8 ways blockchain technology can transform banking in the future

89
Blockchain technology concept

It is no secret that blockchain technology has garnered considerable recognition worldwide. According to Statista, global spending on blockchain solutions is expected to reach around $11.7 billion in 2022 [1]. Global spending on blockchain solutions was less than $1 billion six years ago. Pretty impressive right? 

Over the past few years, interest in blockchain technology has accelerated rapidly, especially in developed nations. Many advocates of blockchain technology believe that the technology has the potential to transform healthcare, supply chain management, and banking. While that may be true, blockchain has not yet lived up to its expectation. That said, things are heading in a positive direction, especially in the U.S. and the United Kingdom. 

Governments across different parts of the world are becoming increasingly warm toward blockchain technology. Thus, there couldn’t have been a better time to understand and investigate the scope of blockchain in different industries. Today, we will shed light on the potential impact of blockchain on banking and whether it has what it takes to disrupt the global banking sector. 

Without wasting much time, let’s dive straight in. 

YOU MAY ALSO LIKE: 5 important blockchain trends for 2022 and beyond

Blockchain technology in banking – how are banks reacting?

While the traditional banks ignored the early alarm bells, they cannot escape from blockchain anymore. In fact, many notable banks have taken notice of the technology and also finding new ways to infuse this innovation into age-old banking practices. 

Here are a few banking institutions that have expressed interest in blockchain, and also pursuing the possibilities of working with it. 

  • BNP Paribas, the popular French investment bank was among the first institutions to investigate the possibility of using blockchain technology for order processing and more. 
  • JP Morgan is another well-known financial entity that is taking proactive measures to adopt blockchain, attracting deals worth around $300 billion. 
  • NASDAQ, Inc., the technology-focused stock exchange is deploying blockchain to minimize time, costs and friction points across capital markets. 
  • Banco Santander (SAN), a company headquartered in Spain, is working internally to create blockchain-based solutions that will lower its costs by $20 billion annually by the end of the decade.
  • Blockchain technology is viewed as “transformative” by Barclays (BCS), which is experimenting with it both internally and through partnerships with start-ups in the context of financial services.
  • UBS, the Swiss investment bank has taken things up a notch. According to reports, UBS is creating its own standalone blockchain lab to perform proprietary research on the company. 
  • According to data released, Citigroup Inc. (C) has worked on at least three separate blockchain-based projects, including CitiCoin, its own cryptocurrency.

Looking at these examples, it is very clear that blockchain in banking is becoming increasingly popular. These developments are a testament to the fact that banks are willing to work with blockchain, paving the way for better and improved banking experiences for customers worldwide. 

Blockchain technology in banking – what can we expect?

Moving forward, we expect many financial services companies to collaborate with regulators to create a clear path for blockchain technology to flourish. In addition, we also expect to see overall progress in standardized solutions that will help the financial sector to reap the benefits of blockchain technology. 

In this section, we will talk about how blockchain can disrupt the different areas of banking in the upcoming years. 

1. Person-to-person money transfer 

A woman using a payment app on her phone

We are well and truly living in an era wherein digital technologies have taken over various aspects of our lives. Who would have thought sending money with just a tap of a button would be possible a couple of decades ago? Today, sending and receiving money is easier than ever before thanks to person-to-person money transfer platforms including Google Pay, PayPal, Wise, Revolut, and more. Nearly 108.9 million people in the U.S. alone use money transfer applications [2]

While the popularity of such applications continues to swell, there are a few drawbacks. For instance, many applications are functional only in a particular region or country, preventing users from other geographies to send or receive money. While there are applications such as PayPal that address this issue, blockchain could prove to be a game-changer in this regard as there are no geographical limitations. Crypto coins are largely used to make person-to-person transactions worldwide. However, one needs to know the exchange rates and also understand that one could lose some money during this process. 

2. Blockchain in banking for international money transfers

Many banks are now using blockchain more extensively to make international money transactions. This is because using blockchain is significantly more cost-effective than using conventional techniques. How cheap is it? In contrast, the overhead charges associated with traditional methods like Western Union, Swift, etc. can range from 5 to 20% of the total amount. However, the overhead costs associated with blockchain hover between 1-3%. 

Another benefit of blockchain is that foreign payments do not need any third-party authorization, which accelerates the process significantly compared to conventional money transfer techniques.

3. Account deposits and balances

Here is an interesting piece of information you should know as a customer. We are all aware that customers turn to banks to deposit money in either their current or savings accounts. However, it is important to understand what happens with your money after you make a deposit. 

In most cases, banks loans out the deposited money through fractional reserve banking. Therefore, the balance reflected in your account when you check the balance is not held by the bank. 

