Financial Industry has seen major technological advancements over the years. However, significant financial processes continued to remain deeply inefficient, error-prone, and expensive. These issues, combined with the existing faulty ecosystem, have driven the demand for an effective solution.
Blockchain technology in the financial industry will facilitate faster and low-cost transactions, higher data integrity, smoother compliance, and much more. In this article, GGTS discuss in detail how blockchain can mend major financial services challenges to a great degree.
Why Blockchain Is the Right Choice For Financial Sector?
Blockchain development can disrupt the entire financial sector. Digital financial companies enjoy more perks of blockchain by applying unmatched levels of connectivity between programmable money, services and holdings. The digitalization of instruments can transform the processes of financial and commercial markets.
There are plenty of benefits of this innovative technology that can be used by banking and financial institutes. Few of them are below:
- Improved Operational Costs
- Lower Infrastructure, and Transaction Costs
- Data Integrity and Authenticity
- Authentic Information
- Secure and Fast Assets Transfer
- Automated and Streamlined Processes
- Programmable Capabilities
These benefits deliver enhanced accountability and transparency in governance systems, efficient business models, better trust between parties, good liquidity ratio, lesser capital costs, and lower risks.
Blockchain Use Cases for Banking and Financial Services
Blockchain technology can save as much as $10 billion to banks by facilitating innovative and efficient processes, according to Accenture. Let’s talk about the most compelling blockchain use cases for the banking and financial sector.
This is the most important use case for blockchain in financial services because it can prove to be extremely cost-effective. Currently, settlements cost billions and take up a long time. As blockchain enables instant transactions by removing a lot of middle-man, transactions can be user-optimized.
Financial Systems can be more efficient and transparent by adopting Ethereum. Ethereum is an open-source blockchain framework that hosts decentralized applications, based on self-executing contracts. The systems built on Ethereum can secure data, track transactions and solve any financial transaction problem. Once the contract is fulfilled, Ethereum tokens are transferred from one party to another in a sustainable way. Several companies are leveraging blockchain to streamline settlement infrastructure such as Overstock and Epiphyte.
Trade Finance refers to the system and funding that assist international trade supply chains. Blockchain has the potential to transform the centuries-old practice of trading; this practice relies on paper-based work which can easily be altered or forged. The current trading process takes around 90 to 120 days to validate documentation, create trust among stakeholders, and advance letters of credit.
Blockchain can deliver an efficient, transparent, and cost-effective medium to trade finance without intermediaries. It can reduce document processing time, capital requirements and fraud, while enabling transparent governance.
Four european banks and 10 companies have already collaborated to develop a blockchain-based platform, We.Trade, for cross-border financial trades.
Blockchain’s immutable and transparent features offer to address challenges such as fraud, operational risks.
When data is stored on blockchain, this traceable and unaltered historic record provides guarantee and validation at every step in the supply chain. Along with each product record, a corresponding digital token is issued by an authorized party to verify its origin. Then, every time the product is traded or exchanged, the digital token moves side by side to form a real chain. Here, the digital token is actually a virtual “certificate of authenticity”, harder to forge as compared to paper. Upon receiving, the final recipient will be able to track the entire transaction from source to destination. Moreover, when trading assets, the arising issues of data privacy can also be overcomed by tokenization. Tokenization is the process of issuing a crypto coin and token. This helps in safeguarding the data by only allowing access to the individual with the correct private key.
Blockchain solves the former mistrust and fraud issues by introducing real-time validation of documents, digitized assets, efficient financial infrastructure and secured finance trading.
Know Your Customer
Financial compliance departments encounter a lot of KYC requirements. KYC usually takes upto 30 to 50 days to complete which slows down the banking transactions. Current KYC processes observe substantial replication of effort between banks and third party institutions. Also, failure to follow KYC guidelines accurately can cause huge fines, however, annual compliance costs are huge. The main issues with current processes such as customer onboarding and KYC procedures is that they involve various middle-man, paper documents, legacy systems and several contract sign-offs.
Harnessing blockchain’s potential, in this regard, will mean more securer and immutable records that can be shared with authorized parities. The data on the blockchain is easily accessible to permission parties which enables real-time verification of account data, financial transactions and lending activities. This is a huge benefit for the anti-money laundering processes as any illegal activity can instantly be detected and reported to law enforcement. Moreover, KYC data can rapidly be shared with concerned business units within a bank to increase the speed of customer verification besides streamlining the complete KYC process.
Private equity companies and real estate funds face tremendous needs to improve risk management and accountability of decision making structures. They need a system which can address the complexity of ever-altering regulations. Blockchain holds the potential to well-organize asset and stakeholder management. It enables:
- Automated Fund Launch
- Tokenization of Assets
- Direct Communication between Stakeholders
- Digitized Portfolio Diversification
- Lower Administrative Costs
- Transactions Confidentiality by Customizable Privacy Settings
Capital markets refer to loaning capital to an issuer by an investor. These issuer can be entrepreneurs, startups and big companies; these organizations face strict regulations, liquidity risk and the process can take up too many days. Blockchain is poised to disrupt the capital market by addressing issues like sloppy monitoring, general regulation and insufficient market system.
Integration of blockchain allows no single point of failure via its decentralized nature, streamline process, privacy of data, fraud prevention, verified transactions, and reduced settlement time.
The Future Of Blockchain in Financial Sector
During 2018, financial institutes spent a total of $552M on blockchain-based projects. This shows blockchain went far in a startlingly short period of time as a usable procedure to streamline financial assets and processes. Now, it clearly seems the only way to disrupt the industry.
If you wish to transform your industry through a streamlined fintech industry revolution solution, feel free to discuss your idea with the Reactive space expert team.