How Banks Can Use Blockchain Technology

Virtual currencies like Bitcoin, Dogecoin, and Litecoin are enjoying seamless functionality courtesy of blockchain. Blockchain features metadata detailing how and when transactions occurred. Startups are developing blockchain-based mobile apps to make it easier for people to transfer cryptocurrencies. The cryptographic security prevents tampering of information, allowing editing of only parts directly affecting you at the moment. Blockchain development has become a plan for financial institutions to look into.

Blockchain can help banks save over $20B every year. It eases and fastens transactions while minimizing the costs involved. Let’s dig deeper into how banks can use this technology to smoothen operations.

Asset Transactions

With blockchain, assets aren’t in a central place but spread across a distributed ledger system (DLT) supported by enhanced cryptography. It eliminates intermediaries, therefore lowering costs and minimizing the unstableness of the securities market.

Did you know that using blockchain technology for transacting assets can save about $17-24 million every year?

Asset buying and selling involve keeping track of ownership. Financial markets do tracking using complex exchanges, clearinghouses, brokers, custodian banks, and security depositories.

All these tracking systems use the old mechanisms involving lots of paperwork record keeping. With the outdated system involved, there are higher deception rates and errors.

When you are conducting asset transactions, your order gets relayed using numerous third parties. Consequently, ownership transfer becomes complex as each party has its truth versions and ledger.

Blockchain will provide a decentralized database for digital assets. The distributed system permits the transfer of asset rights using cryptographic tokens, which can represent them off-chain. Cutting out intermediaries minimizes exchange fees while accelerating the process.

Peer-To-Peer Dealings

These transfers allow you to transact money online from your bank account or credit card to another person. Many peer-to-peer transfer applications are available in the market currently but with several shortcomings.

For instance, some only permit transfers within certain geographical jurisdictions. Others don’t permit money transfers within the same country. Additionally, peer-to-peer services have higher commissions and may not be very secure in storing your sensitive information.

Blockchain technology enables you to decentralize peer-to-peer transfer applications. It enhances trust in transactions through collaboration, clever code, and cryptography. Also, blockchain features no geographical limitations, which allows you to make transfers to any destination.

Again, blockchain-based transactions occur in real-time. So the recipient of your money won’t wait for days to get the money. Peer-to-peer dealings take seconds to a few minutes, making them convenient for emergencies.

Consortia

Hedge funds involve fund managers with groups of investors with limited partnerships. Participants are typically traders and not just any kind of investor. They strive to maximize investor returns while lowering involved risks.

Traditional partnerships function under the control of a fund manager that works with a single entity. In traditional systems, members are limited to geographical constraints and the associated cross-border exorbitant charge rates.

Using consortia is one of the top methods banks are implementing as an enterprise solution for smooth cross-border transactions. Consortia have good core overage promoting massive scale operation and a broad network.

Joining a consortium is the perfect way small banks and those with limited knowledge of blockchain can gain massive benefits from the technology. Blockchain offers such institutions a marketing platform, allows them to exchange lots of information, and offers them a voice in the finance industry.

Decentralization provides an open platform allowing more strategists and investors to join. Banks act as either leaders or followers in consortia. With blockchain technology, leading member banks can persuade participants to remain part of a consortium.

Capital Sourcing

Using venture capital to raise money is difficult currently. Often the process involves entrepreneurs putting decks together. You have to conduct numerous meetings with partners involving lengthy negotiations on equity and valuation. After the tedious process, it is still not sure if you’ll exchange your company for payment.

Blockchain companies hasten the process by raising money using several alternatives. These include Security Token, Equity Token, and Initial Exchange Offerings (STOS, ETOs, and IEOs).

STO is the current most common option due to legal protection. Projects have to undergo due diligence to enjoy STO services.

Remittances and Settlements 

Blockchain enables a direct settlement of transactions and better tracking. You will typically take a few days to settle a bank transfer with the regular infrastructure.

Cross-border transfer of money is a significant challenge for most banks at the moment. This simple transfer needs to undergo several things like custodial services before reaching your desired destination.

