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How the world is applying blockchain in banking?

9 September, 2022 Blockchain
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Currently, the trend of applying blockchain in banking and securities is being promoted. In the context of this industry is facing many shortcomings in the current way of checking and managing information. Blockchain is one of the new doors to optimize operations in the banking sector. In this article, let’s learn about the application of blockchain technology in banking. 

I. What is blockchain in banking?

Blockchain technology is a distributed ledger that efficiently records transactions between two parties and is permanently stored. A blockchain is a collection of individual blocks of data. Consists of related and linked transactions in a certain order.

All stakeholders can share with each other through a digital “ledger” on a computer network without any intermediary agency. That is why transactions through blockchain are faster than regular transactions.

Speed is just one of the benefits that blockchain technology brings in the financial and banking sector. In addition, it also brings better business efficiency with greater transparency and security in transactions.

Also read: What is Blockchain? How is it revolutionizing everyday life?

II. Benefits from the application of blockchain in banking

Banking institutions were created to connect and enable commercial transactions with each other. And blockchain is a tool that can do them on a global scale that is extremely secure and transparent. This means that banking will be one of the leading industries in applying this technology as it holds global commercial potential. 

Moreover, it makes trading more efficient by replacing manual processes on paper with automated and streamlined processes. Also, blockchain is a great collaboration tool because of its decentralization, and no other entity can own it.

III. 10 outstanding blockchain applications in banking

Many top managers now acknowledge that Blockchain plays an important role in the success of the banking industry and financial companies due to its numerous benefits.

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Application of Blockchain in Banking

1. Faster payments

Today, traditional banks can compete with fintech companies by offering new products that are more convenient for customers. For example, banks now can set up a decentralized channel (e.g. cryptocurrency) for payments. Therefore, banks can provide their customers with faster payment services at a lower cost.

Thanks to blockchain technology, banks will be able to cut down on the need for third-party verification. Thereby speeding up the processing time of traditional bank transfers.

2. Interbank transfer

In the past when there was no Blockchain technology, transactions between banks took a few days on average to settle.

Example: You want to send money from an account in a German bank to a bank in the United States. Such transfers would be made through the Society for Worldwide Interbank Financial Communications (SWIFT).

Every day, SWIFT members send 24 million messages to approximately 10,000 different organizations. The centralized SWIFT protocol only processes payment orders. The actual money is processed through an intermediary system. Going through each stage adds an additional cost and often takes quite a while.

When applying Blockchain technology to banks. You can allow banking transactions to be settled directly and track them better. This is because a decentralized ledger of transactions like blockchain can allow banks to track all transactions openly and transparently.

Banks will not need to rely on a network of custodial services and regulators like SWIFT. They can simply settle transactions directly on a public blockchain.

3. Property Purchases

By eliminating middlemen and transfer of property rights, blockchain reduces asset exchange fees and reduces the volatility of traditional stock markets.

According to a report, moving securities on the blockchain could save between $17 and $24 million per year in global trade processing costs.

Financial markets carry out the buying and selling of assets such as stocks, commodities… through a complex network of exchanges, brokers, clearinghouses, central security custody, and banks, monitoring goods. And all the different parties built the archival system out of paper. This leads to longer transaction processing time and risk of theft.

Blockchain will revolutionize financial markets by creating a decentralized database of digital assets. A distributed ledger allows the transfer of the rights of an asset through cryptographic messages, and it can represent those assets externally.

Currencies like Bitcoin and Ethereum accomplish that with pure digital assets. But many blockchain companies are currently working on solutions that help us tokenize real-world assets like gold or real estate. Cutting out the middle man will help reduce exchange costs and speed up the execution process.

4. Fundraising

Raising business capital through venture capital is a complex process these days. The process of calling for investment is as follows: Entrepreneurs combine exchanges. They do countless meetings with partners, negotiate on valuation and equity, and eventually hope to get money from investors.

Today, blockchain companies are accelerating the fundraising process with several alternatives. These include: Initial Exchange Offerings (IEOs), Equity Token Offerings (ETOs) and Security Token Offerings (STOs).

Security Token Offerings are currently the most popular option. Because it is legally protected and secured by corporate assets. To be able to benefit from this model, enterprise projects need to pass an extremely rigorous due diligence process.

The pioneers of STO are companies like Scerri & Concise Ltd and the most prominent ETO trading platform today is Neufund. Scerri & Concise Ltd is a pioneer in benefiting from the STO model.

5. Credits and Loans

Traditional banking institutions underwrite loans using a credit reporting system.

Banks typically process these loan applications by assessing risk through factors such as credit scores, asset status or debt-to-income ratios.

