Benefits and Examples of Blockchain in Banking

Of all the many applications of blockchain technology, finance is undoubtedly the most prominent one. The 2008 financial crisis, which had decimated the world economy, served as the impetus for the creation of the technology in the form of Bitcoin. After the collapse of the old financial system, governments were forced to implement massive stimulus plans in order to support their economies and save failing financial institutions.

Many of the flaws that were made public during the global financial crisis are intended to be addressed by blockchain technology. This article will look at blockchain’s applications in banking and explain how and why this emerging technology can help ease some of the industry’s most pressing problems.

Issues Facing the Banking Industry Today

The banking industry has been serving as a facilitator for a wide range of financial and economic activities, such as trading, lending and borrowing, transaction processing and settlement, underwriting, and so forth. However, this industry has become stagnant, thus, taking a long time to adjust to the ever-changing realities of the digital economy.

According to a study by Deloitte, the finance industry loses billions of dollars a year due to global payment processing, growing expenses, and a substantial increase in cyber attacks. Blockchain technology, also known as distributed ledger technology (DLT), can enhance conventional banking practices, such as improving international payments, securities trading, loan offerings, credit monitoring, and fundraising. In order for banks to stand out from the heated competition in the banking industry, they must adopt blockchain’s immutable smart contracts, real-time finance tracking, and dispute resolution technologies. 

Benefits of Blockchain in Banking

Blockchain’s ledger technology has the ability to process bank payments in a timely and economical manner, serve as a tool for monitoring money laundering, and even provide substitute methods for determining trustworthiness.

Implementing blockchain technologies can help advance the banking sector. Here’s what blockchain in banking can bring to the table.

Cost reduction

Many financial institutions still communicate with their large networks of counterparties and coordinate economic operations using outdated and ineffective methods. As a result, efficient solutions that can speed up the process are needed for banking activities, such as clearing and settlement.

One way to address this problem is by implementing blockchain technology in the financial sector. Blockchain technology can eliminate redundancies within a company, lessen dependency on middlemen, and result in significant cost savings for the industry as a whole as a peer-to-peer, secure data dissemination system. Based on a Accenture’s report, blockchain technology could save investment banks from $8 billion to $12 billion annually in infrastructure costs by 2025.

Enhanced security

Following continuous high-profile data breaches over the past few years, banks have been rushing to bolster their safety protocols and security systems. The banking industry has been severely impacted by cyber attacks, technological issues, and human errors, which have exposed thousands of customers’ financial information. In response to these obstacles, a few lenders have been attempting to utilize blockchain technology to enhance their security protocols.

Bank security can be strengthened by blockchain in a number of ways. First off, since blockchain technology can provide cryptographic protection that ensures the identities of all participants in a blockchain network are verified, it can be leveraged to develop solid know-your-customer (KYC) solutions. Furthermore, all users in the network can readily exchange information, which lessens the requirement for intermediaries to manage data distribution.

Instant payments and transfers

Blockchain implementation has the potential to be extremely beneficial for the industry, especially for cross-border transactions. Global financial institutions nowadays mostly rely on the Society for Worldwide Interbank Financial Telecommunications (SWIFT), an extensive messaging network that manages information transfer between member banks, to process payments across borders. The fact that SWIFT has seen a substantial number of hacks in recent years leads to the reduced use of intermediaries as more lenders are directly connected to one another via blockchain. 

Examples of Blockchain in Banking

Here are top real-world examples of how businesses are utilizing blockchain technology to enhance banking operations.

Ripple

Thanks to Ripple’s real-time blockchain, financial organizations and banking systems can send money immediately. Banks from all over the world can use a standardized network of institutions for quicker and more transparent transactions using Ripple’s payment platform, RippleNet. With a strong presence across 50 nations, Ripple has made its platform with low-cost transactions available to a wide audience.

Cash App

The goal of Cash App was to provide solutions to a safe and anonymous online transaction. The platform’s Lightning function, in addition to its other capabilities, transfers money between individuals using the Lightning Network layer 2 payment protocol and Bitcoin blockchain. Cash App was the first publicly listed business to use the Lightning Network.

Chainalysis

Chainalysis guarantees its users that their transactions are safe and compliant when using its data platform. The company does thorough analysis based on a range of transactions, tracking funds to their origins and maintaining the anonymity of each user. Customers can avoid suspicious transactions in this way, plus, comply with the legal requirements set forth by the banks, law enforcement, and other financial institutions.

Conclusion

Although blockchain technology was first intended to provide competition to traditional banking, a growing number of financial institutions are showing interest in this advanced technology. In the upcoming years, it is possible to that we’ll see more and more use cases and applications of blockchain in the banking industry as this technology develops.

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