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Blockchain in Banking – 10 Key Reasons Banks Adopting Blockchain Technology

Blockchain in Banking – 10 Key Reasons Banks Adopting Blockchain Technology
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    February 22, 2024 Last Updated: February 22, 2024

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According to a survey, the blockchain in the banking and financial services market size will grow from 4.61 billion USD in 2023 to 7.12 billion USD in 2024. This is a huge growth at a compound annual growth rate (CAGR) of 54.6%.

Market Size of Blockchain in banking

Moreover, it is further expected to grow exponentially in the upcoming years and can reach 27.69 billion USD in 2028 at a CAGR of about 40.4%.

Well, this huge growth can be attributed to the rise in the adoption of blockchain technology in the banking sector, the increase in the blockchain technology to minimize fraudulent transactions, the rise in the utilization of cryptocurrencies throughout the world, solid economic growth in emerging markets, increase in number of government initiatives and much more.

Whatever it is, one thing is sure, investment in this sector can prove to be beneficial.

Now you might consider asking why banks are shifting towards this technology at a rapid pace.

Well, here are the top 10 reasons for the same.

Blockchain Technology In Banking - All You Must Know

Before moving ahead with the reasons it is essential to understand what are the general problems in banking these days.

Needless to say, the banking sector has been in existence for millennia serving as a facilitator for a range of financial and economic operations, such as trade, lending and borrowing, transaction processing and settlement, underwriting, and so forth. But because of its history, the industry has become stagnant, taking a long time to adjust to the ever-changing realities of the digital age.

The industry as it currently exists resembles a giant that, although continuing to move ahead steadily due to the immense momentum that has been built up, is simultaneously too awkward to go forward with elegance.

For instance, a lot of banking procedures nowadays still need a lot of paperwork, which adds to processing costs and security risks while also requiring time and money. The sector as a whole has to strengthen its security measures. Along with improving regulatory compliance, lowering bad credit, and tracking credit history, banks are in dire need of dependable solutions. All of this is happening while dealing with an increasingly formidable fintech industry.

This is where blockchain technology can act as a savior. This technology holds the potential to completely change the financial industry. It gives a more comprehensive viewpoint for enhancements such as novel approaches to transaction processing, data archiving, and financial system administration. The banking industry is implementing blockchain technology for the following reasons.

blockchain Technology In Banking

1Fast Payments

Needless to say, every second, a staggering amount of transactions take place in banks. Let’s go back to the present day and say that every time a bank transaction occurs, trillions of dollars are lost. The main causes are various additional costs and sluggish payments.

Public blockchains that support digital currencies like Ether and Bitcoin allow users to send and receive money instantly and digitally without paying additional costs. Banks can use these decentralized payment methods to increase consumer satisfaction. It reduces the complexity by providing faster payments, quicker processing, and more security.

2Clearance and Settlement

A distributed ledger technology like Blockchain has the potential to replace current systems like SWIFT by allowing bank transactions to be handled directly and tracked more effectively. The limitations of the way, our financial system was so constructed that an ordinary bank transfer takes a few days to settle.

For many institutions, transferring money internationally is a practical difficulty. A straightforward bank transfer must be done via a convoluted network of middlemen, such as custodial services, in order to get to its intended location. The global financial system, which consists of a vast network of funds, asset managers, dealers, and more, also requires bank accounts to be reconciled.

For example, If you want to transfer money from a German bank account to an American bank account, the Society for Worldwide Interbank Financial Communications (SWIFT) will handle the transaction. 24 million communications are sent daily by SWIFT members to almost 10,000 distinct organizations.

Well, only the payment orders are processed using the centralized SWIFT protocol. The real funds are handled via a network of middlemen. They are all time-consuming and come with extra costs.

The use of a decentralized ledger, such as blockchain, would allow banks to maintain an open and transparent record of all transactions. Banks won’t be dependent on regulatory organizations like SWIFT or a network of custodial services. They could just use a public blockchain to settle transactions immediately.

3Cross-border Transactions

Money transfers across international boundaries become more difficult when dealing with drawn-out processes. The settlement process takes many days, even after the foreign bank transfer is completed. Before it reaches its recipient, it passes via a number of networks of middlemen. This whole process is quite expensive and time-consuming.

