Blockchain technology is an open, distributed ledger that records records transactions between two parties. A blockchain is made up of individual data blocks that include a sequence of connected transactions that are linked in a certain order. Without the need for a centralized authority or middlemen, all of the parties involved can share a digital ledger across a computer network. As a result, transactions on the blockchain are processed more quickly.
Advantages of blockchain for banking
Blockchain has the potential to revolutionize the way people do business all across the world. It has the ability to improve trade efficiency by automating and streamlining manual and paper-based operations. A public blockchain can be a great cooperation tool because it is decentralized and cannot be held by a single person. That is why blockchain is more than just the technology underpinning cryptocurrencies like Bitcoin and Ethereum.
Here are five blockchain use examples in banking to help you understand how the financial services industry will approach blockchain in the near future.
Raising cash via venture capital is a difficult undertaking today. The typical scenario is as follows: entrepreneurs create decks, have numerous meetings with partners, and participate in lengthy discussions about value and equity – all in the goal of exchanging their company for cash.
Companies that use blockchain technology are able to expedite the process by getting funding in a variety of ways. These include Initial Exchange Offerings (IEOs), Equity Token Offerings (ETOs), and Security Token Offerings (STOs) (STOs). STO has become the most popular option due to its legal protection.
Faster payments with cheaper processing fees is a sure method for improved customer satisfaction. BFSI institutions therefore should rely on emerging technologies by providing a decentralized channel for payments. Banks may offer a higher quality of service, create new products, and eventually compete with creative fintech startups by providing better security and lower payment. Furthermore, by implementing blockchain, banks will be able to reduce the requirement for third-party verification and speed up the processing of traditional bank deals.
Settlement and Clearance System
Blockchain has the potential to allow banks to settle transactions directly and keep better track of them than traditional methods such as SWIFT. A standard bank transfer takes a few days to settle due to the way our financial system was set up.
When it comes to transporting money throughout the world, many banks confront logistical hurdles. A basic bank transfer must pass through a complex chain of intermediaries, such as custodial services, before reaching its destination. Bank accounts must also be reconciled across the global financial system, which consists of a huge network of funds, asset managers, dealers, and other businesses.
Another area where blockchain is expected to have a significant impact is in trade financing. All financial activities relating to international trade and commerce are referred to as trade finance. Did you know that invoices, letters of credit, and bills are still used in many trade finance transactions today? Many order management systems allow you to complete this task online, but it takes a long time.
Blockchain can streamline the trading process by digitizing and eliminating the tedious manual.
Loans and Credits
Traditional banking organizations use a credit reporting system to underwrite loans. We’re looking at the future of peer-to-peer lending, as well as speedier and more secure loan processes in general, and even complex programmed loans that can resemble syndicated loan structures or mortgages, thanks to blockchain.
Banks that process loan applications look at things like credit scores, homeownership status, and debt-to-income ratio to assess risk. They’ll need your credit report from specialized credit agencies to gather all of that information.
How will blockchain transform the future of banking sector
Before becoming a mainstream technology in banking blockchain must meet a number of criteria. It is important to first build the infrastructure necessary to run a worldwide network using matching solutions. Only if blockchain is widely adopted will it be able to disrupt the industry.
However, the investment will pay off handsomely. When fully implemented, blockchain is projected to allow banks to process payments more quickly and correctly while also lowering transaction processing costs.
Authored by Tanisha Gupta.