Technology and money make the world go round. Traditional banks have been at the heart of global financial systems. Technology has made banking easier over the years. However, the technology seems to be growing and evolving faster than the banking system, resulting in alternative financial transactions. Blockchain has become increasingly popular due to its speed and efficiency, among other amazing features.
What is Blockchain?
As its name suggests, a blockchain is a chain of blocks. Each block represents a numerical data. Joining the blocks forms a block chain that is, the different data segments are linked using cryptography. The chains are formed mainly of blocks with correlated transactions. Essentially, chains will consist of linked blocks that connect in consecutive order.
- A blockchain basically works like a ledger. It digitally records transactions on the network.
- Another important aspect of blockchain is that it is fully decentralized. The network is not controlled by any central authority, which allows all members of the blockchain equal access. Essentially, the system is entirely transparent.
- The blockchain is distributed, which means that the data is accessible to all parts of the network. Essentially everyone on a public blockchain receives a copy of the data. The information is recorded and sent in real time, which is a plus in terms of transparency.
- Distributing the blockchain over a network has an additional benefit. It is almost impossible to modify the data recorded on the blockchain. Since everyone in the network receives a copy of the data, all of their documents would have to be changed in different places, which would complicate things.
- All these characteristics of blockchain are remarkable and make reasonable the idea of using it in the banking sector. Security, of course, is an essential aspect of banking. Blockchain promises security measures that have never been achieved before, adding to its use in banking.
Ultimately, the blockchain is almost impossible to hack, modify and be transparent. These are the main reasons why many believe blockchain will change the banking system in due time.
Blockchain applications in banking
Blockchain can play a crucial role in transforming the business sector. Let’s look at some of the ways technology can shape banking globally.
The effective use of financial institutions is to perform financial transactions, including payments. The blockchain would significantly improve the already existing system since the blockchain uses decentralized ledgers to record transactions. These transactions are recorded in real time. It’s important to always protect your Windows and use a VPN during your online transactions. Essentially, the technology would simplify payments while making them relatively quick at the same time. It also has the added benefit of lower transaction fees than banks.
- Clearance and settlement systems
Typically, there will be operational costs when transacting with a financial institution. However, costs will be reduced or even eliminated with distributed ledgers. Blockchain adoption can benefit banks and their customers and reduce prices on both sides.
- Fund inflow
In simple terms, fundraising means fundraising. Individuals and businesses use this method to raise funds and accept donations.
Blockchain has an experimental funding model. The model is called Initial Coin Offerings (ICOs). It is comparable to an IPO for a company. It provides access to businesses and services that help raise funds. However, it has a downside. It is a relatively new concept and there are very few regulations to guide the process.
- Decentralized customer identification
Companies that lend money are required to have crucial information about their customers. Under Know Your Customer (KYC) guidelines, businesses must verify the identity and eligibility of their customers. Companies also need to determine if there are any risks with the customer. These details will determine whether a client will receive a request or not. Customers’ personal information is stored on a decentralized network using blockchain. It would be safer to retain customer information while facilitating data sharing between various financial institutions. It would also eliminate the need to fill out forms every time a customer needs to borrow money.
Is there a future for blockchain in banking?
Blockchain is a relatively new concept for most of the world’s population. It may take a few more years before it is widely accepted and used. Some have negative views on blockchain and don’t think there is a need to discuss its adoption in banking systems.
On the other hand, others argue that the internet started the same way. Everything new starts with some resistance or even skepticism.
Even though it seems that blockchain is more of a talk than an actual part of banking systems, it is gaining momentum.
There are many factors that banks and other financial institutions will need to consider when making the switch. Banks will need the infrastructure, and if blockchain becomes globally accepted, financial institutions will need to adhere to established standards.