Blockchain technology can facilitate cross-border payments by making them easier and more affordable. Cross-border payments can be settled very instantly with blockchain, cutting down on costs and processing times.

4Digital Identity Verification

Without identity verification, banks would not be allowed to conduct online financial transactions. However, customers dislike the several procedures that make up the authentication process. It can take the form of in-person verification, authorization, or other sort of authentication (like each time you connect to the service). For security purposes, any new service provider must go through all of these stages.

Blockchain will help businesses and customers by speeding up verification procedures. This is due to the fact that blockchain technology will enable the safe reuse of identity verification for many businesses. Zero Knowledge Proof is the most well-liked invention in this field. Numerous nations and major companies are now developing ZKP-based solutions.

Users will have the freedom to decide how and with whom they want to communicate their identity. Well, the credit goes to blockchain technology. They will only have to register themselves once on the blockchain. As long as each service provider is blockchain-powered, there’s no need to repeat the registration process for each one. It goes without saying that keeping this kind of data on a blockchain also protects it.

Blockchain Development Services

5Fundraising

Needless to say, raising funds these days via venture capital is a difficult procedure. Typically, it goes something like this:

Initially, entrepreneurs put decks together followed by carrying out countless meetings with partners. Long negotiations over valuation and equity further follow this. And it all ends up with a hope to exchange their company for payment.

Blockchain businesses are expediting the procedure by providing a variety of options for fundraising. These consist of Equity Token Offerings (ETO), Security Token Offerings (STOs), and Initial Exchange Offerings (IEOs). Currently, STO is the most preferred choice due to its legal protection.

Projects are required to complete a process of due diligence in order to be eligible for this model. Switzerland and Malta, where businesses like Scerri & Concise Ltd provide these services, are among the pioneers of STOs. Neufund is now the most well-known ETO trading platform whereas Initial Coin Offerings (ICOs) were more common in the past but are now viewed as fraudulent and untrustworthy.

6Peer-to-peer (P2P) Transfers

Customers can send money to another person online via peer-to-peer (P2P) transfers from their bank accounts or credit cards. There are a lot of P2P transfer apps on the market right now. However, each one has some restrictions.

Certain of them, for instance, only let you send money inside a specific area. Some prohibit money transfers even when the recipients and sender are in the same nation. Furthermore, P2P services could not be safe enough to store sensitive consumer data and might demand exorbitant charges for their services.

Blockchain development can be used to solve each of these issues. Blockchain technology can make peer-to-peer transfer apps decentralized. Moreover, as blockchain is not limited by geography, peer-to-peer transfers can occur anywhere in the world. Additionally, blockchain-based transactions will happen instantly, saving the receiver from having to wait four days to get their money.

Also Read: Merging Blockchain and AI, Why Do You Need It in the Near Future?

7Accounting and Auditing

Digitization in the accounting field has been somewhat sluggish. The necessity to adhere to stringent regulatory standards for data veracity and integrity is one of the causes of the same. For this reason, accounting is yet another industry that blockchain has the potential to revolutionize.

Experts predict that technology will streamline traditional double-entry bookkeeping processes and make compliance easier. Businesses can enter transactions straight into a shared register, thus eliminating the need to maintain separate records depending on transaction receipts. There will be distribution of every entry in the register.

The documents will be safer and more visible as a consequence. A blockchain will verify every transaction, acting as a virtual notary public. In these kinds of applications, blockchain smart contracts can also be used to automatically pay invoices.

8Borrowing and Lending

DeFi (decentralized finance), one of the most popular blockchain and banking movements in recent years, seeks to revolutionize many parts of conventional finance, including lending and borrowing. DeFi wants to take on the banking system head-on by increasing retail users’ access to financial services rather than working to improve it.

Moreover, blockchain technology in banking can also be used to improve bank-facilitated lending and borrowing. The strong verification capabilities of the technology can lower the likelihood of problematic loans. Furthermore, blockchain can verify that borrowers are not dishonest or bad actors, which will strengthen banks’ anti-money-laundering (AML) and know-your-customer (KYC) capacities.

Syndicated loans are another area where blockchain can prove to be useful. Usually, a consortium of banks provides large loans to business clients. This is a multi-step procedure that takes up to 19 days and necessitates cooperation among the lenders. Compliance with KYC and AML regulatory regulations is a significant obstacle in this case.

