Blockchain technology has been widely used in the financial services sector for its ability to bring transparency, efficiency, productivity, and transparency to the ecosystem. Simply put, it helps to reduce operational risk as well as data breaches.
What is Blockchain?
Blockchain technology creates data blocks which are stored in a chain. Each time a block is created, it is added the the chain, creating a digital ledger. There are two types of blockchain networks: public and private. A public blockchain is open to anyone. Private blockchains can only be accessed by verified members who have access to a digital asset stored on a decentralised Blockchain database.
What is Digital Ledger Technology?
Blockchain has attracted the most attention in the financial and banking sectors, but DLT can also transform other industries such as manufacturing and clean energy.
Distributed ledgers make use of independent computers to record, share and synchronize transactions in separate electronic leadsgers. This is in contrast to traditional ledgers which keep data centralized. This technology has the potential to transform the financial sector and make it more resilient, efficient, reliable, and resilient.
DLT can solve persistent problems in the financial sector, and it can transform the roles of financial stakeholders. According to a PwC survey, 56 percent Indian businesses want blockchain as a part their central processes. This speaks volumes about the ease, willingness and speed with which blockchain is being integrated into the economic and social frameworks of India.
Major Banks adopting Blockchain
The Reserve Bank of India published a February 2020 article entitled “Distributed Ledger Technology and Blockchain and Central Banks” that explains DLT and blockchain technology and the latest developments in blockchain technology. It also outlines its use in India’s central banks and around the world.
Many public and private banks responded to the RBI’s initiative by investing and partnering in the fintech industry. The State Bank of India partnered with JP Morgan in order to use its blockchain technology. Axis Bank and ICICI Bank joined the Interbank Information Network (JP Morgan). The investment in equity shares of Indian Banks Blockchain Infrastructure Co Pvt Ltd, (IBBIC), by HDFC Bank and South Indian Bank to provide DLT solutions for the financial sector created ripples in digital lending.
Blockchain Opportunities in Finance
Transparency is improved: Users can execute activities on a public blockchain. The industry is now more transparent. Transparency can expose inefficiencies and help solve problems as financial institutions are less at risk.
Blockchain simplifies operations: Blockchain allows financial institutions track multiple parties in real time and manage letters and bank guarantees. It streamlines the operations of both the merchants as well as the customers.
Faster Settlement: Cashier’s checks, wire transfers, and cashier’s checks are all safe payment options. Cashier’s checks can be forgery, wire transfers can take too long, and cash cannot be traced. These concerns are eliminated by blockchain-based payments, which gives customers greater confidence. Blockchain technology allows real-time transfers of funds between financial institutions. This eliminates friction and speeds up settlement.
Smart Contracts Allow Automation: Blockchain isn’t revolutionising banking only with money transfers. This technology allows for the tracking of transactions and automation. Financial service providers can track seller payments and buyer deliverables with smart contracts. It can also resolve any issues that may arise during the transaction. These automated systems reduce the risk of human error.
Improve Customer Experience: Many banks use blockchain technology to make international payments. This saves time and money. Customers can use blockchain money transfers to send funds online via mobile devices. Customers no longer have to go to a money transfer center, wait in line and pay transaction fees.
Blockchain Finance: The Challenges
Although blockchain technology has many benefits, there are also some challenges.
Relatively new: Blockchain is still in the development phase. There are many obstacles to overcome, and ongoing amendments will be necessary. Regulators have not been able to catch-up. The government might need to establish guidelines and policies to monitor the use and companies of blockchain.
Different Methodology: Blockchain doesn’t allow data modifications. This is a great benefit but it can cause problems for financial institutions that require access to stored data. Companies will need to restructure their business processes to avoid data alteration after the implementation of Blockchain.
Lack of interoperability: Blockchains can’t exchange or make use of information from other cryptos. There is therefore no communication between them. Interoperability solutions must be the focus of blockchain networks.
Accessibility: It is difficult to switch to blockchain technology. This is due to a lack of skilled blockchain developers. Smaller financial institutions may not be able to afford the upgrade systems that are already in place.
Low adoption: Blockchains need to be widely adopted in order to facilitate fast and smooth transactions. This is especially true in the financial sector, where companies interact with one another and need a common framework to handle transactions. If a bank wishes to initiate fund transfers through blockchain technology, all banks involved must have it.
What’s ahead?
The use of blockchain technology in financial services is still very much in its infancy. We expect two major developments in the future – interoperability, and improved transaction processing. These enhancements will make the technology more valuable for financial institutions.
Research Dive’s report states that the global blockchain market will be a huge benefit to the financial sector in the near future. This is mainly because banks and financial institutions are using blockchain applications in their payment processes to offer international exchanges at lower costs and secure transfers.
The disruption is only going to continue due to the IoT’s increasing innovation, which has revolutionized many industrial sectors. Blockchain deployment in banking and finance will reduce paperwork, create a secure environment and speed up transaction processing. This is not the only way that blockchain can open up new avenues for cost savings. It can improve customer journeys and facilitate safer data transactions.