In reality, a bank run occurs when too many clients attempt to withdraw their money at once, but there isn’t enough money to distribute. Therefore, a bank account balance is essentially an accounting entry.

However, blockchain technology in banking can help us overcome this problem. A blockchain is a ledger that records accounting transactions. Consequently, bank accounts may eventually be represented on blockchains, making them more accessible, safe, and affordable to maintain.

4. Secondary market trading

Clearing and settlement of deals are necessary for anything from the simplest purchase of company stock to the most complicated over-the-counter currency swap. It is mandatory to have verifiable ownership transfer and recording of the asset or contract being transferred. Exchange fees and clearing fees are now included in the price of each trade and, given the volume of orders, can grow significantly.

All kinds of asset classes, including stocks, bonds, derivatives, commodities, and real estate, would experience an important reduction in transaction costs and clearing costs if the ownership of shares could exist on a blockchain and any change in ownership could be instantly validated and confirmed.

5. Online verification and identification

No financial transaction may be completed online without establishing an online identity and fool-proof authentication. This is true for every service provider a customer may choose within the banking and financial sector. Blockchain can centralise the online identity verification process, allowing people to share their identity with whichever service provider they choose after just having to authenticate it once using the blockchain.

Users can also choose from different identity verification techniques, including user authentication, facial recognition, and so forth.

6. Blockchain in banking to offer credit reports

A bank official going going through a customers credit report

How do people secure loans? They need to have a good credit score and a credit report to back that up. Only then a bank is likely to sanction a loan. Besides, many third-party credit companies offer credit reports to medium and large-scale businesses. However, the services of such third-party companies are largely restricted to medium and large-sized firms, leaving individuals and smaller companies in a spot of a bother. How you may ask?

Typically, it takes some time for banks to evaluate a credit report before sanctioning a loan deal. This is where blockchain in the banking sector can help. This innovative technology accelerates and streamlines the entire process. In addition, blockchain can also ensure that credit reports are transparent, error-free, and can easily shareable with banks. 

7. Tracking transactions

Blockchain is also very beneficial in transaction tracking, which is a vital aspect of banking. Banks and financial institutions can use blockchain technology to build a centralised, highly secure common register of transactions. There would be no data duplication and there are fewer risks of forgery because of the central availability of all transactions. Blockchain, according to some banking experts, is useful in speciality fields including interbank transfers but is not well suited for consolidating many transactions.

8. Crowdfunding initiatives with blockchain

Many people utilise crowdfunding to launch new enterprises and for other purposes. This entails soliciting donations from the public online or offering shares of the company in return. Many companies can use blockchain technology to provide Initial Coin Offerings, which is the crypto equivalent to Initial Public Offering for businesses. However, one drawback of initial coin offerings is that they are extremely risky because of the lack of regulations and laws around this subject.

Parting notes – blockchain has potential, banks should not ignore it

 As seen in this article, blockchain has the potential to transform one of the oldest traditional sectors in the world. However, for that to happen, government organizations and experts in the financial technology (Fintech) sector need to come together to ensure the seamless adoption of blockchain technology. 

That being said, there is a lot of work that needs to protect consumers and increase awareness related to blockchain, and the risks involved with this novel technology. 

As of now, all we can do is wait and see whether blockchain in banking will gain mainstream recognition or it will cement a place in a few specific areas of banking. 

YOU MAY ALSO LIKE: 7 undeniable benefits of blockchain in big data 

Continue reading iTMunch to read similar articles on the blockchain, cryptocurrency, and other innovative technologies. 

Feature Image Source: Image by Maicon Fonseca Zanco from Pixabay

Image 1 Source: rawpixel.com

Image 2 Source: rawpixel.com

Sources:

[1] (2019) “Worldwide spending on blockchain solutions from 2016 to 2022, by region” Statista [online] Available from: https://www.statista.com/statistics/800561/worldwide-blockchain-solutions-spending-by-region/ [accessed December 2022]

[2] (2022) “22 Mobile Payment Statistics Detailing the Industry’s Growth” MoneyTransfers.com [online] Available from: https://moneytransfers.com/news/content/mobile-payment-statistics [accessed December 2022]

 

Previous articleMagic Eden will now accept NFT royalties to compensate creators
Next article3 Key Takeaways From Programmatic Advertising
Karandeep is a technical content writer based out of Pune, a city in India that is also known as the Oxford of the East. His journey with writing started in 2014 when he decided to try his luck in a gaming startup as a Content Developer. Since then, he has written on a wide range of topics within the gaming and the tech space. Apart from his love for gaming, Karandeep is keeping tabs on the hottest trends in the tech industry. After completing his Bachelors in Business Administration (BBA) from Symbiosis International University, Pune, he worked as an intern in an NGO that focused on urban development.
Read More