According to the conventional approach, each bank executing a syndicated loan must individually guarantee KYC and AML compliance. But thanks to blockchain technology, a bank that has already finished the compliance process can safely share that information with the other loan partners, greatly streamlining the process.

9Hedge Funds

A hedge fund is a kind of financial partnership in which a limited partner group of investors and fund management work together. However, these players are often traders rather than regular investors. Hedge funds are designed to minimize risks and maximize rewards for investors.

Well, more investors and strategists can join on an open platform offered by a decentralized cryptocurrency hedge fund. Fund managers who are employed by a single company oversee traditional hedge funds. A great illustration of blockchain’s potential for the financial services sector is a good example of this kind of decentralization.

10Trade Finance & Trading

When discussing trade finance, it’s evident that the sector has been overdue for modernization, and blockchain is undoubtedly the most suitable solution to address this need. Trade financing is still mostly dependent on paperwork, which is sent out globally via mail or fax. Blockchain technology has the potential to end this once and bring in a period of fast digitization in the industry.

On the other hand, DeFi has already shown that interest in decentralized exchanges and marketplaces is rising at an alarming pace. Although such are now taking place outside of the banking sector, lenders can be persuaded to adopt the idea. As previously said, blockchain technology has the potential to completely change clearing and settlement processes in banks, which are essential to a trading firm.

Blockchain banking

Blockchain in Banking: Statistics & Use Cases

Several major banks have embraced blockchain technology in order to streamline operations and enhance security. These institutions leverage blockchain for various purposes, from cross-border payments to trade finance and identity verification.

The good things that they have witnessed by implementing blockchain technology are improved efficiency, reduced costs, and enhanced transparency.

Well, let’s go through the top 3 of them.

  • Goldman Sachs

Goldman Sachs is using blockchain technology to expedite the settlement of securities transactions, reduce counterparty risk, and increase liquidity. The Komgo trade finance platform, which is built on blockchain technology, aims to lower errors and fraud. Goldman Sachs has been looking at how blockchain technology can be used in futures trading, joining the R3 consortium, and considering the possibility of offering its clients cryptocurrency trading services.

These ambitions, however, were shelved because of the regulatory environment around crypto trading. Goldman Sachs has contributed to about 10 businesses since 2013 and filed patents related to the technology. It has implemented blockchain technology to increase productivity, reduce risk, and foster transparency.

  •  JPMorgan

JPMorgan Chase developed Quorum by implementing blockchain technology in order to improve and streamline financial operations. Quorum is a permissioned blockchain that offers privacy, security, and scalability. Additionally, it created the Interbank Information Network, which enables banks to exchange data and more effectively address compliance-related concerns.

If we go through the stats, blockchain technology was used by JPMorgan Chase in a repo transaction in 2019 that decreased counterparty risk and increased transparency while cutting settlement time from 3 days to a few hours. It has proven that it is possible to save costs and increase efficiency by up to 75% in the time it takes to settle payments and complete the KYC procedure.

  • HSBC

Blockchain technology was used by HSBC in order to cut expenses, increase transparency, and increase efficiency. Banks can communicate trade data instantly because of Voltron which is a platform built on the Corda blockchain and that eliminates the need for paper records and labor-intensive manual procedures.

The bank can settle FX deals in real time because of the blockchain platform FX Everywhere, which benefits all parties by accelerating transactions, lowering transaction costs, and increasing efficiency.

As of 2021, supply chain finance and digital identity verification are two additional sectors in which HSBC is looking at improving blockchain development. The bank is investigating further applications for blockchain technology, which can result in more uptake down the road.

How Blocktunix Can Help You With Blockchain Development?

Needless to say, a bank will need to collaborate with a blockchain development service provider in order to really establish itself in the banking industry going forward. This is where Blockctunix can assist you.

As a premier blockchain development company, Blocktunix has enough experience in blockchain development to help you sail ahead swiftly in the global market. From crafting decentralized apps (dApps) to implementing smart contracts, Blocktunix holds the power to turn your ideas into secure, transparent solutions.

Our expertise spans blockchain integration, tokenization, and consensus mechanisms while ensuring scalability and reliability. It’s time to experience seamless transactions and data immutability with our innovative solutions.

Let’s shape the future of banking, finance, supply chain, and beyond together.

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