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How Will Blockchain Technology Impact Financial Sector?
When we talk about the technological trends that are making headlines, Blockchain could be the real winner. It has provided the industries with a whole new level of security and transparency in their data processes. The banking industry is adopting this technology to transform their business practices.
• Blockchain Technology in Banking
The blockchain is a digital transaction ledger. Decentralized systems of individual PCs can contribute data to the ledger, in the wake of solving a mathematical problem as confirmation of their legitimacy. The information is then stored as squares, in a progressing and unchanging public chain. Blockchain innovation can revolutionize the banking sector by providing a more efficient approach for the banks to adopt and follow. The two critical fundamental functions are mentioned below.
1. Security: Blockchain's framework makes it less susceptible to any cyber threats or breaches. It is far easier to bombard a single database, regardless of how new its barriers may be than to discover and target at least one of a group of computers all working autonomously to encode information safely. Therefore, we can conclude that blockchain provides a higher degree of safety than other networks.
2. Transparency: Each block of data is arranged consecutively one after another, forming a unique spot within an ever-growing line-up of data structures. In this manner, blockchain technology provides real-time data records that can be traced in chronological order. The data stored by this technology preserves data in verifiable and immutable chronological structure which are virtually tamper-proof and transparent as well.
Five potential uses of blockchain in banking
1. Payments: Facilitating payments to the customers is one of the primary tasks for any financial institution, but many payments take a longer time span than expected. The blockchain-based alternative to this obsolete system is being introduced by many companies.
Payment systems based on blockchain will help banks to communicate and make the required payments directly via shared databases keeping all relevant payment data in an easily accessible format thereby cutting out the role of intermediaries.
2. Clearing and Settlement: The asset transfers between financial institutions often take days, and not hours, this is due to the time-consuming procedure known as 'clearing and settlement.' Clearing refers to the verification of the details of options, future and security transactions and direct transfers between the banks. Clearing procedures are handled by intermediaries thereby slowing down the already complicated process.
The blockchain solution will allow banks to streamline this process. By integrating blockchain technology into their system, the financial institutions will be able to cut down the unnecessary fees of the intermediaries. The banking sector is inclined towards this technology and is investigating ways to take advantage of this technology.
3. Compliance: Identity verification is essential for the financial industry, particularly in light of later and stringent know-your-customer (KYC) and anti-money-laundering (AML) enactment. Right now, identity checking methods are non-institutionalized and untrustworthy – also labor intensive and expensive.
Nonetheless, blockchain could present another level of transparency and certainty to the banking compliance process. By setting identity information on sharable blockchain databases, banks would have the capacity to get to records that are transparent and set in the verifiable timeline.
4. Syndicated Lending: Syndicated loans are the one wherein numerous banks come together to provide funds to a borrower. Blockchain technology improves the efficiency of syndicated loan transactions by giving a path to all the moneylenders to add to and access a chronological and digital record of loan-related data.
5. Trade Financing: Many believe that blockchain-banking solutions could help to modernize certain aspects of trade financing, though it would take years to be implemented. This is because every one of the tremendous number of parties engaged with trade finance – from custom houses and shippers to ports and dealers – would need to purchase in and consent to progress far from conducting business on paper. Until the point that that move happens, there would be a minimal practical advantage to setting exchange financing documents on a blockchain-managing network.
Check Out: CIOReview | Medium