Blockchain technology has garnered a lot of interest in the previous decade. Everything from financial transactions to how money is generated in the private sector is transformed by blockchain. Will the conventional banking industry adopt this innovation and alter the financial sector’s future needs?
Blockchain technology enables untrusted parties to reach a consensus on the status of a database without using an intermediary. A blockchain might deliver certain financial services — such as payouts or securitization — without the involvement of an institution by offering a ledger that no one manages.
This article will show you how blockchain implementation in different sectors of the financial industry will change in the upcoming time. At the end of this article, you will learn:
- The problems in the traditional financial industry.
- How is blockchain technology solving these problems and changing the trends?
- How can Blockchainconsultant.io help your financial business?
Let’s have a quick look at the current challenges the traditional financial sector is facing.
Current Challenges in the Traditional Banking and Finance Sector
The banking and finance sector is facing several challenges, which impede its growth and development. These challenges and problems make the users think about adopting new technology.
Security Challenges
One of the significant challenges is security issues and fraud prevention. The rise of digital technology has made it easier for hackers and scammers to steal sensitive information from financial institutions.
Moreover, cyber-attacks on banks are becoming increasingly sophisticated. This problem is making it difficult to detect and prevent them. In this situation, this industry is looking for a solution where there is no possibility of cyber hacking.
Slow and Expensive
Another significant challenge is slow and expensive cross-border payments. Traditional banking systems are known to be slow and inefficient when it comes to processing cross-border transactions. Not only does it take a long time for funds to reach their destination, but customers are also charged exorbitant fees for the service.
This puts a strain on the banking sector’s reputation and affects customer confidence. The sector needs to adopt innovative payment systems that facilitate faster, more cost-effective cross-border transactions.
Lack of Transparency
In recent years, several regulatory and compliance issues have arisen, leading to a decline in public trust in the sector. Customers want to feel confident that their money is in safe hands and that banks are operating in a transparent and accountable manner.
Banks need to provide greater transparency and accountability, including the disclosure of fees, adherence to compliance regulations, and stronger ethical practices. To fill up all these demands financial institutions need to adopt such technology that provides transparency, strong accountability, and customer safety.
Surely, blockchain provides the solution to all of these problems. The decentralized nature, proof-of-work mechanism, and secure hash encryption techniques make this technology more secure, accountable, and transparent. Let’s learn how this technology is solving these problems and changing the upcoming trends.
How Is Blockchain Addressing These Problems and Changing The Trends?
In this section, we will show you how blockchain technology has the potential to change current trends in the traditional banking sector and open the door to new business models.
Payment System
Blockchain technology can enable quicker payments at cheaper costs than banks. This is done by creating a decentralized ledger for payments (like Bitcoin). Blockchain technology provides a quick and inexpensive method of delivering payments.
This technology eliminates the need for third-party verification and outperforms the processing times for conventional bank transfers. 90% of participants in the European Payments Council predict that by 2025, blockchain technology will profoundly alter the sector.
Currently, the average time for Bitcoin transactions to settle is 25 minutes. In some rare circumstances, this could take hours or even days. Even though it is still not ideal, it is faster than the typical 3-day handling time for traditional transfers.
Additionally, crypto-based transfers are challenging for governments and regulatory agencies to monitor, control, and shut down due to their distributed and complicated nature.
To process cryptocurrency transactions more rapidly, researchers are also focusing on scaling less expensive methods. For instance, transactions on Bitcoin Cash and TRON cost, on average, less than a cent each.
Direct Settlements and Clearance System
Direct settlement of transactions and improved transaction tracking over current protocols like SWIFT are also potential benefits of distributed ledger technology. Our financial infrastructure was constructed in such a way that an average bank transfer, as previously said, takes three days to settle.
It affects many people than just the customer. For the banks themselves, shipping money around the world is a logistical headache. A straightforward bank transfer from one account to another must now go via a convoluted network of middlemen, from associate banks to administrative services, before it can get anywhere.
Blockchain technology, which acts as a decentralized “ledger” of transactions, has the potential to change the current situation. An interstate blockchain may maintain track of all events openly and publicly rather than utilizing SWIFT to match up the ledgers of each financial institution. That suggests that payments could be resolved immediately on a public blockchain rather than requiring dependency on a system of custodial infrastructure and correspondent banks.
