Five Ways Blockchain Transforms the Future of Banking Sector

April 5, 2022 Published by: Semaphore

blockchain developers

Blockchain technology is getting mainstreamed in the banking sector. We can certainly expect that blockchain development will gain ground swiftly in the coming years, thanks to the prevalence of online payments. Today, blockchain technology has evolved beyond Bitcoin and cryptocurrencies, and there is a lot more to this technology that is yet to be explored.

Blockchain technology is all set to transform every process ranging from transactions to raising money in the private market. The traditional banking sector witnesses disruption because of this open, distributed ledger that eliminates the need for middlemen. In this article, we are going to discuss how blockchain technology brings radical changes to some of the core banking processes. But, before moving forward, here are some interesting stats on the blockchain.

Interesting Stats

  • 74 percent of tech-savvy executive teams believe that there is huge business potential in blockchain technology
  • It is expected that corporations will spend over USD 20 billion per year on blockchain services by the end of 2024
  • Financial institutions alone have spent around USD 552 million on blockchain-based projects

Currently, the financial sector is accounting for over 60 percent of blockchain’s market value globally, As per the Statista survey, cross-border payments and settlements are the largest blockchain use case and banking has emerged as a sector with the highest distribution of blockchain market value. Let’s dig deep into five ways this futuristic technology can bring disruption into the core processes of the traditional banking industry while bringing new business models.

Impact of Blockchain Technology on Core Banking Activities

Payments

You can hire blockchain developers for developing online payment and cryptocurrency apps that offer a secure and cheap way of sending online payments. Blockchain app development companies explore cheaper solutions to process crypto transactions with more speed and convenience.

This technology facilitates banks and financial institutions to eliminate the need for verification from third parties. As a result, we can get rid of slow payments, penalties, and additional fees. Offering such quick and cost-effective yet highly secure online payments is highly profitable for banks as well. For example, cross-border transactions ranging from payments to letters of credit generated a revenue of over USD 224 billion in the year 2019.

Fundraising

Be it a startup, an individual, or an SME, every entity has to go through an arduous process while raising money through venture capital. From countless negotiations to meetings for defining valuation take a lot of time and effort of entrepreneurs. In contrast, some companies can raise funds using ICO (Initial Coin Offering) model that is powered by public blockchains like Bitcoin and Ethereum. Here, projects sell tokens or coins in exchange for funding.

Through ICOs, companies can beat the conventional fundraising process and sell cryptocurrency directly to the public. High-profile ICOs or blockchain-based startups have raised hundreds of millions or even billions of dollars. For example, Filecoin, a blockchain-based startup for data storage, has raised $257 million. However, it should be kept in mind that ICOs are not much in trend because of stringent rules and regulations.

Loans and Credit

Traditionally, banks and lenders underwrite loans on the basis of the credit reporting system. Here, blockchain technology has opened up doors of a new possibility- peer-to-peer (P2P) loans. These loans are complex programmed loans that resemble a mortgage or syndicated loan structure. This structure is faster and more secure than the traditional loan model.

When applicants file a request for a bank loan, banks evaluate the risk associated with the proposed loan. They consider various factors including the applicant’s credit score, homeownership status, and debt-to-income ratio. Based on this information, banks determine the risk of defaulting through the interest rate and fees.

Blockchain development can enable banks and lenders to offer a cheaper, more efficient, and highly secure alternative to the traditional loan processing model. With a decentralized registry of historical payments and other data, customers can apply for loans on the basis of a global credit score. These days, P2P loans and credit based on blockchain technology are gaining popularity swiftly across the world.

Settlements

As per the traditional financial infrastructure, an average bank takes 3 days to settle transactions. It is cumbersome not only for customers but also for companies. Even a simple bank transfer has to go through a complicated system of intermediaries, which involves a lot of effort and time. As a result, we need to wait till the payment reaches to destination. Here, blockchain technology comes in handy. It serves as a decentralized “ledger” for online transactions that can keep track of all transactions publicly while removing intermediaries.

What’s more, blockchain technology enables bankers to get atomic transactions that clear and get settled as soon as the payment has been made. In contrast to the current banking system, the atomic transaction is quicker and more secure.

Fraud Prevention

The biggest advantage of blockchain technology is it contributes to preventing online fraud. Blockchains can securely store customer information on different blocks to prevent cyber attacks and data breaches. In recent years, a rise in online fraud and cyberattacks has becomes a major reason of concern for bankers. As most banks have implemented centralized ledger systems to store all information of their customers, it is easier for hackers or fraudsters to access this confidential information.

Blockchain technology decentralizes the storage of customer information to prevent a hacker from accessing all the information at once. Blockchain-based smart contracts can be another way to ensure safe online transactions. All these contracts are based on the ‘if/then’ concept, which means that the next step of the online process happens only after the prior one is completed. It enables the BFSI sector to ensure secure online transactions and payments.

What Lies Ahead for Blockchain Technology?
There is no exaggeration in mentioning that blockchain will spread exponentially to the banking sector. Various top bankers across the world are exploring innovative and user-friendly applications of blockchain for transforming processes. However, much of this technology is yet to be tested widely, and therefore, it is necessary for bankers to make the infrastructure ready for leveraging the benefits of blockchain and other emerging technologies.

Concluding Lines

Apart from these core processes, blockchain technology has its an impact on trade practices and securities. This technology can take banking to a new level while making all the processes more transparent and customer-friendly. Chances are high that all leading banks will count on this revolutionary technology for their daily operations over period worldwide.

At Semaphore Software, we have an in-house team of experienced blockchain professionals. We integrate blockchain advancements to ensure a highly secure and seamless users experience in our feature-rich enterprise apps. Do you want to hire blockchain developers from Semaphore for your upcoming project? Simply drop us a line at info@semaphore-software.com and our expert consultants will get back to you soon.