Blockchain Chronicles: Banking Made Easy
Banking Institutions - The discreet keepers of millions
Have we ever thought about why banks came into existence? Banks were created to serve as trusted intermediaries to help people protect and use their money safely. From then to now, banks have been discreet keepers of millions of databases and have always been the regulatory gatekeepers for anything and everything that relates to money.
That was until now. Disruptive technology, Blockchain, is changing the way customers and therefore banks think about trust, the role of intermediaries, and the future of money. Today's banking system is complex, redundant and expensive. For example, the current banking system uses intermediaries, to facilitate most financial transactions. Because of these intermediaries the transaction costs as well as the time to facilitate such transactions increase. An overseas transaction can take up to two to three days depending on the bank.
Blockchain enters the scenario
Now let's imagine a world that has a single, universal, absolutely trustworthy and completely indestructible financial ledger, where technological revolutions would be born not out of competition but out of pure collaboration. This future would be a place where all sales would involve immediate transfer of funds and businesses would have instant access to cash. That is Blockchain. The new technology that is disruptive and can result in disintermediation of many financial processes.
Each block represents various transactional records; all these blocks are linked together with a 'chain' using a hash function. Once the records are confirmed on the distributive ledger the blocks are paired with the earlier block; therefore, creating a chain of blocks or blockchain. Add to this the ability to codify "smart contracts" among participants across that chain that automatically execute when certain criteria are met, and you have a very powerful, disruptive new technology.
So we can see Blockchain as a wild card having the potential to overhaul financial services and the way banks do their transactions. Major banks in the world are exploring this technology to operate trusted transaction in a trustless environment; potentially eliminating the centralized trusted authorities, lowering the cost of many financial activities; nearly to zero. This would have a dramatic effect on big banks, currently facing high operating costs.
How Can Blockchain Change the Game?
Thanks to its various built-in attributes, Blockchain has the potential to create wonders for the FinTech sphere. Following are just a few ways:
" Reduce Transaction Cost Considerably
Various businesses are leveraging Blockchain platforms to solve various problems. Let's take the example of Ripple. Ripple has its own blockchain platform and tokens. Ripple uses this blockchain platform to reduce domestic and overseas transaction costs up to 40-60%. Ripple achieves this by ensuring there are no intermediaries in between the transactions which are safely verified and processed using the blockchain technology. This reduction in cost compiled with faster transaction costs is pushing banks to reduce their payments time in order to compete. For example: The average ripple transaction cost is around USD $0.004. A major cost reduction from the current banking charges.
" Banks Going Virtual
In the future consumers will need banking services, but they may not turn to a bank to get them. At least, not what we conventionally think of as a bank today. The so-called sharing economy may have started with cars, taxis, and hotel rooms, but financial services will follow that soon. In this case, the sharing economy refers to decentralized asset ownership and using information technology to find efficient matches between providers and consumers of capital, rather than automatically turning to a bank as an intermediary.
" Safer Data Storage
Blockchain is also immutable. This means that once data is written to the chain, it replicates across the chain and cannot be changed or deleted. Once verified transactions are added to the Blockchain, the transactions are added they cannot be tampered with. Therefore, the Blockchain when used by financial institutions can have many advantages.
" Faster Know Your Customer (KYC)
Banks spend a considerable amount of money on Know Your Customer (KYC) processes due to regulatory reasons. The same KYC process may be done by different financial institutions, with the help of Blockchain, financial institutions would be able to share the verified data with the other financial institutions, therefore, reducing the cost of double verification. This will help banks reduce their KYC costs by a huge margin.
" Faster Transaction Speed
When compared to the traditional banking system, Blockchain platforms such as Ripple and Stellar can facilitate any transaction in a couple of seconds. Compare this to the traditional SWIFT GPII which takes hours or days to complete a transaction.
Conclusion
Quoting John Wolpert, Global Blockchain Products Director, IBM, "Blockchain is not only about transactions and moving things around between separate entities. What it is about is reducing the energy required to create and grow business networks." Even though financial institutions are testing the water with Blockchain as a technology, major banks already have partnered with Blockchain technology platforms to embrace the technology and solve real business challenges with blockchain-based applications. These financial institutions include some of the world's largest global banks, regional giants, exchanges, and financial operators that have announced global projects. In the Indian context, MoneyGram, IDT, Mercury FX, SBI Holdings, and LianLian are making an impact in the payments space in particular, with leading names such as Kotak Bank, Axis Bank and Yes Bank using these platforms.
And these examples are only for payments and one of the hundreds of blockchain platforms out there. While Ripple is a popular platform in the payments space, other platforms like Ethereum, Quorum, Fabric, and Corda are equally disruptive in the opportunities they're providing to bring trust to transactions across counterparties without the need of an intermediary. We're seeing advanced work being done in areas like post-trade clearing, with tri-party repos, debt issuance, tokenization of assets and more.
That is the future if Blockchain is made the technology of choice.
