The benefits of blockchain technology in the banking industry
The digital revolution saw the uptake of digital computers and internet technologies but has since seen the mainstream adoption of blockchain and cryptocurrency in the last decade which is now transforming work practices across every industry, particularly banking.
The banking sector has seen some radical changes with the introduction of blockchain and cryptocurrencies by the way in which we are able to manage, use and share data. The distributed ledger technology (DLT) offers a range of benefits for all parties involved in the transaction cycle, and can remove many of the challenges that the sector experiences in this modern age. However, conventional banks have been slow to adopt this technology despite contending with more intense competition that will impact their profits and customer base.
Let’s take a look at the various benefits that blockchain technology can bring to the banking industry…
1. Speed and efficiency
Blockchain technology creates a real-time record system that is transparent, auditable and secure, where customer information is stored on a decentralised ledger that can make it easier and safer to share information between financial institutions.
These digital ledgers run autonomously on a peer-to-peer network and share data with all those involved in a transaction, improving speed and efficiency by removing the need for document duplication or the involvement of third-party intermediaries to inspect transactions or validate credentials because all members have access to the same ledger at any given time.
This structure will ultimately improve banking efficiency by streamlining financial processes and, in some cases, speeding up transaction times by automating manual tasks while also managing risk, improving customer experience, and reducing costs associated with establishing creditworthiness for example.
2. Trustworthiness and security
The decentralised structure of blockchain in banking uses a distributed database where the network is maintained by many individual devices instead of one centralised computer, meaning there are no single points of failure that could be compromised by malicious attacks - something which has caused security issues with traditional banking systems in the past.
Due to the architecture of blockchain technology, it provides a more secure environment for recording, storing and sharing data that significantly increases security and helps protect against cyber attacks.
In addition to this, the immutability of information stored on the blockchain means that data cannot be altered and any changes are visible to all participants in real-time, which gives reassurance that people can trust the reliability and accuracy of their data without doubt or hesitation.
Blockchain’s distributed consensus mechanism prevents online malicious activities, unlike traditional centralised data-storage and management systems that are susceptible to hacking, intrusion, breaches and other corruptive, fraudulent or illegal activities.
It creates a clear and uneditable audit trail that prevents unauthorised changes made by its users which helps to eliminate hacks, fraud and identity theft in banking through enhanced transparency and traceability between the parties involved.
On top of this, the collective verification and validation processes that are required for each transaction stops fraudulent transactions from passing through, so it is impossible to compromise the integrity of records stored in the blockchain.
The large number of ledger copies on the database also provides a reliable backup that can overwrite a ledger that has been illegitimately modified, even if several are hacked.
Since third parties are not required to confirm the identity of a customer, there is a reduced risk of error and banks are able to improve compliance with standard industry regulations such as anti-money laundering and Know-Your-Customer (KYC) regulations.
4. Reduced errors
Blockchain’s distributed ledger technology helps to reduce errors and speed up processes by reducing risks and automating a number of tasks.
Without the requirement of third-party verification, there is no need for manual checks or expensive intermediaries to complete transactions.
In addition, blockchain technology can streamline processes and reduce documentation errors, simply by removing unnecessary steps in certain processes along with any potential miscommunications between parties involved.
Human error can also be eliminated through blockchain via the automation of many of the tasks that would otherwise require multiple people or teams to perform.
In fact, a study by IBM found that 95% of cyber security breaches result from human error, which explains why many organisations are turning to blockchain technology as a means of ensuring accuracy and accountability in their operations.
5. Lower costs
Blockchain-based solutions can help banks reduce costs, particularly through the automation of tasks and digitisation of data.
By automating certain tasks that would otherwise be carried out by human employees, it’s possible for banks to achieve significant reductions in operational expenses such as those associated with regulatory compliance, maintaining liquidity, credit scoring, data validation, and accounting systems as there is no need for multiple intermediaries.
This innovative technology helps to cut costs and reduce the complexity of transactions, particularly for making loans and international transfers, as well as venture capital operations.
These cost savings can then be passed onto customers in the form of lower bank charges or better interest rates, giving a competitive advantage in the marketplace.
As you can see, blockchain is a disruptive technology that is transforming the way we do banking.
While the industry is seeing rapid changes, traditional banks face the largest challenges of all as they fail to adopt this new technology in a timely manner.
It is obvious that banks and other financial institutions have the ability to lower costs, streamline business activities, increase their efficiency and improve security measures with blockchain. However, many are still trying to figure out their role in this new ecosystem and any slight hesitation to implement this will continue to expand the opportunities for the growing presence of innovative competitors who are already taking advantage of this new technology.
We expect that more banks will start to adopt blockchain technology in the coming years and there will soon be a tipping point when they realise that it is only a matter of time before everyone else catches up too!