Blockchain is a decentralized record-keeping system that uses a distributed ledger to store essential data. This adds much-needed trust, traceability, and transparency to the blockchain. With that, blockchain has the potential to solve several long-standing challenges in the banking industry. Let us find out more about that in this blog.
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Before delving deeper into blockchain technology in banking, it is important to understand blockchain and its importance.
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What is Blockchain?
Simply put, blockchain is a decentralized record-keeping technology, in which, a distributed ledger is used to store critical information. This information is stored in digital form and distributed to all network participants. Thus, the system makes it almost impossible to modify the stored database.
On top of that, since the database is not stored at just one location, and is distributed, it is impossible to destroy the database. Plus, the information can be passed on quickly among the participants of the network, without the interference of anyone. All these together make blockchain an extraordinarily and exceptionally safer technology.
In a sense, in the blockchain network, each and every participant is a gatekeeper and watcher of the stored information. This provides blockchain with the much-needed trust, traceability, and transparency factor a database technology needs for higher adaptability to be mainstream.
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Why is Blockchain important?
The lucrativeness of blockchain lies in its decentralized, secure and transparent nature. A business always desires that its database remains secure, tamperproof, transparent, and undestroyable. And, blockchain accurately overcomes all these hindrances, usually faced by traditional database systems.
In addition, blockchain significantly reduces the costs of operations by removing third-party mediators from the system. And, the quickness of blockchain has increased transaction speeds. These exclusive traits have made blockchain an effective and affordable option for all businesses while making it also extremely important.
After a brief understanding of blockchain, its importance, and the importance of blockchain in banking, it is time to dive deeper into blockchain technology in banking and its advantages.
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How is Blockchain in banking important?
The banking sector has been plagued by operational and functional challenges for a long time. Blockchain technology is seen as an effective solution to overcome these challenges.
The following are some areas in which blockchain technology can prove useful in banking:
- Authenticity: Blockchain ensures the integrity of data and ensures proper authenticity.
- Streamlined Process: Blockchain makes all banking operations effective and efficient.
- Economic Benefits: Better operational costs, less infrastructure and transaction costs.
Banks are already experimenting with blockchain technology to improve their operations. A number of banks have started using blockchain for payments and other financial transactions.
The following is a detailed explanation of the application of blockchain technology in the banking sector and its advantages.
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Increased Security and Reduced Fraudulent Activities
Security has been the core principle of the banking sector since its inception. So, the banking sector has always been vigorously fighting to tackle fraudulent activities. But, banks have failed to eliminate or trace the syndicated fraudulent activities that have cost them billions. Payment fraud is estimated to be a $20 billion-a-year problem.
Blockchain technology can help to counter or exclude such fraudulent activities as it creates a clear inspection trail of all the activities that take place on the network. And, since it has multiple redundancies, it’s nearly impossible to alter any information once it has been stored on the network.
A blockchain network is maintained by a number of computers, and there’s no central system or point where criminals can attack the network and temper the data without leaving any proof behind. During times of rampant cyber attacks, this privilege makes blockchain technology a highly sought-after domain currently.
SecureKey Technologies of Canada is working on a new digital identity operation and trait-sharing network grounded on the blockchain. The network will allow individual consumers to control what information they provide, while associations can efficiently validate a client’s identity to arrange new services. By reducing spare verification processes and the quantum of paperwork demanded to execute them, there would be smaller vulnerabilities for culprits to exploit.
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Quicker and Cheaper International Transactions
Currently, the transfer of money from one country to another can take multiple days and involves a number of third parties. This means that by the time the money reaches its destination, the sender loses a significant amount of money.
Blockchain finance is a new technology that promises to revolutionize the way money is handled and used. Blockchain technology can speed up and lower the cost of cross-border payments. For example, a 2% fee for blockchain remittances is far less than the 5-20% surcharge imposed by other third parties.
Additionally, blockchain does not require third-party authorization, which significantly speeds up cross-border payments. Because of this, cross-border payments are also on the rise, spurred by Swift or Western Union to date but now being powered by blockchain as well.
One example is Santander, which is testing a new service called “Instant Payments” that uses blockchain technology to speed up international payments. Similarly, in 2016, Westpac, one of Australia’s largest banks, partnered with Ripple to implement a low-cost cross-border payment system based on blockchain technology.
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Reduced Operational Costs and Man-Made Errors
According to several statistics, man-made mistakes in record-keeping and accounting are among the primary causes of fraudulent activities. Even in terms of security operations, it is frequently an unintentional human error or negligence that results in major cyber security vulnerabilities.
Blockchain technology conveniently avoids such errors by using an automated mechanism to record transactions that cannot be changed afterwards. Many manual operations can be phased out by adopting this technology, which will erode human errors, enhance efficiency, and limit the effect of cyber attacks.
Apart from reducing man-made errors, blockchain also has the potential to drastically cut the cost of financial services while also improving product quality. Today, financial institutions are actively seeking methods to use this technology to overcome transaction speed and operational cost issues. When using blockchain, a lot of processes can be automated.
The safe, transparent, decentralized, and easy-to-use characteristics of blockchain allow enabling the automation of several banking-related tasks like financial transactions. This leads to increased efficiency while significantly reducing operational costs as it removes unnecessary third parties from the system.
As previously said, blockchain technology will be a game changer in the banking industry. Not only will it help banks, but it will also boost consumer satisfaction as a result of simplified and efficient operations.
There is little question that blockchain technology in banking will fundamentally alter the way the industry functions. Although widespread adoption of blockchain in banking may take time, it is clear from the current scenario that blockchain technology will eventually dominate the financial sector.
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