Rising Significance of Blockchain in the Banking Industry
Banking has been an inseparable part of society since the very inception of it, and today the world has discovered a technology which challenges the very foundation of this sector. As young as the Blockchain technology might seem, it is already transforming almost every sector of our economy including the age-old banking industry. The requirement of trust (a reliable central authority) has been the subject of scrutiny for ages.
Loopholes in the present banking system
The democratic nature of Blockchain technology offers safe and reliable solutions to innumerable loopholes in the banking sector. Banks involve many mediators to exercise different roles in keeping assets safe for people. This gives rise to a serious need for trust and often the involvement of too many third parties and manual processes lead to frauds and errors.
Also, the requirement of these mediators makes banking expensive. Banks exercise complete control over your assets and can deny or limit access to your money. This regulation in all jurisdiction of banking makes banks centralized power-houses.
How Blockchain is reshaping banking?
The alluring features of Blockchain like immutability, transparency, provenance, decentralization and also the stupendous popularity of cryptocurrencies and the boom of ICOs have contributed to the wide dissemination of Blockchain into banking and other industries. The wide-reaching implications of this infant technology hold the potential to revolutionize the banking sector by reducing potential costs, labor savings and by empowering the unbanked population.
Blockchain technology comes empowered with capabilities which provide untrusted parties with a method of agreement without using a middleman. A distributed, decentralized and immutable ledger along with features like ‘smart contract’ provides a whole new environment for transforming banking services.
Paving new ways for new banking culture
Banking has been the most integral and vital section of the society with the present global banking currently a $134 trillion industry. Let us see how Blockchain and DLTs transform the key services provided by banks including cross-border transactions to fund-raising.
- Reforming traditional bank transfers
Transactions across borders have been a costly affair for so long. Currently, for transferring money from one part of the globe to another, banks charge you a flat fee for wire transfer along with exchange rate fee and additional charges amounting to more than 7% of the transfer amount. The transferring and receiving banks get a cut out of this and the receiver has to wait for weeks before he or she can even register the transaction.
This cumbersome and exhausting process sloshes trillions of dollars around the world every year. Therefore it needs to be revamped via the use of Blockchain technology which offers a high-security, low-cost payment sending methods that eliminate the need for verification from third parties and also processes transactions instantaneously.
Several start-ups like BitPay and BitPesa are emerging across the globe which are helping in materializing the goal of instant and low-cost B2B transactions along with Bitcoin payments.
- Generating a secure loan and credit scenario
The centralized system of lending and credit is often hostile for consumers. Unlike the traditional system where lenders underwrite loans based on a system of credit reporting, Blockchain paves the path for peer-to-peer loans. These loans would be a more complex programmed which would approximate a mortgage or syndicated loan structure, also establishing a faster and more secure loan process. Blockchain would also enable banks to reach a broader pool of consumers while lending cheaper, more efficient, and more secure personal loans.
EthLend is one such ICO which aims to improve lending through Blockchain by building a decentralized peer-to-peer lending application based on Ethereum. Basically, when a borrower issues a loan request, a smart contract is created with the loan amount, interest rate, and time frame. The EthLend tokens act as collateral, so if the borrower fails to pay the loan in time, the lender receives tokens as collateral.
- Simplifying the arduous process of fundraising
ICOs i.e. Initial Coin Offerings have become extremely popular in the past few years and some high-profile ICOs have raised hundreds of millions (even billions) of dollars of funds before even presenting the proof of a viable product. These Blockchain powered networks and platforms offer a completely different fundraising mechanism through venture capital. This puts an end to tiresome endless meetings with partners and negotiations over equity and validation for getting some investment.
There are many success stories of ICOs such as Telegram, the messaging app which raised $1.7 billion via ICO and is challenging other popular messaging apps. Filecoin, a Blockchain enabled data storage start-up raised $257 Million, while EOS, which plans to build a ‘world computer’ raised more than $4 billion via ICO itself.
- Empowering the unbanked population
According to the statistics released by World Bank in May 2018, about 1.7 billion people across the globe did not have access to banking services in 2017. Majority of the unbanked population resides in the countries which are politically unstable and their widespread corruption has curbed the desire for large institutions to enter the market.
So Blockchain based banking service access point for the unbanked population would signify their financial inclusion which would translate into other potential development benefits. The important fact is that providing a Blockchain backed banking platform would be an easier, and cost-efficient option as compared to the extension of the current cumbersome banking facilities.
Many projects like BitPesa in Kenya, Ripple in Japan, OmiseGo technology, and Humaniq among others, enable peer-to-peer value exchange and payments to encourage financial inclusion of the underprivileged and unbanked population with/ without requiring any bank accounts between parties.
The Path ahead
One of the recent study conducted by Accenture Consulting Company, the world banking industry would save up to $20 billion by 2022 through implementing Blockchain and DLT services.
Though the Blockchain technology is still in its latent stage, it is offering rigid solutions which one day might replace traditional banks altogether. But as we all know, disruptions don’t happen overnight, it is a long transition. We might not be able to predict the future, but one thing is very clear: Blockchain will indeed transform the way banks function and how we deal with our assets.