Application of Blockchain in Commercial Banking
The entire commercial banking industry is undergoing rapid change. This is because of the fact that technological advancements are having a huge impact on the way operations are run in the banking industry. One of the big technical changes which are on the horizon for the commercial banking industry is the large-scale adoption of blockchain technology in the industry.
Blockchain technology is still believed to be in the nascent stage. It is believed that a lot of operational processes in the commercial banking field will be impacted by blockchain technology. In this article, we will briefly introduce blockchain technology and explain how it is likely to impact the banking industry.
What is Blockchain Technology?
Blockchain technology is a revolutionary new way of storing data. Up until now, data has been stored in the private servers of business entities. Hence, it is the task of individual business entities to ensure that the data is consistent.
There are a lot of costs involved with the maintenance of such data. However, when it comes to blockchain, the data is not maintained by one single entity. Instead, the data is held on a common platform and several entities have copies of the same data.
Whenever a transaction is made, all entities are asked to verify the consistency of the data. If the data is inconsistent i.e. transactions have been added or deleted, it gets called out. This is because it is possible to manipulate a single database.
However, it is not possible to manipulate copies of the database being held by different entities at the same time.
Now, since we have a basic understanding of blockchain technology, let us understand how it can be applied in the field of commercial banking.
- More Efficient KYC Process: The Know Your Customer (KYC) process is quite a complicated process for commercial banks. In the previous articles, we have already learned that commercial banks are tiring to fight against money laundering, terrorism, and drug funding.
Hence, they need to be aware of who their customers are and what their business is. Right now, verifying the activities of a business firm takes a long time. This time and difficulty can be greatly reduced with the use of blockchain technology.
This is because right now, banks have to request access to the databases of the government and of other private entities in order to validate the data given by the customer.
However, with the application of blockchain technology, this will not be required since the data will be available in the distributed ledger and therefore will be instantaneously verifiable. The end result will be that the time and the cost required to complete the KYC verifications will reduce greatly.
- Reducing Information Costs for SMEs: Right now, commercial banks are not able to lend to small and medium industries at attractive interest rates even if they want to do so. This is because they do not have information about the scale of business and the cash flows of these firms.
Right now, the data related to the transactions mentioned by the small and medium industries are not easily verifiable. As a result, most of these companies stay outside the banking fold and have to rely on more expensive sources of capital. This is likely to change with the adoption of blockchain.
This is because transactions conducted on blockchain networks are easily verifiable at a low cost. Hence, commercial banks can be surer of the cash flow patterns related to small and medium enterprises.
The end result is that they will be able to lend to these companies at lower interest rates. This is likely to be a win-win scenario for both parties since SMEs will be able to borrow at a lower cost whereas the banks will be able to expand their lending portfolio.
- Trade Finance: Blockchain technology is also likely to have a huge impact on the way trade is financed by commercial banks. For instance, right now banks have to manually verify certain conditions and then manually release payments to other parties.
However, blockchain technology makes the use of smart contracts possible. These smart contracts will be able to automatically detect whether certain conditions have been fulfilled and then funds can be automatically released.
Some banks have already started adopting blockchain technology in this area since it helps in faster, reliable, and more secure communication with other business entities. As a result, commercial banks are able to save costs and provide high-quality commercial banking services at lower rates to their customers.
- Lower Security Related Expenses: Commercial banks are likely to have lower data security-related expenses in the future. This is because the blockchain system believes in public access to data while having multiple copies of the same data so that it cannot be manipulated.
Hence, a lot of the data which banks are trying to secure now is likely to be in the public domain. Hence, the emphasis on data security as well as the expenses related to data security are likely to reduce with the passage of time.
The fact of the matter is that the introduction of blockchain technology is a huge change that is on the horizon of the commercial banking industry. With the passage of time, more applications of the technology will be discovered in the commercial banking industry. Commercial banks who stay abreast with the latest technology are likely to become market leaders of tomorrow.
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