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A Pulse on Digitization in Banking Part 1: How Blockchain will Revolutionize Banking


Over the past few years, blockchain has entered the global lexicon. This is largely thanks to cryptocurrencies such as Bitcoin which have emerged as digital, decentralized alternatives to traditional currencies, and are underpinned by blockchain technology.

At first glance, this technology appears to threaten the existence of banking entirely. Cryptocurrencies have the power to circumvent our current banking system completely. What’s more new fintech startups and neobanks have emerged to harness the power of cryptocurrency and blockchain and overtake the current banking system.

But there’s another way to look at the blockchain story. Instead of viewing blockchain as a threat, traditional banks can leverage this technology to disrupt current business models in an exciting and innovative way. It can help banks increase efficiencies, lower costs, and increase transparency – a win-win for banks and consumers.

In part one of our five-part series on digitization in banking, we will take a look at the ways blockchain technology will revolutionize banking.

Increase security and reduce fraud

Today, banks keep all customer information and transaction records centralized. This helps employees gather and reference information about customers quickly. However, it also allows hackers to easily access customer data to steal or corrupt valuable files for personal gain.

Reducing fraud with automated record-keeping

Blockchain increases security around customer data by keeping it in a decentralized, automatically-updating database. With blockchain, there’s no need for a central database run by a single authority. Instead, a public registry of sorts exists on the blockchain, transparently and securely recording ownership, transfers, and transactions.

These ledgers cannot be altered, providing a clear, automated audit trail for all transactions, and mitigating fraud. The fact that these transactions are recorded automatically also reduces the human error associated with any kind of manual data entry.

A hack-proof system

Aside from deterring human error and fraud, a blockchain-based system repels hackers, as well. Because the blockchain records everything, hackers cannot possibly attack the network without leaving evidence behind. In a time when cybercriminals are becoming more sophisticated and carrying out larger-scale attacks, this quality is highly desirable.

Zero Knowledge Proof

What’s more, blockchain in banking breeds simpler and more secure customer access and authentication. Banks need to verify member identities to complete transactions. Blockchain simplifies the identity verification process by using a Zero Knowledge Proof method. This form of authentication is highly secure because it verifies user identity and enables access without revealing anything about the user in the process.

Blockchain in banking can speed up and simplify transfers

Blockchain technology in banking can help simplify all transfers, eliminate transfer fees, and speed up transfer settlement. Let’s dive into two examples of transfers blockchain makes easier and quicker: international transfers and peer-to-peer transfers.

International transfers

Today, customers that wish to transfer money overseas must incur fees and wait up to weeks for the transfer to complete. This is especially an issue for those who are part of the multi-billion dollar global remittance market working in foreign countries and sending money home to their families. Businesses, too, have to weigh either incurring hefty fees for international transfers or pushing the cost along to their customers.

Part of the issue stems from a lack of interoperability between global financial institutions’ payment systems. Although the G20 is prioritizing faster, more efficient cross-border transfers, the current infrastructure is not ready to keep pace with the need.

Blockchain can help alleviate the obstacles related to international transfers. This technology can help connect the infrastructure of financial institutions, increasing interoperability and reducing complexity. What’s more, blockchain keeps a perfect record of transactions and customer history. This removes the need for intermediaries like custodial services that typically intervene before the transaction settles.

Peer-to-peer transfers

Peer-to-peer (P2P) transfers make it possible for customers to send money to one another online. The mobile P2P transfer market alone is expected to grow to $9 trillion by 2030. Several mobile and online applications enabling these kinds of transactions exist online today, but they come with limitations. Some of these limitations include geographic location constraints, transfer fees, and security concerns.

Luckily, blockchain can eliminate some of these limitations making the multi-trillion dollar peer-to-peer transfer market more secure, simpler, more global, and fee-free. A decentralized channel for payments through blockchain enables faster payments and lowers the fees associated with processing such payments. It allows for seamless global transfers and provides more security by publicly and transparently recording and validating all transactions.

Simplify credit and lending

One of the main ways banks make money is through interest on loans. But the process can be cumbersome, error-prone, and time-intensive as it exists today. Luckily, using blockchain in banking can make the lending process smoother and more accurate for lenders and customers.