To get all that information, they need to request a customer’s credit report provided by specialized credit agencies.

Such centralized systems often harm consumers because they contain misinformation. Furthermore, such centralization of personal information in a minority of organizations makes it very vulnerable to attacks.

Last year, Equifax, the credit records management agency, was hacked and exposed the credit information of more than 145 million Americans.

By applying blockchain technology, the lending process will be faster and safer because the loans are programmed with complexity, structure estimation and loan collateral are reasonable. This will make businesses and customers more secure in providing and using the service.

6. Trade Finance

Another application of Blockchain is set to revolutionize the trade finance sector. Trade finance is the field that deals with all financial activities related to international trade.

Today, many financial operations still rely on paper-based procedures such as invoices, letters of credit… Many management systems allow these tasks to be done online, but the process takes quite a lot of work time.

Blockchain-based trade finance will streamline the transaction process by eliminating such time-consuming manual processes. We can consider the following example:

In traditional trade finance systems, all participants need to maintain their own database for transaction-related documents. All these databases need to be continuously reconciled. So, as long as an error occurs in a document, it will be replicated as copies of this document in different databases for each person.

How does Blockchain technology help? With blockchain, there is no need to keep several copies of the same document. Because the information has been integrated into a digital document, it is updated in real time and can be accessed by all members. So the participants can edit it without any copies.

7. Digital identity verification

Banks will not be able to conduct financial transactions online without verifying the identity of the customer. However, the verification process involves many steps and takes a long time, which makes users uncomfortable.

With blockchain, users and banks will benefit from faster verification processes. That’s because blockchain will make it safe to use identity verification for other services.

Users only need to log in once and do not need to log in multiple times – as long as the provider is also powered by the blockchain. They can choose how they want to be identified and with whom they agree to share their identity.

The most popular innovation in this area is Zero Knowledge Proof. Some countries and large corporations are currently working on solutions based on ZKP. 

8. Accounting and Auditing

Accounting has been a relatively slow field to digitize. One of the reasons is the strictness of requirements and regulations to ensure the integrity and validity of data. That’s also why accounting is likely to be transformed by blockchain.

Experts believe this technology will simplify compliance and streamline traditional double-entry bookkeeping systems. Instead of keeping separate records based on transaction receipts, businesses can add transactions directly to a shared register. A blockchain will act like a digital notary verifying all transactions. As a result, the records will be more transparent and secure.

In addition, this technology can also be used in applications to pay bills automatically.

9. Hedge Funds

A hedge fund is a type of investment partnership involving a fund manager and a group of private investors. The goal of hedge funds is to maximize investor returns and minimize risk. Fund managers are usually in charge of controlling these hedge funds as they will work within a single entity.

According to Autonomous NEXT, the number of crypto-trading hedge funds doubled between October 2017 and February 2018.

A decentralized crypto hedge fund offers an open platform that allows a wide range of investors and strategists to participate. This will create decentralized decision making and will be the potential of blockchain for the financial services industry. Because decentralization in decisions can bring more benefits to investors when following the principle of “Do not put all your eggs in the same basket”.

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10. Peer-to-Peer (P2P) Money Transfer

Peer-to-peer (P2P) money transfers allow customers to transfer money from their bank account or credit card to someone else’s account or credit card online. 

Currently, there are many P2P money transfer apps available in the market and most of them come with certain limitations. For example, some apps allow you to transfer money within a certain geographical area. Other service providers do not allow you to transfer money if both parties are in the same country.

Moreover, P2P services can charge high fees for their services and are not secure enough to store customers’ personal information.

Blockchain can solve all of these problems. This technology will help decentralize applications for peer-to-peer (P2P) money transfers.

An outstanding advantage is that blockchain allows money transfer globally and without geo-restrictions. Besides, blockchain-based transactions will happen in real-time, so the recipient won’t have to wait 4 days until the money is received.

III. The future of blockchain technology in banking

Many bank CEOs believe that in the future, blockchain will become the mainstream technology in banking. To take full advantage of its features, banks first need to develop the necessary infrastructure to run a global network smoothly.

When widely deployed, blockchain is expected to allow banks to process payments faster and more accurately, while reducing transaction costs for customers. Furthermore, banks applying blockchain technology will bring a better experience to their customers and can easily compete with today’s fintech companies.

If you want to apply this technology to your business, you’re coming to the right place. Pando Infinity is a leading company in the software development industry in Vietnam. We specialize in blockchain development resources, especially Blockchain Integration, Decentralized Application and Smart Contracts Development. Contact our experts to figure out what values we can bring to you and your business.

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