How Blockchain Could Disrupt Banking Industry?

In today’s day and age, banks are the most important key point in the whole finance ecosystem where they serve as the critical storehouses and transfer hubs of value. Now with the induction of Blockchain in this domain, the role of banks in the transaction and the value of fiat currency is going down day by day hence there could be a scenario where blockchain could propose a big threat to large institutions like JP Morgan and Credit Suisse.

What makes blockchain (so) disruptive for banks?
The answer to this question lies in the three specific in-build properties of a blockchain: Decentralized, distributed and Immutability. These differ completely from those of banks that are centralized organizations.

• Decentalized Network
  Blockchain operates on a decentralized network, that is acting on a peer-to-peer basis. It handles all operations similar to a bank, but without any central authority that monitors all data. So it potentially cuts out the middleman, giving back the power to the owner of the assets (i.e. data or tokens carrying some financial value). All information is stored across its network via blocks. These blocks, which are time-stamped and linked together with all past and current transactions, are permanently recorded and consistently reconciled and updated in a cryptographically secure way. By storing data across its network, blockchain eliminates the risks that come with data being held centrally.

• Distributed Ledger
  A second property of blockchain is the distributed ledger, that allows sharing of a ledger of activity - such as arbitrary data or virtually anything of value between multiple parties. What makes blockchain so important is its ability to automate trust and transparency among all parties using it. Because the ledger is distributed among all transaction participants, it exists simultaneously in multiple places. Each of the computers in the distributed network maintains a copy of the ledger to ensure transparency and also prevent a single point of failure and all copies are updated and validated simultaneously. This makes it extremely difficult to manipulate entries or tamper with the data without the other parties noticing.

• Immutable Records
  A third unique property is its immutability. By design, blockchains are inherently resistant to modification of data. All blockchain networks adhere to a certain protocol for validating new blocks. No changes can be made once the system is set with the initial standards. Once recorded, the data in any given block cannot be altered without the alteration of all the subsequent blocks, which requires the consensus of the network majority.

Where will be blockchain hit on the Banks ??
Though blockchain is said to have an impact on virtually every aspect of the financial system, most disruptive use cases can be found in activities such as cross border payments and remittances, share trading, clearing and settlement, trade finance and supply chain finance, regulatory reporting and compliance, as well as smart contracts. It is however clear that when the technology further evolves there will be many more areas for applying the blockchain technologies emerging.

1. Cross border payments
   It is not surprising that payments are emerging as the first and foremost blockchain use case of any banking and/or financial system. Nowadays payments across borders are a time-consuming and expensive process, given the need for correspondent banks or other intermediaries.

   Blockchain offers an easy and secure solution, as it will not require third party authorization. . By cutting out many of the traditional middlemen, the laborious and costly process of cross border payments is simplified, thus significantly speeding up the cross-border payment process and that at a cost much less than with the traditional banking systems.

2. Share Trading
   Using blockchain for buying and selling stocks and shares could also bring several significant benefits. Share trading involves many third parties, such as brokers, CCPs, CSDs and exchanges, making this process time-consuming.

   The decentralized nature of blockchain technology can remove all those intermediaries and enable trading to be run on computers all over the world. Eliminating some of the middlemen from the share trading process speeds up the settlement process and allows for greater trade accuracy. Trading transactions in blockchain thereby reduces the redundancy of information and thus improves performance.

3. Clearing and settlement
   The global cash settlement for fixed income, equity, and derivative products in various currencies is slow, costly, and complicated. Because of the large number of parties involved, It takes several days to settle.

   By eliminating a large number of intermediaries, blockchain enables instantaneous settlement leading to substantially lower costs

4. Trade Finance
   Many trade finance activities still involve lots of paperwork, such as bills of lading, invoices, letters of credit etc. All participants in the trade chain must maintain their database for all transaction-related documents, that must be constantly reconciled against each other. It is as a result a time-consuming activity.

   Blockchain-based trade finance can streamline the entire trading process by getting rid of this time-consuming paperwork and bureaucracy. It eliminates the need for several copies of the same document and can integrate all necessary information in one digital document, which is updated in real-time and can be accessed by all network members.

5. Digital Identity Verification
   Another area where customer experience could be significantly improved when using blockchain is in the digital identity verification process. Online financial transactions require a lot of steps to be taken, including face-to-face checking, authentication, authorization etc. All of these steps need to be taken for each new service provider.

   Blockchain makes it possible to securely re-use identity verification for other services. With blockchain, users can choose how they identify themselves and with whom they agree to share their identity. They still need to register their identity on the blockchain, but they do not need to repeat the registration for each service provider if those providers are also powered by blockchain.

6. Smart Contracts
   Smart contracts are another way to fundamentally change the way business is done nowadays. The functions of a bank such as lending, deposits, treasury, investment advice, business intelligence, regulatory compliance, payments, and remittances will be disrupted by using these contracts.

   Through the use of smart contracts, blockchain technology will change the way information and money are exchanged in finance (and in many other industries). Smart contracts enable operating and automating business processes in a fully decentralized fashion, enabling shared rules of engagement, conduct, and business processes to be automated and enforced ecosystem-wide.

7. Intensive collaboration
   The blockchain-based bank ecosystem will be one of intensive collaboration, within an increasingly open banking environment, not only with other banks but also with various third parties in the financial chain. Whether the third party is a payment processor, a fintech startup or a creative app developer.

   Future success will depend on their willingness to co-operate – even with the apparent challengers to their core activities. Banks don’t have a choice in this – not if they want to survive and prosper. Although it might seem counterintuitive to banks to facilitate new services beyond their immediate control and balance sheets, standing in the way of external creativity and innovation carries the greater risk.

8. Bank-fintech partnerships
   Even as the disruptions continue, the ecosystem will see deeper collaboration between financial institutions and fintech firms and the creation of platform companies to meet the changing needs of their customers. While fintech companies have the advantage of innovation, financial institutions provide a sandbox for proof of concept and scale.

   Most fintech start-ups lack several features for a stand-alone existence, that are well known for traditional banks. Fintech firms need to be wary of product functionality, flexibility, scalability and compliance. Banks have the advantages of greater resources and a larger scale. Good partnerships between banks and fintech could bring the best for both worlds.

These are the domains in which banks could face the competition and could potentially lose ground against Blockchain technology and cryptocurrencies.

REFERENCES #

Carlo R.W. De Meijer. “Blockchain and Disruption in the Financial World: Will Banks Survive?” Blockchain and Disruption in the Financial World: Will Banks Survive?, Finextra, 12 Feb. 2019, https://www.finextra.com/blogposting/16658/blockchain-and-disruption-in-the-financial-world-will-banks-survive.