Improving credit checks

Today, banks use credit checks to underwrite loans. We depend on three major credit bureaus in the United States to provide the information necessary for banks to underwrite these loans. However, these institutions housing some of the most critical customer information are vulnerable to hacks.

This is perhaps best exemplified by the Equifax hack in 2017 which exposed 147.9 million personal records. These records included social security numbers, credit card information, names, and addresses. To make matters worse, these critical records aren’t always accurate and are susceptible to human error.

Blockchain can help solve security vulnerabilities and record inaccuracies in our current credit check system. This technology provides a more accurate method of verifying identity and accurately records transactions, lending to a more precise customer credit profile. Plus, it removes the need for third-party verification, approvals, and fees these intermediaries require to access credit history. This would make credit checks a faster and smoother process.

Speeding up the lending process

In addition to easing credit checks, blockchain technology can simplify the lending process. Smart contracts, or contracts that self-execute when the pre-determined conditions of the contract are met, are stored on a blockchain. These contracts make it possible for loans to automatically be approved in near real-time when it’s determined that the customer qualifies for the loan.

This can save massive amounts of time and money spent verifying customer credit and qualification. It can also open the door to peer-to-peer loans and mitigate double spending and defaulting. All in all, smart contracts applied to lending provide a more secure, more efficient, automatic, and cheaper way to process loans.

“I think we’ll see most leading banks use blockchain in some capacity in the years to come to help increase efficiencies across the board.”

– Derek Gillespie, Head of Large Enterprise Sales, Zayo

Prove asset ownership

Proof of ownership is one of the fundamental elements of non-fungible tokens (NFTs) which are built upon blockchain technology. While NFTs are commonly thought of as digital assets like digital art, they can be used to represent ownership of real-life things like real estate or luxury goods. This concept could translate to the banking industry, too.

Today, financial institutions keep track of asset ownership through a network of different parties. This ownership is typically tracked on paper or in digital documents and oftentimes manually entered into a system. This, of course, makes these records prone to human error. Transferring asset ownership is also more complex when all of these disparate sources have their own recording system and need to transfer paperwork from one party to another.

By leveraging blockchain technology, an asset could be tied to a cryptographic token, representing ownership of the asset. Because something existing on the blockchain is unable to be changed or counterfeited, this provides accurate and verifiable proof of ownership. What’s more, blockchain enables the seamless and provable transfer of ownership without the need for intermediaries and paperwork.

Lower costs

There are several ways in which blockchain can lower costs for banking institutions. The cost savings associated with IT infrastructure are perhaps the most significant. Experts estimate that blockchain technology could save the financial services industry between $15 and 20 billion a year in IT and infrastructure costs.

Aside from saved IT and infrastructure costs, blockchain technology can help lower costs in the following ways:

  • Automating tasks. Previously manual tasks like filling out paperwork, conducting credit checks, and auditing can be automated with the help of blockchain technology. Automation can eliminate some of the tedious manual work for bank employees, freeing them up for more strategic tasks.
  • Reducing bank-to-bank transaction costs.  By enabling a distributed ledger technology for transactions, blockchain encourages lower transaction fees for both peer-to-peer and bank-to-bank transfers.
  • Removing costly intermediaries in general. Brokers, creditors, clearinghouses, and more are generally unneeded when contracts can self-execute and all transactions are verifiable, accurate, visible, and automatically recorded.
  • Eliminating the need for auditing in many scenarios. Because blockchain technology is largely immune to tampering and human error, there is less of a need to audit transactions, transfers, and ownership.

Get a Pulse on the Digital Landscape in Banking

The reality we’ve outlined above is only possible if blockchain technology is widely adopted. For now, antiquated systems riddled with human error, drawn-out processes, fraud, unnecessary fees, and paperwork will prevail.

For now, we’ll have to envision a world with seamless, accurate record-keeping, unprecedented visibility, process automation, foolproof identification, and decentralization.

While blockchain technology is an interesting emerging concept to consider, it’s not the only digital technology poised to revolutionize the banking industry as we know it.