Blockchain is a public ledger that can record the origin, movement, and transfer of any valuable asset. To process a payment or transfer of a good, the blockchain requires unanimous approval from the individual nodes in the blockchain, as opposed to relying on a central authority like banks. The banking sector is most interested in ledger technology because it solves many of the industry’s current problems, most importantly, security and efficiency. The use of blockchain in banking subverts institutions in ways that make today’s banking industry appear archaic. So, it’s no surprise that the world’s biggest financial powers are looking for a seat at the table. The promise of DLT technology to eliminate unnecessary middlemen, paperwork, and security headaches can save banks crores of rupees each year.
List of ways in which Blockchain in Banking is transforming the Industry
1. Creating trust with smart contracts
Blockchain’s ability to efficiently establish trust through smart contracts is its most critical application in finance.
Smart contracts are similar to physical contracts in that the contract’s terms are fulfilled in real-time via the blockchain. Smart contracts are advantageous, particularly in the banking sector, for a variety of reasons. These contracts are fulfilled as soon as all contract demands are met, do not require any middlemen, and provide more security. Smart contracts benefit parties seeking very specific outcomes. The contract is fulfilled by both parties following all of the predetermined rules, and the contract is automatically dissolved in the event of a violation. UPI platforms have already begun to explore this facility and therefore, UPI has changed the financial ecosystem in India.
Investing is a good example of this. When an individual invests in a company, the terms and conditions are clear between the two parties. The unambiguous nature of the contract is advantageous because the blockchain can then enforce those rules using its network of computers to ensure that all contractual agreements have been met before the investment proceeds. Because of its efficiency and privacy, integrating smart contract technology by introducing the use of blockchain in banking is currently at the top of everyone’s list of requirements.
2. Payment simplification
The ability of blockchain to process payments almost instantly while maintaining data integrity is one of the most appealing ways blockchain in banking can change the industry.
Because the goal of blockchain in banking is to avoid centralised institutions, sending money from peer-to-peer is as simple as pressing the “send” button on a phone. Once initiated, the blockchain nodes work in unison to accept or deny the payment in an instant. Cash need not sit idle for days while the bank processes the transaction, nor is it subject to exorbitant fees.
Customers and banks alike could save an unprecedented amount of time and money by using blockchain to conduct money transfers. Blockchain-based currencies are also universal, which means there are no exchange rates, international transfer fees, or perplexing country-by-country laws prohibiting crypto transfers. It is speculated that blockchain might bring to banking what AI might bring to UPI payments.
3. Trading and investing advancement
The use of blockchain in banking has the potential to transform the stock market by reducing complex and time-consuming processes, as well as high costs and security risks.
A traditional stock market has many participants, including the investor, brokers, regulatory agencies, and the centralised institution that processes investments. Investments can take up to three days to process due to lags and uncertainty in the process. Blockchain technology, which includes smart contracts and a decentralised process, promises to improve the investment process’s speed, accuracy, and efficiency. UPI platforms, especially those that specialise in B2B transfers, have made this easier as well.
If the blockchain deems the investment valid, an investment fulfills immediately rather than after a few days. The peer-to-peer investment process shortens and eliminates unnecessary steps. The tightened security encryption protocols of blockchain significantly reduce the risk of a banking data breach. Furthermore, companies are increasingly turning to blockchain-based start-ups because they provide a faster, safer, and more accurate method of raising capital.
4. Programs for loyalty and rewards
Maintaining and expanding a customer base can make or break a business. It’s no coincidence that high-performing stocks have massive customer loyalty programs and millions of devoted followers. Businesses seeking to increase revenue and retain customers have discovered a new solution: blockchain-based loyalty rewards. Companies’ current loyalty programs are difficult to maintain, are out of date, and pose a high risk of data breaches.
Like any other business, the finance industry wants a piece of the massive data and profits that customer loyalty rewards programs can bring, which essentially enables the assimilation of blockchain in banking. This is one of the reasons why many banks and financial institutions are looking into providing various UPI channels to their customers.
Blockchain can further optimise banking processes by reducing costs, enabling real-time transactions, and protecting critical data. Smart contracts enable customers to collect rewards in real-time and businesses to better manage their data. The consolidation of a customer’s loyalty program into a single blockchain-based “wallet” encourages customers to use their rewards more frequently. Customers will also develop trust and affinity for businesses that use a high-level security blockchain to secure their personal information.
5. Increasing the effectiveness of digital identity management
Maintaining the integrity of a customer’s “digital identity,” which contains some of our most sensitive information, is one of the most serious responsibilities of banking institutions.
We entrust our passport information, biometric scans, social security numbers, accounts, and addresses to banks, expecting them to protect them. Over the past year, millions of Indians’ digital identities were compromised and their credit card and bank information were stolen. The integration of blockchain in finance has the potential to thwart hackers in their tracks.
According to the 2018, World Economic Forum in Davos, Switzerland, blockchain’s greatest advantage is its security. According to the Forum, blockchain could increase data security by increasing trust, accountability, and efficiency. Notably, the conference indicated that leveraging the use of blockchain in banking and finance to build decentralised mechanisms against increased risk and cyber-attacks could enable the banking industry in ushering in a new era of digital identity security.
You now have a solid idea of the many applications of blockchain in banking. It all depends on how successfully you can integrate it into your current marketing initiatives. Depending on your organisation, you may require a complete overhaul or simply a few minor changes to your marketing strategy.