7 Key Advantages of using Blockchain Technology in Banking

The banking industry has faced numerous challenges in the past, including delayed transactions, security concerns, and high costs associated with intermediaries. However, with the advent of various innovative technologies, banks are finding solutions to these issues and gaining significant advantages in their operations.  One of those brilliant innovations has been done by introducing blockchain to enhance productivity in the banking industry. 

While blockchain in banking has been slow to gain momentum, the technology is poised to rise from $4.9 Billion in 2021 to beyond $67.4 Billion by 2026. Its growth reflects the growing interest in blockchain across other industries, and banks are beginning to adopt this technology on a small scale. 

A few international banks have started to adopt blockchain to gain the competitive edge and reduce their costs significantly, such as JP Morgan, The Swedish Central bank, and HSBC.

7 Key Advantages of Blockchain Banking for the Financial Industry

There are many advantages of blockchain in banking and other financial institutions worldwide are adopting this technology to streamline their operations. 

Here are the seven key advantages of blockchain banking that are transforming the banking industry.

Instant Settlements of Payments

One of the primary advantages of blockchain in finance is the instant settlement of payments. Blockchain removes the need for many intermediary and back desk staff at banks, as transactions settle instantly. Resolving payments due to office and back-office work can take almost a week. With blockchain technology, transactions are completed in real-time, leading to faster settlement and lower transaction costs.

According to a report of Accenture and Mclagan, the blockchain technology could reduce the cost of 8 investment banks out of the world’s 10 largest investment banks by up to 30%, from $8-12 billion in annual cost of savings.

No Intermediaries Cost

Implementing blockchain technology in banking removes the need for intermediary banks to make peer-to-peer transactions. This smoothens interbank or inter-branch transactions, reducing the cost associated with intermediaries such as custodian banks and clearing banks. Here are a few ways how blockchain technology reducing intermediary costs- 

For example, Cross Border Payments used to take a considerable amount of time and cost that are currently done through the Swift mechanism of international payment and settlement. Ripple is a blockchain technology that works similar to the Swift, a blockchain-based digital payment and network protocol. The main process of Ripple is payment settlement asset exchange and remittance system that claims 40-70% of reduction in the cost of the whole process in cross-border  payment. 

Smart Contracts Optimize Contractual Performance

Smart contracts can potentially revolutionize how banks conduct transactions and improve contractual performance. Smart contracts are computer programs that execute automatically once certain pre-set terms and conditions have been met. It eliminates the need for transaction intermediaries, reducing the time and cost associated with traditional contract execution. There would be a reduced chance of error while executing the contracts, leading to faster and more efficient processing.

Reduced Reconciliation and Error Handling

Finding the cause of an error is tedious and requires a significant cost in manual handling. Using blockchain technology, the data entered in the distributed ledger is immutable, and the chances of errors are next to zero. There is no need for a reconciliation and error handling process as the data entry is done in real-time. Any mistakes can be corrected when entering the data itself, leading to more efficient processing.

Secured Data with 100% Transparency

Blockchain technology offers a high level of security to banks. For every transaction, there are two security keys. Every user has access to a public key, whereas the parties to a specific transaction have a private key. Once a transaction’s data has been verified, it cannot be changed, ensuring complete transparency in the transaction process. If regulators have access to the blockchain, financial firms will have more transparency, leading to improved regulatory reporting and monitoring by central banks.

Accountability

Accountability will enable banks to gain from blockchain by lowering fraud and misappropriation of corporate assets. This creates higher trust between customers and banks, leading to more business and better relationships. Banks won’t have to worry about substantial mistakes being made with digitally created transactions. They won’t need to be concerned about crucial facts being manufactured.

According to a report by Deloitte, blockchain technology can help banks to improve their risk management and compliance processes, leading to potential cost savings of up to $20 billion per year. Another report by Capgemini suggests that blockchain technology can improve regulatory compliance by up to 90%.

Quick Processing & Delightful Customers

The speed of transactions is another significant benefit of blockchain technology in banking. Transactions can be completed in seconds, leading to faster and more efficient customer banking services. 

Furthermore, with the ability to cut out intermediaries, customers can complete transactions more quickly, and banks can process more transactions, resulting in greater customer satisfaction and increased revenue.

Advantages the big investment banks are availing right now-

For centuries, banks have played a critical role in facilitating economic and financial activities such as lending, trading, transaction settlement, payment processing, and more. The traditional banking system still relies heavily on paperwork, faces security vulnerabilities, and has numerous time-consuming and costly processes in place. But with the evolution of blockchain technology, the banking industry has found a new solution to its challenges. 

Blockchain technology eliminates the dependency on intermediaries and provides a secure and transparent platform that is fast gaining more support from big banking names. Let’s look at some examples of how banks are using blockchain technology to their advantage.

• J.P. Morgan is utilizing blockchain to improve money transfers, lowering payment processing and verification time for large payments. By leveraging this technology, J.P. Morgan is providing faster and more efficient services to their customers while simultaneously reducing costs and streamlining their operations.

• The Swedish Central Bank is taking a bold step towards creating a country-wide usable cryptocurrency known as e-krona. Based on R3 Corda distributed technology, this move highlights the bank’s commitment to exploring new technologies and improving the country’s financial infrastructure.

• Meanwhile, HSBC is using the R3 blockchain platform to enable Digital Vault, a custody blockchain platform for storing digital assets. By leveraging blockchain, HSBC is able to lower the cost of their custodial service significantly while also providing more secure and reliable services to their clients.

Conclusion

As new financial products and services continue to emerge, it is evident that blockchain will play a pivotal part in shaping the future of finance. It is clear that blockchain technology offers numerous benefits for the financial services industry. With faster settlement times, reduced transaction costs, and improved security, banks and other financial institutions have the opportunity to improve their operations and better serve their customers. 

Although there are still challenges to overcome, such as regulatory issues and cybersecurity concerns, the potential for blockchain technology to transform the banking industry is significant. It is imperative for financial institutions to embrace this technology and remain competitive in an ever-evolving industry.