Why are Big Banks Adopting Blockchain Technology?
In the 21st century, blockchain is on a mission to revolutionize the traditional modes of functioning in every industry it operates in and generate new avenues altogether. It transforms everything from payment transactions to funding rounds in the private market. However, it also makes us ponder the elimination or replacement of the traditional banking industry.
Blockchain technology has gained a lot of attention over the last decade that has routed towards the mainstream conversation of banking experts and investors. It enhances the speed and efficiency of transactions and could play a positive role in various sectors, including banking, commerce, healthcare, insurance, and government.
Even the statistics reveal the worldwide spending on blockchain solutions in 2021 surpassed USD 6.6 billion, with the banking sector achieving the highest distribution of blockchain market value. Thus, there is no doubt that blockchain for the banking industry is going to be the next big breakthrough for the entire banking sector.
What problems are faced by the present-day banking system?
The present-day banking system faces many problems, so let’s have a look over a few of the major ones to get a broader perspective:
- Customer Retention
According to a global survey by Accenture Financial Services of approximately 33,000 banking clients from 18 regions, customer service fosters loyalty, yet the existing system falls short in this area.
2. Outdated Mobile Experiences
Although most of the banking organizations have developed their own banking app so that customers can enjoy all the benefits sitting at home at their comfort, still that experience isn’t much sweet as customers are facing many issues using these apps.
3. Security Breaches
It is not new to read and hear about the security breaches happening in the banking sector, as these banks are not spending enough amount of money on updating their technology and security on a broader scale.
4. Continuous Innovation
In order to be successful in any business and ensure that things go smooth, innovation is one of the essential key factors. But similar to the case with security breaches here, organizations also need to spend a significant portion of their budgets to be in the race.
5. Changing Business Models
Traditional sources of banking profitability are under strain as the cost of capital rises, interest rates remain low, return on equity declines, and proprietary trading declines. And in addition to this, investor expectations have remained unchanged, which is building a huge pressure on the entire banking sector.
Thus, it is essential to upgrade the current banking systems with something solid that can keep them in line with the rapid pace of technological innovations and the ever-decreasing customer patience. Currently, the only visible option that can take up this enormous task is using blockchain for banking.
What are the benefits of blockchain in the banking sector?
Blockchain technology has a massive opportunity to disrupt the $5T+ banking industry by disintermediating banks’ critical services. Thus, let’s have a look over some of the blockchain use case for banking:
Payments
Banking systems are prone to the late transfer of payments. The present model is habitual of slow turnaround and high fees that delay the payments. Even though payment transfer is a highly profitable venture for banking systems, people face barriers regularly when transferring via banks.
Blockchain powers cryptocurrencies that help users to send and receive money quickly. As cryptos are present on the public blockchains, they cut down on the need for trusted third parties to verify transactions. The use of blockchain for payments in the banking industry will speed up the entire process and provide affordable, fast, secure, and borderless payments.
Clearance and Settlement Systems
The transaction settlement system is so slow that even your e-commerce parcel will travel to your home, but an average bank transfer will be late. If it’s not a nightmare for a consumer, we don’t know what is. Given that the funds are transferred from one bank to another, you must bypass a complicated system of intermediaries before it ever reaches any destination.
However, blockchain in banking allows for near-instant settlement as it maintains a decentralized ledger of transactions (DLT). The distributed ledger keeps track of all transactions, which anyone can view on a public blockchain. While a DLT will help reduce operational costs, an atomic transaction will instantly process at meager fees.
Fundraising
Are you still planning to go into an arduous process of raising money from venture capitalists?
It kills a lot of time and requires entrepreneurs to sit through countless meetings with partners and endure lengthy negotiations in the hopes of gaining some funds.
It seems excruciatingly complex and mops up precious time that could be better spent honouring your idea.
Blockchain technology transforms this scenario by allowing companies to raise funds via initial coin offerings (ICOs). The projects sell tokens to investors in exchange for funding by shortening the conventional fundraising process. Also, ICOs occur online and allow anyone to invest. On the other hand, it also gives control to the fundraisers to only allow specific parties to participate in such investment processes, thus enabling higher control over the ownership of your company.
Asset Class
Financial markets have many asset classes that tie-up with brokers, exchanges, central security depositories, and custodian banks. A complicated process makes the system slow, outdated, inaccurate, and prone to deception as it involves multiple intermediaries.
Blockchain for the banking industry will revolutionize financial markets by creating a decentralized database of digital assets. It helps to transfer the rights to an asset through cryptographic tokens called “off-chain.” Thus, blockchain helps cut out intermediaries, lower exchange rates, provide access to global markets and create more efficient, interoperable capital markets.
Trade Finance
Trade Finance helps mitigate risks, extend credit, and ensure a seamless process for traders to execute international trade. Although it is a crucial part of the global financial system, it operates on antiquated, manual, and written documentation. Hence, it suffers from logistical setbacks due to archaic, outdated, and uneconomical physical documentation processes.
Blockchain for banking enables companies to streamline and simplify the complex world of trade finance, saving importers, exporters, and financiers billions of dollars every year. It helps provide greater visibility into shipments moving through their pipelines and more delivery assurance. Also, smart contracts allow to set up rules that would ensure automatic payments and cut out the possibility of missing, lapsed, or repeatedly mortgaged shipments.
Real-world applications of blockchain in the banking sector
Blockchain rapidly expands its sector and captures banks’ interest with its revolutionary technology. Thus, let’s examine some of the real-world examples of blockchain technology.
Goldman Sachs
It is one of the leading U.S. investment banking institutions that has set up an educational microsite to explain the benefits of blockchain technology in banking. Goldman Sachs is one of the investors behind the USDC, a stablecoin pegged against the U.S. dollar. It allows them to move vast sums of money globally without worrying about crypto’s volatility.
J.P. Morgan
Last year, J.P. Morgan stated that they are using blockchain for banking to help improve money transfers. It allows the bank to reduce the verification and payment processing time for large payments. They use Liink, a blockchain application, to enable financial institutions to make secure peer-to-peer data transfers with incredible speed and control.
Wrapping Up
Blockchain for banking has the potential to innovate several aspects by accelerating transaction clearing and reducing transaction costs. We also need a proper legal framework to allow decentralization flow in the economy. However, disruption doesn’t happen overnight, and many blockchains in banking have yet to be perfected or widely tested.
For a bank to digest the essence of blockchain technology, they would also have to partner with a blockchain development service provider that will implement the tech stack suitable for the current generation.
Reach out to our experts to discuss your requirements for the blockchain development company.
