Early 2018 introduced cryptocurrency to the world that created a buzz in the market with a sudden spike in the cryptocurrency price. The cryptocurrencies like Bitcoin and Ethereum keep evolving with the time for improved applications. At the center of these cryptocurrencies, there is a decentralized digital ledger technology named blockchain. The Blockchain technology came into existence in 2008, but it took almost ten years for people to understand its potential. But, now nearly 24% people across the globe are aware of the technology. In 2016, nearly $365 million funding was secured by 13 different blockchain companies. Moreover, these companies were able to raise a total of $1 million in 2017. The continuous evolution of the technology has proven that blockchain is the future of many industries including the banking sector.
According to the latest survey, 70% of the financial leaders accepted that the smarter and quickly changing technology concerns them. Besides, the Blockchain can transform the banking sector with its undependable approach. Most of the banking giants have already started investing in the bank-based blockchain projects to unlock the maximum potential of this technology. Where some of the financial leaders have accepted this change, few are still hesitating. But, there is one question that still needs to be answered that how is blockchain going to change the financial and banking industry?
How Will Blockchain change the financial sector?
Most of us now aware of the technology driving the cryptocurrencies but we don't know much in detail about it. In order to understand how the banking industry could leverage Blockchain, we must understand how it works exactly. You can consider blockchain as a more digital operator who processes, secures and finalizes the transactions. Someone requests the transaction using cryptocurrency, computers connected as nodes process that transactions. Once the transaction is processed blockchain verifies it by giving a unique address via sharing it with every single node in the system. After completing the process, the blockchain put that transaction in a new block aligning it with the chain of existing block containing the previous transactions. This makes blockchain a decentralized approach, so any central authority does not store the information or transaction.
Now you have an idea how blockchain works, but how does this system going to influence the banking sector? Currently, banks use the agreement method to carry out the different transactions. The process involves both the parties agreed to the transaction for exchanging the resources. However, the process is time taking and also holds the risk of any of the involved party may revoke at any time. The agreement and transaction process called the settlement which takes too much time. According to the Oliver Wyman report, the settlement process costs almost $65-$80 billion every year. With the integration of blockchain the banks won't be needing the settlement process. This will help the banks in saving billions and a lot of time. Besides, the blockchain equipped bank system will make the transaction secured for quick global currency exchange. The blockchain-backed transaction will also help the banks to get rid of traditional medium for processing the transaction between sellers and buyers.
Benefits of using the blockchain in banking
The blockchain is far less expensive
Transactions are much more secure and faster in the blockchain
The Harvard Business review shows that as of 2016 60% financial organization planned to use blockchain for international money exchange and 23% for security and settlement. The banks and financial organizations could leverage the blockchain for improving the infrastructure and increasing the productivity.
Another report reveals that the business sends approximately $150-$300 trillion across the national borders all over the world. The processing fee for these transactions is 10% on average, and it took 3-5 days for making the transactions. Now, the blockchain powered transaction system could save all this processing fee and time need to make it happen. Moreover, the international transaction will be more secure and can be performed without the dependency on other factors.
IBM is among the few tech giants that are investing in the blockchain supported banking projects that include Hyperledger Fabric project. The Utility Settlement Coin and R3’s blockchain consortium are also among the most prominent bank-based blockchain projects.
Hyperledger Fabric project- IBM Hyperledger Fabric project is a trade finance platform for international transactions. The platform will be based on blockchain technology for making the transactions across national borders. The initial seven supporters of the project are Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit.
Utility Settlement Coin- Utility Settlement Coin is the latest digital banking project based on blockchain that can be used by traditional banks for carrying out efficient transactions. Barclays, CIBC, Credit Suisse, HSBC, MUFG, and State Street have already announced that they will be backing up Utility Settlement Coin.
R3- Blockchain consortium R3 has raised $27 million in May and already have four big names as its supporters including Temasek, SBI Group, Bank of America Merrill Lynch, and Intel. The tool is another bank-based blockchain project for improving the transactions process in the industry with additional benefits.
These above projects are just an initiative in the industry for accepting the new technology for enhancement. In the coming time, we will be experiencing a significant transformation of the financial and banking sector with the help of blockchain technology. However, the acceptance may be slow as understanding the technology could take time but it is going to change the industry for sure.