08 Apr Impact of Blockchain Technology in the Banking Sector
The introduction of Blockchain technology has shaken up many sectors. With this technology, netizens have finally realized their dream of a legitimate decentralized Internet. From communications to healthcare, many industries and fields have been positively affected by it. One such industry is the Banking and Finance sector. Of which the Blockchain Technology might have completely changed the face.
Since 2008, Blockchain technology has become the sort of disruptive technology that has brought changes in the ways the banking sector functions. This sector benefits the most from implementing this technology, as it aids in eradicating any chances of errors and fraudulent transactions. This blog dives deeper into what makes Blockchain so exceptional for this sector and explores its impact.
Current Banking VS Blockchain Banking
Most traditional but modern banking systems get built on a centralized database system. They have a single point of failure, and from there on, everything that the system touches becomes vulnerable. The more centralized a banking system, the more the chances of it getting breached over time become.
The growing popularity of Blockchain has increasingly made its impact clear. This technology can transform the following sectors: Smart Contracts, KYC (Know Your Customer), Payments, Fraud Reduction, And Customer Management. Below are some details on what exactly changes with the implementation of the Blockchain technology in the Banking Sector:
Blockchain’s Technical Impact
Following are the ways BlockChain Technology will technically impact the banking sector as this technology keeps developing:
Security: The Centralized nature of the current and traditional banking system leaves a lot of room for vulnerabilities and errors. It has all the data, including that of transaction history, stored in a central database. That takes away the accessibility and power from the customers and gives it all to people with possible malicious intent that are within or outside the bank. With a decentralized system, that problem ceases to exist. Implementing this technology in the banking system will take away the middle man’s involvement in the stored data.
Transparency: Blockchain technology helps simplify the financial process and creates a source of sharing data with every participant in its network. Specified and certain parties are free to access transactional data at any given moment. That is made possible through the distributed ledger that gets shared between them. Additionally, the system that records transactional data helps offer a high level of data transparency. It also aids in securing many privacy aspects while sharing only selected data between businesses.
Programmability: The processes that a Blockchain system indulges in is almost always automatic. It does so by allowing the processes to run through the execution of smart contracts. With these smart contracts, the tasks that get directed get carried out only if their terms and conditions apply. This kind of contract is different from a legal contract as it is a code that gets executed within a blockchain.
Low Costs: An International transaction in a traditional banking system gets charged by the bank additionally. This kind of transaction gets sent to the central bank and only then transferred to the local bank. On the other hand, With a Blockchain system, the transactions occur directly between the sender and the receiver, with no middle man handling the business.
Data Quality: The currently existing data storage systems in the banking sector have proved to have a high probability of having your data altered. That is due to the fact that the data gets controlled by the bank, and hence, the present information cannot be up-to-date and can get distorted for malicious use.
The networks within a Blockchain System get designed to accommodate a large number of transactions. They get designed to do so while supporting the interoperability of different chains within the Blockchain itself. That thus improves performance and data quality.
Blockchain’s Non-Technical Impact
Following are the ways BlockChain Technology will impact the banking sector as this technology keeps developing in a non-technical manner:
Fundraising: In conventional ways, businesses tend to seek funds from various external sources such as investors, venture capital or banks. This process proves itself to be tedious and time-consuming. Blockchain, on the other hand, works by creating funds through what is known as Initial Coin Offering (ICO) and Initial Exchange offering (IEF). That takes away any involvement of banks or financial institutions.
Asset Tokenization: The process of buying or selling other assets such as stocks, commodities, bonds, and currencies is complex and requires the cooperation of sectors such as banks, brokers, clearinghouses,s, and exchanges. That is because the process needs to be as precise and efficient as it can be. The process gets simplified by tokenizing those assets using Blockchain. It also helps that most of the assets get sold online.
Loans: Loans often get monopolized by the involved firms and banks. They control the interest rates and raise and lower them by sheer will. This process may eventually trap the borrowers. Blockchain technology prevents something like that from happening by allowing customers to borrow in Decentralized Finance (Defi) Ecosystem. That, in turn, creates a more accessible financial system, as it aims for more financial applications using Blockchain.
A New Set Of Customers: This generation of customers relies heavily on digital technology to carry out their daily tasks, including financial ones. This generation of customers grows in a well-networked environment with a good amount of know-how about crowd-sourced funding and online transactions. Using Blockchain will bring in new millennial customers concerned with data security and it will be easy to integrate the technology with other sectors due to the generation’s familiarity with the digital space.
Blockchain technology is nothing less of revolutionary innovation. With its ever-growing impact on the healthcare and data-mining sector, it is about time that it fundamentally changed the banking sector too.