The “atomic” transactions, or payments that open and finalize right away after a payment is made, are another feature of blockchain technology. The present financial systems, which process and finalize a transaction days after payment, are in opposition to this.
Fundraising
Venture capital fundraising is a difficult procedure. In the hopes of turning some of their company into cash, entrepreneurs prepare decks, undergo endless meetings with partners, and put up with protracted equity and value disputes.
In contrast, some businesses are using initial coin offerings (ICOs), which are supported by open-source blockchains like Ethereum and Bitcoin, to raise capital.
In an ICO, projects trade coins or tokens for funds (often denominated in bitcoin or ether). The profitability of the blockchain enterprise is, at least theoretically, linked to the token’s worth. Token investments give investors a direct option to wager on consumption and price. Blockchain businesses may avoid the traditional fundraising procedure by offering tokens to the general public immediately through ICOs.
Most Important: Security
Blockchain technology eliminates the intermediary in asset rights transfers, cutting asset exchange fees, providing access to broader global marketplaces, and lessening the volatility of conventional securities markets.
To acquire or trade assets such as stocks, loans, and commodities, you must know who owns what. Today’s financial markets do this via a sophisticated network of brokers, platforms, central security depositories, intermediaries, and custodian banks. These many parties are based on an antiquated system of paper custody that’s not just slow but also incorrect and prone to deceit.
When we attempt to carry out this transaction online, things get a lot more difficult. We are unwilling to cope with the day-to-day administration of the assets, such as certificate exchange, accounting, or dividend maintenance. As a result, we subcontract the shares’ custody to custodian institutions. Because consumers and retailers do not always choose the same custodian banks, the custodians must rely on a trusted third party to keep all paper certificates.
Blockchain technology has the potential to transform financial markets by establishing a decentralized database of unique digital assets. It is feasible to transfer the rights to an asset using a distributed ledger by using cryptographic tokens that represent assets “off-chain.”
While Bitcoin and Ethereum have done so with purely digital assets, new blockchain companies are working on ways to tokenize real-world assets such as stocks, real estate, and gold.
KYC Policy and Fraud Safety
Aside from clearing deals, processing transactions, and trading daily, a bank must also onboard customers, verify their identities, and ensure that their information is correct. This is referred to as “know your customer” (KYC).
Banks can spend up to three months completing full KYC procedures, which include picture ID verification, address proofs, and biometrics. Some clients may end their ties if the KYC procedure is delayed.
Compliance with KYC regulations costs banks money in addition to time and effort. According to the same poll, banks spend up to $500 million every year on KYC compliance and client due diligence.
Blockchain technology can assist in reducing the human labor and expense associated with KYC compliance. With KYC client information stored on a blockchain, the platform’s decentralized structure allows any organizations that require KYC to access that information. Utilizing blockchain for KYC might cut bank employee requirements by 10%, resulting in yearly cost savings of up to $160 million.
Banks may also employ blockchain technology to improve fraud detection and cyberattack detection. One of the major sources of concern for the banking sector is the increase in fraud and cyberattacks. The reason for this is that banks have resorted to storing all client information in centralized ledger systems, making that data more vulnerable to an attack.
Blockchain technology, by decentralizing information storage, helps prevent a hacker from rapidly obtaining access to all of that consumer information at once.
How Can Blockchainconsultant.io Help Your Financial Business?
If you are a financial business owner, you should think about implementing blockchain technology into your industry. But, it can be a daunting task for you. We are here to help you. You can have a free consultation to get the best blockchain implementation policy for your business.
We have years of experience and expertise to help you in this field. Our experts have the proper knowledge and experience to help financial organizations to get the best blockchain implementation service.
Final Thoughts
Many enthusiasts think that blockchain and cryptocurrencies will completely replace banks. Others believe that blockchain technology will augment and improve established financial infrastructure.
It remains to be seen how far banks will go to adopt the technology. However, one thing is sure: blockchain will indeed transform the industry trends in the upcoming time.
