bold step towards the creation of a country-wide usable cryptocurrency.

HSBC 

The bank is using the R3 blockchain platform for enabling Digital Vault – a custody blockchain platform for storing digital assets. The technology helps with lowering the cost of their custodial service to a huge extent. 

Key takeaway

With this, we have looked at the many roles of blockchain technology in the banking sector. It is undeniable that the technology is bringing a lot of innovations in the sector around lowered transaction cost, expedited transaction processing, and better data verification. 

But for a bank to truly become a name in the future of blockchain in banking phenomenon, they will have to partner with a blockchain development service provider. A service provider that best understands the multi-faceted approach of integrating the new-gen technology in the banking domain. We can help. Get in touch with our blockchain experts.

THE AUTHOR

chirag

Blockchain Evangelist