Blockchain is a groundbreaking technology that is transforming the financial sector in ways never imagined before. The technology has proved to be extremely valuable in enhancing operational efficiency leading to increased cost cuts thus increased profitability.

Buoyed by the technology’s capabilities, a good number of banks are increasingly leveraging the technology in a bid to transform a sizable chunk of their businesses. Financial institutions are setting up consortium and carrying out proof of concepts, all in the effort of testing the potential of the new technology.

In the banking sector, the digital ledger technology is poised to have a big impact on various operations which should lead to operational efficiency. Increased profitability should allow the financial institutions to generate more shareholder value going forward.

Clearance and Settlement Systems

It takes a minimum of three days for a big transfer to go through with traditional banking systems, in part, because of how clearing systems are built. Blockchain Technology, on the other hand, has shown it has the capacity to reduce the amount of time it takes for clearance and settlement systems to finalize transactions.

Most clearing systems in the sector are managed through a myriad of messages and manual reconciliation that are time-consuming.

A simple bank transfer must bypass a string of complicated system as well as intermediaries before reaching the final destination. Settlement of transactions involving cross-border payments often take days depending on the amount at stake.

Rather than relying on SWIFT to reconcile financial institutions ledgers, an interbank blockchain could help keep track of all transactions on the deployment of blockchain technology.

What this means, is that banks will no longer have to rely on a network of custodial services.  Instead, transactions will be settled directly on a blockchain.

Blockchain technology should alleviate the high costs of maintaining global networks thus allowing them to save big on operational costs. Initial indication is that Blockchain will cut at least $20 billion worth of costs from the financial sector.

Ability to process and settle transactions in real time should allow banks to handle as many transactions as possible at any given time while adhering to regulations.

Streamlining Payments

The time-consuming and expensive global network, used by banks to complete cross-border payments should be a thing of the past as blockchain technology innovation and integration take shape. Unknown to many, is that the typical costs per transactions average 7.68% on any amount up for transfer. The costs are associated with payments like wire fees as well as other hidden exchange rate markups.

Despite the huge transaction fees, banks have generated a significant amount of profits by offering such services. However, their profits from facilitating such transfers could inch a notch higher on switching to a more efficient and secure system.

The blockchain is the technology that banks are slowly looking at, given its attributes on security and low costs when it comes to peer-to-peer payments. Blockchain technology does away with the need for intermediaries in transactions.

That said banks would be in firm control of the entire process allowing them to handle more transactions at any given time and in the process generate a significant amount of profits.

In developing countries where the number of unbanked people is high, blockchain should make it easier for millions of people to gain access to financial services. Banks that explore this route stand a better chance of generating a significant amount of profits given that they only need to come up with blockchain powered mobile apps to provide banking services.

Enhancing Trade Finance

For the longest time banks, have had to be content with huge paperwork’s when it comes to facilitating or when engaging in trade finance. Blockchain has since emerged as the ultimate solution capable of modernizing the process, by enabling easy access to information needed to facilitate trade between various parties.

In trade finance, the digital ledger technology will allow multiple parties to transfer and store sensitive information needed to complete various transactions. The technology should thus simplify paper-heavy expensive or complicated financial systems used by banks in this case.
Trade finance is data depended.

For example, when shipping goods from the U.S, as many as 50 people may need access to the same data. Moving goods from one port to another is at times the easiest part. However, processing paperwork needed to facilitate shipments is known to drag the process.

Digitizing trade finance should thus go a long way in ensuring everyone is engaged in trade finance has access to vital data thus smoothing out the process.

Identity Verification

Identity verification is an important aspect of any financial institution. Banks have to verify the identity of the people they are dealing with on a daily basis as well as the transactions they are handling. Regulators hold such institutions responsible for verifying the identity of the people they are dealing with as well as the transactions they initiate.

The process as it stands can be time-consuming, something that leads to a significant loss of opportunities thus reduced profits. For the longest time, banks have spent vast sums of money to set up a shared digital record of customers but with little success.

However, with blockchain technology, banks can heave a sigh of relief as they only need to maintain a digital ledger that all banks can access transparently to get an idea of who they are dealing with. Blockchain with its cryptographic protection attribute is a solution that will solve the know-your-customer problem once and for all at low costs.

Blockchain technology should be of great help in trimming the costs incurred when it comes to know-your-customer and anti-money laundering policies. The charges that come into being on messing on this front can at times eat a significant chunk of financial institutions profitability.

Loans and Credit

Banks and lenders offer loans and credit based on the information they receive from other credit reporting agencies. For instance, they must spend hours asking and going through credit reports. The institutions also have to look at debt to income ratio as well as home ownership status.

The Federal Trade Commission of the United States estimates that one in five reports analyzed by the financial institutions contains materially incorrect information. False information depending on how it is used can have severe effects on both the lender and the borrower.

For instance, a bank can end up lending vast sums of money to a person who is not in a position to pay back, because of wrong information. Conversely, the institution can back out from an opportunity to lend out to a credible borrower because of false information.

However, with Blockchain technology financial institutions would gain access to a cheaper more efficient way of personal lending loans to a broader pool of clients. With a cryptographically decentralized registry, lenders should be able to lend creditworthy people and in the process strengthen their revenue streams leading to more profits once the loans are paid off.

Even though blockchain powered lending, projects are still in their infancy, they are cropping up by the day given the benefits at hand.

Bottom Line

Blockchain utilization in the banking sector is still in the infancy stages. However, it is becoming increasingly clear that it will supplement traditional financial infrastructure thus helping banks enjoy high levels of efficiency thus allowing profits for businesses.

In addition to transforming the sector, the technology should lead to higher levels of cost savings which should help banks generate more profits on capital deployments.

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