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Why the banking industry is so interested in Blockchain (and how it can affect you)

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Blockchain in Banking - IIB Council Blockchain Blog

Darwin populated the idea of ‘the survival of the fittest’ in the natural order of the world, but little did he know that this ideology will define and reshape business enterprises forever.

Every new technology brings new advantages, making its predecessor obsolete.

Blockchain technology is the latest contender to make rounds in the business world, poised to do what the internet did for personal communication and information publishing/sharing industry.

Blockchains gained attention after the launch of the first cryptocurrency, Bitcoin, whose sole purpose was to eliminate the modern incumbent financial intermediaries and facilitate peer-to-peer transactions without the involvement/need of financial institutions.

Faced by technology that could potentially eliminate the need for banks, the financial industry retaliated by adopting the underlying technology of cryptocurrencies, aka blockchain. Let’s find out how banks are moving towards blockchain technology, and how it can help them become more efficient, transparent, and cost-effective.

Major banks are investing heavily in blockchain

Leading international banks have shown growing interest in blockchain implementation and third-party investments. Bank of America, one of the largest American banks, leads the pack in terms of the highest number of blockchain-related patents, with the latest being in cash handling and management.

Goldman Sachs has moved one step further with Circle USD Coin, and the bank had plans to launch a crypto trading desk, which was later reversed for regulatory reasons. In addition to implementing blockchain technology, Goldman Sachs has made significant investments in third-party blockchain solutions, like the one in enterprise blockchain startup Axomi and blockchain payments startup Veem.

JPMorgan is another major bank ready to experiment with blockchain technology. It launched its own cryptocurrency JPM coin for payments, primarily for institutional clients at the moment. In addition to these banks, financial institutions from around the world are experimenting with blockchain technology in one way or the other.

How blockchain technology is disrupting the banking industry

Unlike the first-generation online banking infrastructure that merely replicated offline processes into online portals, blockchain technology holds the potential to introduce real innovation in the current legacy banking landscape. Let’s find out the impact of blockchain technology in different banking verticals starting out with payments!

Payments

One of the primary areas of interest in blockchain technology is its ease of sending and processing payments. Unlike the traditional banking infrastructure, which could take up to a week to settle payments, blockchain technology facilitates instant payments. Additionally, it removes intermediaries and their associated fee from a financial transaction. Through appropriate blockchain training, a handful of employees could manage the entire payment division, which would otherwise require multiple teams; thereby cutting the labor cost in financial transactions. JPM Coin is an excellent example of traditional financial players using blockchain technology for payments.

Instant settlements

If you have ever done an online monetary transaction, you already understand how cumbersome it could get to wait for settlements. In some cases, it could take up to 2 to 3 days for interbank transactions. What you might not know is that to process this transaction, your bank connects with the receiver’s bank through multiple intermediaries and third-party payment networks, with every party charging a fee for its services. Blockchain technology eliminates this entire intermediary network and provides instant payment settlements. Furthermore, your funds are visible throughout the transaction, unlike the lack of transparency in the traditional payment settlement network.

Security threats

The global business landscape is going digital at a never-seen-before rate, and there has been a proportional growth in the instances of digital hacks or threats undermining the operational efficiency of businesses and banks alike. Infamous hacking incidents on Goldman Sachs, Bank of Montreal, Equifax, and Bank of Bangladesh have exposed the crippling security infrastructure of modern financial institutions. Furthermore, it’s not just banks, but technology firms such as Adobe and RSA Security have been a victim of cyber attacks too.

Blockchain uses cryptographic encryption to fend against cyber attacks. Additionally, its decentralized nature, providing multiple strongholds, makes it nearly impossible to overpower an entire network. Through the implementation of blockchain technology, banks can eliminate most of their security concerns. In order to maintain operational privacy, banks can look into privacy protocols such as Enigma from MIT or z-STARKS/SNARKs.

Cross-border payments

The cross-border payments segment is one of the fastest growing subsets of the financial industry. The surge in eCommerce and globalization have catalyzed the cross-border payments market, with banks dominating up to 95% of all the cross-border transactions. However, the current cross-border payment infrastructure is workable at most, fret with issues like lack of transparency, high fees, and delays in payments. Blockchain technology is capable of not only providing instant settlements for cross-border payments, but it can substantially lower the cost of these transactions. Ripple is one of the major enterprise blockchain solutions facilitating cross-border payments at a fraction of the cost of the traditional service providers. The blockchain company offers multiple products for cross-border payments, including xCurrent, which facilitates instant cross-border settlements; RippleNet, which has over 120 banks and financial institutions in its network; and xRapid, an upgrade of xCurrent for handling liquidity problems. Ripple is not the fintech company working in this direction. Several financial institutions are working with third-party or in-house certified blockchain professionals or experts to improve their cross-border payment facilities.

Record storage and maintenance

The blockchain technology can help financial institutions save billions of dollars annually on their record storage and maintenance expenses. By some estimates, the banking industry could save up to $12 billion annually in record storage itself. Additionally, the paperless, digital nature of blockchain can eliminate roughly 60% to 70% of the record management costs of financial institutions. Blockchain also eliminates losses pertaining to natural disasters or human errors that could affect paper-based records. Several companies offer blockchain certifications aimed at training professionals on storage management using distributed ledger technologies. We already looked at the Bank of America’s patent application for record management using blockchain technology. Interplanetary File System (IPFS) is another promising solution providing blockchain-based storage services, creating an open, distributed web.

Conclusion

Blockchain technology addresses a significant operational and efficiency gap left by traditional financial institutions. It holds the potential to transform P2P, B2B, and B2C financial industries, and banks must incorporate blockchain technology to stay relevant to their customers.

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