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Blockchain for the banking industry: is the future already written?

There are two main reasons why this technology will likely work out for the banking industry

blockchain banking

Blockchain for the banking industry: is the future already written? Source: shutterstock.com

First of all, let’s remember when blockchain was invented. It was 2008, and people still barely know about it. According to statistics, no less than 24% of the world’s population is aware of this technology now. If we look back in history, 13 blockchain projects raised $365M in 2015, while in 2016, they had amassed no less than $1B.

Nevertheless, not all market players are happy with such a rapid pace of development of this technology. The new technology offers a lot of innovation, as well as fundamental changes too. The banking sector, for instance, expresses concerns, because it is not entirely ready for dramatic changes. The interesting thing is, the majority of financial industry leaders have no doubt the technology will have a positive impact on the industry. They just are concerned about the speed of progression of blockchain technology.

Before we start, let’s find out what blockchain is, and how it works.

How does blockchain work, and how can it be useful for the banking sector?

Basically, blockchain is a combination of two words – “block” and “chain”, which means a chain of blocks. Moreover, it’s not just a randomly generated chain, it is a rigorous sequence. You may ask what are these blocks and what are these chains? Blocks contain transactions and contracts of data inside the system presented as cryptographic information. These blocks develop the chains, which means they are connected. If you need to create a new block, you have to read the data from the previous blocks.

The data is accumulated and forms a database. The best thing about this database is that one can’t delete or change anything inside this database or substitute any of the blocks.

How does the process work? Let us suppose that person A needs to send some money to B. All transactions jump into this network, and data is transferred into these blocks. Each of the blocks contains a number and the hash of the previous one. All the blocks are sent to all system members (also known as nodes) for verification. If there are no mistakes, all the nodes add this new block to their part of the system. Only after that, is this new block added to the “main” system. Finally, the money is transferred. That’s the way it works.

In simple words, blockchain is a mathematical model, which processes, secures, and finalizes transactions.

Typically, banks have a lot of transactions every single day. That is one of the main reasons why this technology will likely work out for this industry.

To cut a long story short, there are two main reasons for that:

  1. It is much cheaper to use this technology.
  2. This technology is much faster.

It is much cheaper to use this technology

Banks are always trying to find ways how to spend less money, so if a bank sees a way how to save money – it will seize the opportunity. One of the most critical issues for banks has always been the return on investment rate (or just ROI). Some experts claim that there are three major problems, which affect banks’ efficiency and profit.

They are:

  • An uncertain regulatory environment (which changes every 12 minutes).
  • Historically low-interest rates.
  • Digital disruption.

It’s hard to find precise figures, but some professionals in the industry say banks can lose around $300B by 2021 due to these major problems.

The total amount of money (for payments) that businesses send abroad is from $150 to $300 trillion. The average fee for each transaction is about 10%, while the average transfer takes from 2 to 5 business days.

Will blockchain help to ease these problems? There is a high likelihood that it will. Blockchain can remove all extra expends for customer identification.

Here’s how a report by PWC puts it:

Blockchain systems could be far cheaper than existing platforms because they remove an entire layer of overhead dedicated to confirming authenticity. In a distributed ledger system, confirmation is effectively performed by everyone on the network, simultaneously. This so-called ‘consensus’ process reduces the need for existing intermediaries who touch the transaction and extract a toll in the process. In financial services, that includes those who move money, adjudicate contracts, tax transactions, store information and so on

Other reports claim this technology can save banks up to $20B annually. It sounds awe-inspiring. However, financial institutions still doubt the usefulness and profitability of this new technology. And it’s easy to understand why because it is very hard to accept a new system when you have worked with the old one for the past 20-30 years.

In other words, it is vital for banks to find a way to learn to trust blockchain technology. It is the only way how to start to use it, thus, saving money. Of course, it will take some time. How much time will it take? Nobody really knows. As the old proverb says, “Only time will tell”. Experience has shown, however, that things go much faster when money is involved.

This technology is much faster

To better understand how this technology works let’s imagine that you are shipping clothes from China to Germany. Among the significant questions are the costs of delivery and the speed at which they come to the delivery point. Technically, nowadays it can take no more than a day. Nevertheless, there is not only the delivery time to consider. Let’s not forget about the paperwork. It will take no less than a week to settle the issue. Blockchain can significantly ease this process, making such a thing happen within a couple of seconds, and it is an excellent example of why it is much easier and faster to use blockchain technology.

Trade finance is an obvious area for blockchain technology. It is so old it's done with fax machines and you need a physical stamp on a piece of paper
Charley Cooper, Managing Director, R3

Let us not forget that SAP, ATB Financial, and Ripple have jointly launched the first-ever international blockchain transaction from Alberta, Canada to ReiseBank in Germany.

The result was quite stunning – ordinary, it takes from 2 to 6 business days for such a kind of transaction to be processed, whereas blockchain transaction took around just 20 seconds. The technology has been improved many times since, so now it is possible to complete such a transaction in only 10 seconds.

It’s good to know that 40 large banks worldwide are now investing huge funds into the blockchain. Bank of America is looking for blockchain patents, while Goldman Sachs, JPMorgan Chase, Citibank, and Bank of New York Mellon all created their own cryptocurrencies. They all do this because they understand that blockchain it’s not just about savings. It also offers faster transactions, which means happier customers, efficiency, and accuracy.

Conclusion

We can clearly see that many banks have begun creating their own сrурtосurrеnсіеs and are ready to use blосkсhаіn technology for transactions nowadays, and this trend seems to be getting more and more popular.

It is hard to find other reasons for it, except the time and money-saving factor. Frankly, there is no need to look for any other reasons, because what can be more important for a business than time and money?

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