If you have been wondering, “What is blockchain and how can it change banking?” it’s time to find out. This post will answer those questions.
What is Blockchain?
Blockchain technology is being embraced by:
- Business Owners;
- Regulatory Agencies;
- And other types of organizations, industries, and professionals.
Blockchain offers potential benefits that are generating excitement, such as increased efficiency, reduced costs, and greater security.
But how does this innovative technology actually work? We need to begin by describing what it is.
Basically, it’s a digital database that is accessible by multiple parties from all over the world. The data is accessed via APIs and torrent sites. The information that gets stored on the blockchain is kept up to date and can never be deleted.
The blockchain system is known for being highly secure. Here’s why:
- The entire system is a transparent record of every transaction that occurs.
- Cryptography protects this data from alterations.
- The blockchain can only be modified with private keys that allow editing.
How Blockchain Will Change Banking
Although likely to transform the entire financial industry, blockchain technology might not replace banks. Instead, it could be used to decrease costs and increase net profit. Listed below are some specific examples of this.
Assists with Reconciliation
Reconciliation is a fundamental component of many different types of organizations, including financial institutions. At this point, individual companies have their own, internal database, which slows down the rate at which transactions are completed. This is because each business that is involved in the transaction must ensure their records are in agreement with each other.
According to Deltec Bank, Bahamas- “Blockchain can make the entire reconciliation process more efficient by using a single, shared database that can be accessed by multiple organizations. This would automate reconciliation and speed up the transaction process.”
According to Nelito, about, “45% of financial intermediaries like stock exchanges and money transfer services are prone to financial crimes routinely.” Blockchain could decrease that percentage.
The current banking system relies on a centralized database. Unfortunately, that type of database allows hackers to gain access to an entire system. A blockchain-based system would eliminate that risk, making data far less susceptible to a cyberattack.
Reduces KYC Costs
Nelito also cites the Thomas Reuter survey, which reveals that, “Financial institutions spend anywhere from $60 million up to $500 million per year to keep up with Know your Customer (KYC) and customer due diligence regulations.”
Such regulations are intended to fight against money laundering and terrorism, but the costs to comply are extremely high. However, blockchain could decrease those costs by granting access to a client’s verification details.
This would make KYC procedures easier and quicker because the process would not have to be duplicated by various organizations for one client.
Disrupts the Payment System
We can’t talk about blockchain without mentioning how it could disrupt our current payment system. Using blockchain to make payments would eradicate the need for intermediaries while increasing security and decreasing costs.
Improves Trading Platforms
Blockchain technology has the potential to reduce risks associated with fraud and operational blunders on trading platforms. Furthermore, blockchain could reduce costs and promote greater efficiency on these platforms.
Creates Smart Contracts
Information that gets stored digitally can be used to compose smart contracts. The contracts are generated by computer code that is set to perform when the correct keys are entered by participating parties.
What Banks Need to Do Now
There are many possibilities that exist for organizations that are open to the implementation of blockchain technology. For banks, this will require making some major changes to their systems and operations.
These banks will need to reevaluate:
- What role they have to play if blockchain becomes a prominent part of our future;
- How they can continue to survive despite competitors that are popping up;
- What unique benefits they can offer to consumers;
- How they will attract new customers and keep current customers;
- How to improve current systems, operations, and security by using new technology;
Banks that address these issues head-on will have a much better chance of thriving in the face of blockchain’s disruptions. The sooner these banks begin to consider how to handle those disruptions, the better.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.