Blockchain Advancements in the Banking Industry

Blockchain Advancements in the Banking Industry

The banking sector is a delicate industry that records millions of transactions worth billions of dollars each day. As a result, blockchain systems have revolutionized their operations to reinforce transparency, security, and cost-efficiency. A critical analysis of the banking sector depicts a gradual progression from the traditional barter system, which was later replaced by commodity money, then fiat money up to the current digital currency. This trend indicates that technology is a game-changer, and thus blockchain can transform fiscal transactions significantly. From a broader perspective, blockchain has brought about significant advancements in the banking industry. Do you need urgent assignment help ? Get in touch with us at eminencepapers.com.

Discussion

Blockchain has come as a great relief to cross-border payments. Generally, banking services are gently being replaced by the Fintech companies, including TransferWise, and PayPal, which are better in terms of speed, flexibility, cost, and transparency. However, the banks rely on the Society for Worldwide Interbank Financial Telecommunications (SWIFT) to conduct international monetary transfers. SWIFT is a trusted entity, but it is costly and takes 1-5 business days to complete a transaction. As a result, the banking sector is progressively incorporating blockchain as a strategic way of eliminating third parties. The ledges facilitate direct inter-boundary transfers with self-initiated bookkeeping for future reference (Khadka, 2020). Banks will successfully overcome Fintech by leveraging their speed, time, and reliability by articulating this mechanism.

Blockchain technology has further come to the aid of trade finance which has persistently been inefficient. World Trade Organization (WTO) acknowledges that trade finance supports 80-90% of worldwide trade implying that it is highly valuable. Generally, banks provide trade finance as credit support to fulfill trade transactions. Therefore, the banking institutions are mandated to draft a Letter of Credit on the buyer’s behalf to assure the seller that it is liable for paying faulted purchases. This method is tiresome and involves a lot of paperwork in creating Letters of Credit. Therefore, blockchain introduces smart contracts that materialize when the involved parties establish a blockchain network (Hassani, Huang & Silva, 2018). It becomes convenient to provide information within a private distributed ledger. This technology oversees the entire purchase process from order, payment, shipment, and delivery, thus a significant gain for the banks.

The active role of banks in the capital market has significantly been leveraged by blockchain technology. Ideally, the capital market has several intermediaries, including investors, brokers, and credit agencies, making account settlement complex. Each party used to maintain their ledgers, and in some instances, the defaulting of a single participant could incapacitate the entire market. For this reason, blockchain came in to enhance the efficiency of custody security services. It provides a common blockchain platform that upholds transparency and security. It has currently become an integral part of the Initial Public Offering (IPO) (Khadka, 2020). Recent trends indicate that the technology can save more than $6 billion annually in the capital market. Its effectiveness in recording balances, issuing activities, clearing, settling, and reporting financial records is irrefutable.

Banks are strictly observant of the Know Your Customer (KYC) mechanism as a strategic way of confirming clients’ authenticity. On average, the process takes a minimum of 26 days, and such a long period might not suit all investors. The recurring procedures become tiresome because an individual has to resubmit personal details at every bank when opening an account. Therefore, the blockchain technique proposes that banks should store customers’ data in a sharable block so that multiple facilities can access it (Guo & Liang, 2016). Besides, the technology provides a digital single source ID that uniquely identifies a client in any bank. This is a significant advancement and is heavily backed by the immutability characteristic of the technology. This attribute makes it hard to alter recorded transactions. If there arises need for change, a new entry is created and replicated in all computers. Such an approach amounts to high trust and privacy, hence, a significant milestone in the banking industry.

The potential of blockchain in supporting financial reporting and compliance has become more evident in the present day. Ideally, banks are mandated to submit timely reports as a tactical way of demeaning anti-money laundering activities and fraud. However, it is typically tiresome and time-consuming to manually amalgamate voluminous data regularly. Therefore, the blockchain has significantly automated such processes by eliminating paperwork. It is now possible to record and process a transaction automatically, making it possible to save money and time (Hassani et al., 2018). Nevertheless, the technology allows monitoring, which is an excellent gain for both banks and regulatory bodies. The streamlined processes are prone to future enhancements since technology keeps on growing.

Blockchain has substantially rectified the loans and credit sectors in banking institutions. The facilities are now better positioned to provide personal loans to a large group of investors without bias. Initially, loans would be awarded based on several factors such as the applicant’s debt-to-income ratio, credit score, or homeownership status. The Federal Trade Commission (FTC) considers this approach biased as most people are locked out from accessing money. Some people’s credit scores have “potential material error,” making it hard to qualify for loans. However, blockchain is a significant relief as it ensures that personal loans are granted via a cryptographically decentralized and secure registry of historical payments (Knezevic, 2018). For instance, consumers are allowed to borrow money against a cryptocurrency such as ether or bitcoin as the primary collateral. This implies that the rendered loans are gauged on the collateral’s value rather than credit score. Though this method is still in its infancy stages, it has a high potential of becoming more dominant in the future.

In addition, technology has offered an alternative means of raising money. This is made possible by Initial Coin Offering (ICOs), making it possible to acquire money by selling coins and tokens. ICOs primarily work by allowing the banks to sell ether or bitcoin and get money in return. The value of the cryptocurrency is usually quantified in theory and is highly dependent on how the parent blockchain fairs in the global market. Various banking facilities have earned billions of dollars using this strategy. ICOs are essential sources of liquidity and a sure way of accessing a broad pool of investors. This domain continues to thrive despite the fierce opposition from regulators.

Conclusion

Blockchain has indeed changed the way of doing things in the banking industry. It has revitalized multiple processes leading to seamless transactions in the long run. The technology has increased efficiency in cross-border transactions and improved trade finance. It has further enhanced the capital market by increasing transparency and security. Key functionalities such as KYC, financial reporting, and loan offerings have been redesigned for the better. Besides, banks can now gain extra revenue by trading the provisioned cryptocurrencies and tokens. The collective role of technology in reinforcing data integrity, and speed, eliminating middlemen, and paperwork while promoting decentralization in the banking industry is incredibly pivotal.

References

Guo, Y., & Liang, C. (2016). Blockchain application and outlook in the banking

industry. Financial innovation, 2(1), 1-12.

Hassani, H., Huang, X., & Silva, E. (2018). Banking with blockchain-ed big data. Journal of

Management Analytics, 5(4), 256-275.

Khadka, R. (2020). The impact of blockchain technology in banking: How can blockchain

revolutionize the banking industry?

Knezevic, D. (2018). Impact of blockchain technology platform in changing the financial sector

and other industries. Montenegrin Journal of Economics, 14(1), 109-120.

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We have viewed how Blockchain has made a significant impact on businesses and industries. Select ONE INDUSTRY and highlight the advancements Blockchain has had on that single industry.

Your paper should meet these requirements:
Be approximately four to six pages in length, not including the required cover page and reference page.
Follow APA 7 guidelines. Your paper should include an introduction, a body with fully developed content, and a conclusion.
Support your answers with the readings from the course and at least two scholarly journal articles to support your positions, claims, and observations, in addition to your textbook.
Be clearly and well-written, concise, and logical, using excellent grammar and style techniques.