Blockchain technology has become popular in several industries across the world due to its security and ease of access. It originated with Bitcoin and other cryptocurrencies as a way to permanently store data, protect valuable information, and offer easy accessibility to its users. Although it is still popular in this field, it has since migrated to industries with applications such as medical technology and real estate property record-keeping.
While blockchain has been disrupting many other sectors, the financial field is no stranger to its convenience and added security. The use of blockchain technology in banking is far-reaching — it can apply to several different uses for both customers’ and businesses’ peace of mind. People want to trust their money will be safe, and banks seek to provide that advantage.
Cases of blockchain banking use continue to increase in quantity as more financial institutions realize the benefits of employing this technology. Blockchain is well on its way to transforming banking and financial tech on a large scale. Soon, it may become common across banks all over the world. Here are a few methods of how banks use blockchain to streamline their operations:
Payments are one case of blockchain use in banking that’s catching on fast — primarily because it’s the main thing for which people use their bank accounts. Many banks are turning to this technology to handle payments and even leaning toward issuing their own digital currencies. Blockchain can operate in real-time when moving money, which is a major contrast to the traditional multi-step authentication that many banks still use.
Yet, it preserves the necessary level of security needed for transferring money to create a process that’s both fast and safe. This ability could enable banks to operate 24 hours a day instead of holding transactions for the next day after a specific time. Cross-border payments could also become quicker and more feasible for a larger range of individuals. Banks like Australia’s Westpac and Estonia’s LHV Bank have successfully integrated blockchain tech in the past — whether it’s been cryptocurrency or fiat currency.
2. Identity Verification and KYC
Identity verification plays a significant role in banking — no one wants their money stolen by cybercriminals. However, the authentication and authorization process can be so involved that efficiency suffers. Banking clients have used blockchain technology to remove some of these extra steps. By registering with the blockchain once, they avoid the need to repeat verification for other service providers if they also use blockchain.
Know Your Customer (KYC) also benefits from this technological system. The typical onboarding process for new customers is expensive and time-consuming, as businesses review each person’s financial history — along with much more data. Blockchain tech, however, can automatically update customer databases with this information and facilitate secure sharing between loan officers and banks.
These features are especially useful for an industry that’s seen $150 million spent on KYC procedures in 2017 alone. Fintech professionals could help their clients save big-time by employing better, more cost-effective technology.
3. P2P Transfers
Peer to peer (P2P) transfers involve money that’s sent from someone’s credit card or bank account to someone else’s by using a mobile phone or the internet. Platforms like Cashapp and PayPal exist for this reason. Many websites and apps in this category place limits on what kind of P2P transfers can be conducted — such as no international money exchanges. These kinds of platforms also pose concerns for some users who don’t trust that their money will stay secure during the transfer.
Blockchain technology in banking can provide an answer to both the limitations and security issues. Because blockchain is available everywhere, people within any country can use it, which removes the constraints set by banks that only service customers in specific countries. Additionally, some platforms allow people to make both cryptocurrency and fiat transfers through blockchain.
Bitwala is a fitting example of a P2P app that uses decentralized blockchain tech to facilitate money transfers. This platform focuses mostly on cryptocurrencies such as Bitcoin. However, it differs from other cryptocurrency exchanges in that it allows daily financial management.
4. Record Sharing and Storage
Banks store a tremendous amount of sensitive records, and this requires a security solution that allows them to share and collect this information safely. Paper documentation was a widespread practice for many financial institutions, and it still is for some. However, others have turned to digital solutions to keep up with an increasingly technological world. Plus, this process creates less paper production and waste — a little eco-friendliness doesn’t hurt where possible.
Blockchain technology in banks lends itself well to recording storage because of its structure. It uses a decentralized system that encrypts every block of information within a ledger, creating a bunch of unchangeable blocks that link together. This system keeps the records easily accessible and transparent while also permanently storing data and reducing the costs associated with paper documentation.
The bank HSBC recently announced plans to exchange its paper records for a blockchain platform, which would shift over $20 billion assets to a digital, secure solution.
5. Trade Finance
The trade finance sector deals with commercial and international exchanges, which often involve a lot of paperwork and multiple intermediaries. Export credit agencies and financiers are just a couple of the additional parties buyers and sellers must communicate with when trading. Trade finance fosters documents like bills of lading and letters of credit, which entail more paperwork to file away for safekeeping.
Blockchain can eliminate these intermediaries and significantly speed up record-keeping. Normally, all participants would need to maintain their own database for these documents — this arrangement requires frequent reconciliation and is prone to errors. With one real-time digital file, everyone can access data as needed and make updates with fewer mistakes.
The agreement between Alfa-Bank, the German bank Commerzbank, and Marco Polo offers an excellent example of effective blockchain trade financing. This arrangement allows Alfa-Bank to integrate its bank instruments into the global trade ecosystem, offering easier collaboration for its clients.
6. Loan Syndication
Loan syndication can be a lengthy process because of how many participants are involved — one borrower dealing with several lenders. It also lacks an element of transparency concerning the underwriter, or the person who assesses the risk of lending money. Additional issues include the complexities of KYC verification and potential delays related to Anti-Money Laundering (AML) and the Bank Secrecy Act (BSA). Fortunately, this situation opens the door for the perfect case of blockchain use in banking.
Lenders can approve loans quicker by reducing instances of data duplication and exchanging information with other banks without repeating compliance procedures. They can decrease the expenses associated with lending regulatory requirements while also saving time and servicing the borrower more efficiently. One notable example comes from the German engineering firm Dürr, which participated with banks like BNP Paribas and UniCredit to create an $840 million syndicated blockchain loan.
Invest in Blockchain Technology for Your Banking Needs
Will your bank use blockchain technology to enhance its operational structure? If you’re in the market for a blockchain solution that will save you time, resources, and money, Hydrogen can help. Our Molecule API lets you manage blockchain identities for clients, create security tokens, and track on-chain data within an application.