SME Tech

Integrating Blockchain into Banking

The integration between Blockchain and Banking is now catching up after an initial reluctance. Global banking leaders have started figuring out the benefits of a Blockchain-Banking merger. The global banking and financial services leaders have realized the potential of the blockchain technology and look forward to a permanent amalgamation between the two.

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The history behind this marriage is technological progression which was directed towards an opportunity to explore and reconstruct the business models. Global incumbents introspected and realized that disruptors would wreak collateral damage on traditional business models. Blockchain will define the new business models for businesses across all industries be it banking, healthcare, music streaming, real estate, insurance, publishing etc.
Blockchain, the shared and distributed ledger technology has tremendous potential to change the business operating model. The shared, distributed and replicated ledger helps the incumbents become transparent, and create trust and accountability among the Peer-to-Peer (P2P) participants. Ledger technology (Blockchain) should not be considered as a replacement of the payment and messaging system of a bank. Instead, it augments the networks on trust and subsequently execution of transactions. This, in turn, reduces costs, the complexity of transactions, time to execute the transaction thus enabling trust for banks and financial services. Blockchain is a secure transaction ledger database shared by all parties in a distributed network, which records and stores every transaction that occurs in the network, creating an irrevocable and auditable transaction history.
Blockchain will be a self-sustainable framework and a tool for any industry. And banking would be one of the biggest beneficiaries to start with. Banking should start unleashing the power and potential of Blockchain. Banks across the world are using similar database/s maintained separately in isolation by each bank, that’s an unrealistic cost in terms of technology as well as processes. Blockchain will converge banking into universal database cutting across redundant processes and converging systems closer. Blockchain will throw open opportunities for people and organization/s to start their setup without investing heavily in the infrastructure. The emergence of new banks can happen without investment in infrastructure and just latch on to the existing setup of Blockchain.
The emergence of blockchain will disrupt each and every part of banking setup.

Retail Banking

Cross party transactions will see a major shift in banking. Blockchain will remain under the radar and support decentralized distributed ledger which anyone in the network can see and approve. Cryptography and replication help in making a transaction secure. The network here is a chain of computers validating and approving exchange before the transaction is recorded. The peer-to-peer transaction will have a major shift in terms of establishment of trust. Blockchain will eliminate multiple parties involved in transactions in the creation of trust across any border/s. Upfront use cases where global banking should start piloting is on retail loans, bank assurance, saving and current account opening’s KYC (know your customer) process; this will eliminate a lot of paperwork, smoothen internal validation process and create a strong sense of trust. Recordkeeping will be eliminated completely or with a minimal presence which will save tons of expense and costs. Similarly, processes for car and home loans concerning KYC can be made redundant with blockchain, as once the trust is created, repetitive threads can be eliminated.
A smart contract is another use case application through which banks can pilot a project. Smart contracts will facilitate banks with common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries. This will turnaround inefficiencies and return value. Investment banking can extrapolate the smart contracts to reap the benefits of blockchain.
Banking Mobile wallets is another use case where blockchain has a potential of disruption. Wallets can use the underlying blockchain setup for peer-to-peer transaction electronically.
New retail banks can smartly enter into banking setup/industry without investing in huge infrastructure.

Clearing and Settlement

According to some industry estimates, implementation of blockchain in clearing and settlement will save at least USD 20 billion per year. Blockchain will make clearing and settlement processes of balance reconciliations/s, end of day processes, reconciliations with central authority etc. redundant. It will have a huge impact on almost all industries viz global trading, investment industry, pension funds, and asset management as clearing and settlement will be near to real-time.

Lending

Peer-to-peer lending will take a new shape with blockchain. A convergence of global communities into a setup of blockchain will showcase trust, transparency and accountability. P2P lending with banks will enable trust as well. SME lending is one of the most concerned areas for banks for lending due to lack of transparency and trusts. SME lending through blockchain will enable banks with trust, accountability and transparency with high level controls on NPA’s.

Payments

The payment world will see a major shift as companies will offer blockchain as a service to support any local and global bank to bank transactions. If digital currencies are regulated and legalized, then payment industry will have a rebirth.

Trade Finance

A field where banks can immediately start the piloting is trade finance. Banks should leverage the power of blockchain to a financial supply chain. Information data such as letter of credits, and bill of lending can be powered through blockchain to establish trust between parties, and subsequently, the bank will save an enormous amount of costs.

Blockchain will have its challenges in terms of implementation and adoption, but early movers will have phenomenal advantages. It will impact bottom-lines first and subsequently throw open the doors for new business avenues and models for revenues and create a dent in the overall ecosystem.

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About the author

SPI Group

SPI Group is a well known publishing house in the Middle Eastern region. The group possesses three premium publications: Intelligent SME, Robust RAK and Apps Middle East. The group also conducts the Emirates NBD Global Business Series, The SME World Summit and The Global App Summit.

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