Everyone is talking about the new technology in the fintech industry, blockchain. Banks are competing to harness its power, believing that it can cut costs and transform the industry. It has energized the fintech service industry on a global scale. Blockchain provides a shared digital ledger that allows instant updates for Bitcoin, Ethereum, Ripple, Eris Industries, and other crypto currencies to make fast transactions, securely and publicly.
The “block” in blockchain is the current part where recent transactions are recorded, and permanently part of the database. Every time a block is completed, another block generates. The blocks are linked together like a chain in chronological order. In this way, it is like a complete history of banking transactions. Each block is like an individual bank statement.
Digital signatures are used by financial intermediaries to update the ledger to complete a transaction. This shared ledger is encrypted in order to protect the data. The key processes in executing a trade such as security, trading, clearing and settlement is simplified in the solution that blockchain provides.
Blockchain’s potential for financial services has gained itself the reputation as the “Internet of finance.” It has been gaining momentum in banking, with its many important benefits.
Benefits of Blockchain in Banking:
Transparency: Transactions are recorded publicly and chronologically, and is audit-able by participants. Blockchains allow authorities to see the specifics of transactions, relieving the need to rely on accuracy of banks’ reporting. Whether banks will be prepared for transparency is another question.
Security: Though banks work hard to prevent breaches in enterprise and customer data, it is inevitable. Blockchain eliminates these risks with its tamper-resistant design and cryptography. Breaches that occur are isolated, and located quickly.
Simplification/Cost Reduction: Moving assets from one institution to another involves several intermediaries, and additional message exchanges. With blockchain, there is no need for intermediaries and slow manual processes, thus simplifying the process. It can reduce time and costs at a bank and at the industry level. According to Santander InnoVentures, banks can save $20 billion annually by using blockchain technology.
KYC (Knowing Your Customer) costs spiral for banks every year, and banks are looking to reduce these costs and number of KYC checks. Banks are interested in blockchain technology that store KYC data and improve identity management.
Blockchain’s impact relies on network effect, the value of the service depending on the number of people using it. The network relies on the ability of system to operate with one another. If this is not possible, banks will create internal blockchain solutions, which may create small improvements in efficiency, but the industry will ultimately end up with fractured systems that are unable to operate with one another. Some blockchain technology organizations are sticking to a limited network, while others are willing to work with an endless amount of bank partners.