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Right from the advent of cryptocurrency, Blockchain technology has always been in the news. Blockchain is more than bitcoin, today this technology has stepped far beyond just powering the cryptocurrency. Due to its main benefits such as transparency and immutability, Blockchain is being integrated into many sectors including the banking sector, and this is making financial services more accessible and convenient.
If you are wondering how Blockchain is transforming banking and financial institutions, you have landed at the right place. This article highlights the benefits of Blockchain over traditional banking and provides you with valid reasons to integrate Blockchain technology in financial services.
Blockchain Vs Traditional Banking
Now you might be thinking, why do we need Blockchain to change the traditional methods of banking? Keep reading to find answers to all your questions!
For a decade, traditional banking systems have faced several pitfalls and challenges in their operation. From inefficient payment clearing processes, frauds to a limited number of currency options, traditional methods of banking surely have many problems. To solve these challenges, Blockchain technology is being brought into the picture.
Blockchain is a distributed ledger technology made up of blocks that contain a record of data that is controlled by all the members of a particular ledger. One of the features of Blockchain technology that makes it a perfect fit for financial institutions is that this ledger facilitates bilateral settlement by removing any third parties’ costs, failures, and credit risks.
Benefits of integrating Blockchain in Financial Institutions
Blockchain technology enables more secure, open, and new products and services in banking and finance. This technology enables digital securities, at lower unit costs, and greater levels of customization. The digital financial instruments offered by this impeccable technology can be tailored to investor demands, expanding the markets for the investors, and reduction in risks.
Following are the benefits offered by Blockchain technology in the financial sector:
Blockchain’s distributed architecture helps financial institutions to eliminate single points of failure and also removes the intermediaries involved.
This technology employs mutual standards, protocols, and processes as a single shared source of truth for all the participants of the network.
Blockchain makes it easy for different parties in a business to collaborate and manage data.
Allowing selective sharing of data with leading tools drastically improves transparency, trust, and efficiency for the financial institutions.
Blockchain technology supports interoperability between the public and private chains which offers each enterprise a solution for global reach.
Blockchain Use Cases in Financial Industry
Over the past few years, Blockchain technology has been transformed into the technology for enterprise-grade uses such as security, transparency, privacy, and scalability. Let’s have a look at the use-cases for Blockchain technology!
1. Capital Marketing
Capital markets refer to the coupling of investors with the issuers who have a demand for capital with suitable risk and return profiles. The issuers can be entrepreneurs, start-ups, or large organizations but the process of raising capital could still be challenging.
Here are some use cases that would help us to know the benefits of Blockchain for capital markets:
- Reduction of a single point of failure through decentralized systems.
- Streamlining processes, reduction of costs, and decrease in settlement times.
- Digitization and tokenization of assets and financial instruments reducing frauds and overall counterparty risk.
2. Asset Management
Capital market firms, real estate organizations, and markets face a huge demand for improvement of liability risk management and adopt more decision-making structures.
Blockchain can help in effectively streamlining assets. This technology allows in:
- Digitization of portfolio and existing holdings.
- Improved governance and transparency of investors and stakeholders.
- Seamless stakeholder engagement with assets and services.
3. Banking and Lending
Core banking services comprise loans, mortgage, and payment services. Following the traditional banking methods, these services depend majorly on legacy processes.
Blockchain can help to streamline the banking and lending services, and also allows you to:
- Streamlining the credit scoring markets and better credit prediction.
- Reduction in operational risks and real-time verification of financial documents.
- Assisted the collateralization of assets because digitization enables real-time asset management.
4. Global Payments and Remittances
Global payments systems involve a lot of intermediaries that charge tolls for their services. This process costs about $48B through fees and hence a large number of costs are directly reduced through intermediaries and financial institutions.
By integrating Blockchain technology into the system, you can efficiently get:
- Rapid domestic retail expenses.
- Secure cross border payments.
- Digitized KYC/AML data and transaction history that reduces fraud and enables real-time authentication.
Blockchain technology and its underlying architecture are being touted as the next big thing after the internet. Similar to other sectors of the economy, financial institutions are also facing a major impact of this technology. Blockchain technology with its benefits such as interoperability, immutability, and transparency has the potential to transform well-established financial institutions.
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