For instance, if you make a bank transfer from Germany to the USA, SWIFT will process the payment order. Several intermediaries will then process the actual money, with each increasing the cost and transfer time. Intercountry remittances using the old technology involve a 10 to 35% cost.

Blockchain will enable transparent, public transactions eliminating the need for regulatory bodies such as SWIFT and custodial services. With blockchain technology, transfer costs are as low as 2%.

Loan Services

Traditional banks rely on credit reporting to underwrite loans. Blockchain facilitates peer-to-peer loans with more secure and quicker loan processes. Plus, it will permit complex loans that can approximate mortgages and syndicated loans.

Banks have to evaluate risks before processing your loan request. Risk evaluation involves looking at factors like homeownership status, credit score, and debt to income ratio. They have to access this information from credit agencies. In the USA, for instance, this involves three institutions.

Such systems may be harmful as they sometimes contain wrong information. Additionally, having lots of this sensitive information in few institutions increases its vulnerability. For instance, the hacking of Equifax exposed the credit information of more than 145 million Americans.

So, blockchain is excellent if banks want to combat security issues while having faster and cheaper loan processing.

Trade Finance

Did you know that numerous trade finance procedures still rely on paperwork like invoices, bills, and so forth? Multiple order management systems can conduct these activities online but take a long time. 

With the old banking methods, each person has to maintain a personal store of all transaction-related documents. Banks must continually reconcile these documents for accuracy. Should a mistake occur in any document, the mishap perpetuates to documents coming after that one. Blockchain will ease trade finance by eliminating bureaucracy and time-consuming paperwork. 

You don’t have to keep several copies of a document with blockchain. Information stays in a single digital document that updates in real-time and is accessible to all members.

Privacy in Identity Verification

Identity verification allows banks to conduct online money transactions. However, the process involves numerous steps that you may not like. These include authorization, authentication forms, and face-to-face checking. And you have to repeat these steps with each service provider to ensure top security.

Blockchain allows users to enjoy fast verification procedures as it permits secure reusing of identity verification with other services. Zero-Knowledge proof is a vital blockchain innovation that enhances the identification process.

With blockchain, you’ll be able to choose how to identify yourself and with whom you can share your identity. You’ll only have to register your identity once. Storing your identity information with blockchain technology also guarantees security.

Accounting

Accounting hasn’t digitized as fast as other sectors. One of the leading causes of this is the need to observe strict regulatory stipulations concerning data validity and integrity. 

The double-entry traditional bookkeeping method is upgradable by blockchain technology. You can add your business transaction in a joint register with other businesses instead of keeping separate receipts. All entries to the register then get distributed.

This way, there is better security and transparency in record keeping. Blockchain technology will ensure the verification of all transactions. Blockchain is also excellent when generating smart contracts for automatic invoice payments.

Payments

Banking institutions can establish decentralized channels to use new technologies to offer faster payments and reduce processing fees. For instance, blockchain needs only 2-3% of the funds on transfer while the old systems charge as high as 35%. It’s almost impossible to hack a transfer via blockchain because one won’t only have to interfere with the current transfer but all the transfers preceding the current one. 

With reduced costs and enhanced payment security, banks can bring new products to customers. This way, they can compete with fintech startups.

Blockchain also allows banks to reduce third-party verifications such as through Western Union or Swift. In doing so, it hastens standard bank transfers.

Final Remarks

Aren’t we all tired of the lengthy funds’ transfer procedures involved with the outdated banking systems? Streamlining the finance sector with blockchain technology is the only way banks can keep pace with virtual currencies.

Lower transfer costs, swift transactions,  better service provision to customers, enhanced security on sensitive information, and the list of blockchain merits still rolls on. With blockchain technology, your bank will undoubtedly enhance its services in both efficiency and magnitude. This is the best way your bank can compete favorably in the fast-changing finance industry.

“More than 40 financial institutions said they were working with blockchain [in 2015], and now other financial firms such as insurance companies are calling up asking if it’s too late to join the blockchain party.”

As told by one analysst to the Wall Street Journal in early 2016

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