Blockchain in Banking Industry: Overview, Advantages, and Use Cases

Since Bitcoin’s release in 2009, the technology powering it – Blockchain, has become the center of attention for tech enthusiasts all over the globe. Blockchain is an innovative technology that seems much ahead of its time.

Initially, most people viewed blockchain as a technology with its scope limited to Bitcoin and other cryptocurrencies. However, with the development of certain blockchain platforms, especially Ethereum, it became evident that blockchain is much more than just a technology to power cryptocurrencies.

At present, several industries are leveraging blockchain solutions to boost their overall efficiency. While some industries have started the adoption of blockchain technology on a large scale, many others are taking baby steps to decide if it makes sense to them.

One particular industry that seems to have great scope for blockchain is none other than the banking industry. It’s no secret that Bitcoin was developed as a peer-to-peer electronic system that follows a decentralized approach. Therefore, the whole concept of blockchain revolves around making transactions quick, easy, and secure.

The growth potential of the blockchain industry itself is huge. According to a report by Research and Markets, the global blockchain market is expected to grow from $4.9 Billion in 2021 to a humongous $67.4 Billion in 2026. Also, the banking industry is expected to play an important role in this massive growth.

Here, we are going to discuss how blockchain fits in the banking industry and offers various advantages over traditional banking. But before that, let’s understand the key issues with traditional banking.

Challenges Associated with Traditional Banking

Banks have been a part of our society for centuries. Over time, the traditional banking system witnessed several significant changes to become more customer-centric and efficient. Today, banks are the go-to choice for people who want to safely store their money, send money, make online payments, and get loans for a variety of purposes.

However, the current banking system is prone to manipulation and cyber attacks. Bank scams and hacking incidents happen every now and then. Also, several processes are time-consuming and costly, such as international money transfers.

Blockchain emerges as a potential solution for most issues faced by the banking industry today. Many experts believe that the massive adoption of blockchain can revolutionize the whole banking industry. However, the lack of regulations and little to no support from governments and central banks has made the adoption of blockchain in banking difficult.

Why is it a Feasible Idea to Use Blockchain in Banking?

Blockchain is a peer-to-peer network and no single entity have full ownership of the network. Basically, a blockchain acts as a distributed ledger that stores transactional data. There are several nodes within the network with each node having a copy of the ledger.

Whenever a transaction happens, the nodes verify that transaction and record it on the blockchain. As each node has a copy of the ledger, it becomes impossible to manipulate the data in a single node as other nodes will detect the unauthorized change and reject it straightway.

With blockchain, there is no need for a central authority such as a central bank to maintain the integrity of the transaction records. Also, as the data stored in a blockchain is immutable, it is impossible to manipulate transactional data.

Additionally, the use of cryptography and digital signatures makes it easy to verify the ownership of digital assets. Thus, unauthorized access or transfer of funds is simply not possible while using blockchain for facilitating banking services.

All the properties specified above make blockchain a great choice for the banking industry. 

Advantages of Using Blockchain in Banking

Blockchain acts as a database that is publicly accessible and stores transactional data. Here are the key advantages of using blockchain in the banking industry.

• Enhanced Trust

One of the biggest advantages of blockchain is its decentralized nature, which restricts any single entity to have complete control over its operation.

Unlike traditional banking where a central bank or a third party is responsible for processing transactions, blockchain distributes the control of the network across the participating nodes. As a result, these nodes are responsible for processing and validating the transactions.

Blockchain eliminates the dependency on a single entity to process transactions, which in turn increases the trust among the users.

• Better Security

Blockchain is immutable, which means that the transactional data stored in it can not be altered. Also, blockchain makes use of cryptography to secure transactional data.

Every transaction between two parties involves the use of public and private keys to authenticate the transaction. While the public key is available to every user on the blockchain network, the private key is only known to the parties involved in the transaction. With the help of public and private keys, it is possible to process transactions securely while eliminating the risk of fraud.

• Fast Transactions

A blockchain can process transactions instantly. In fact, some blockchain networks are really fast, such as Solana, which can process nearly 3000 transactions per second (TPS). This is also a  major reason why many businesses choose Solana for blockchain app development.

Generally, banks rely on intermediaries to process transactions. This makes the transaction verification process time-consuming. However, by integrating blockchain, banks can eliminate the need for intermediaries and process transactions at a much faster rate.

• Reduced Costs

Another significant benefit of using blockchain in banking is that it reduces the costs associated with transaction processing. With blockchain, banks no longer need any third party to process and settle transactions, and there’s no need to pay any fee to them.

Additionally, banks can leverage the smart contract functionality to quickly create digital agreements between two parties. Smart contracts help to reduce the administration and service costs associated with the contract setup process.

• Automated Transactions

The smart contracts in blockchain help to automate transactions. Generally, a smart contract is a program on the blockchain that runs automatically when certain conditions are met.

For instance, a smart contract can help a bank to automate the process of charging a fee whenever the account balance of a customer goes below a certain limit.

Blockchain Use Cases in Banking

Following are some of the main use cases of blockchain in the banking industry:

• Customer Identity Management

Customer identity management or KYC is one of the most important processes in the banking industry to prevent money laundering. In general, it can take days to complete the KYC process, which involves documentation, photo verification, biometric verification, etc.

If a user wants to create accounts with two different banks, they have to go through the same KYC process two times, and this can be a frustrating experience for the customer. Moreover, performing KYC costs a significant amount to banks.

With blockchain, it becomes possible for customers to perform KYC once and store all the details on a blockchain network. They simply need to share these details with the banks and their KYC can be completed almost instantly.

• Cross-Border Payments

The process for international money transfers is complex and costly. Traditional banks make use of intermediaries, such as SWIFT to process international transactions. Apart from charging a hefty fee, it takes up to 5 days to complete the money transfer.

Blockchain, on the other hand, can process cross-border payments quickly and that too at much lower costs. As there is no need for a middleman to process the transaction between two banks located in different countries, there’s no need to pay any commission.

• Loans and Credit

Smart contracts can help banks to streamline and automate loan processing. On the basis of the credit score and debt-to-income ratio of an individual, banks can offer a loan and ask the individual to submit all the required documents.

After the individual submits all the documents, the smart contract gets executed and the loan amount gets transferred to the individual’s bank account. In all, the use of blockchain makes loan processing and disbursement quick and hassle-free for both customers and banks.

• Credit Report

Banks make use of credit reports to check creditworthiness and decide if they can offer a loan to an individual or organization. Usually, there are several third-party credit bureaus that maintain credit scores and generate credit reports for both individuals and organizations.

It can take a significant amount of time for banks to get credit reports, assess creditworthiness, and sanction/reject a loan.

This is exactly where blockchain comes into the picture to make the process of maintaining and sharing credit reports quick and effective.

It is possible to host the credit history data of individuals and organizations on a blockchain and banks can easily fetch credit reports that are accurate and tamper-proof.

To Wrap it Up All

Many banks today are looking to revamp their operations with the help of blockchain. However, they are reluctant to perform a full-scale implementation due to the lack of global standards and regulations. As a result, the adoption of blockchain in the banking industry is happening at a slow pace.

Blockchain has the capability to revolutionize the banking industry in many ways. From decentralizing the banking processes to saving on operational costs, banks can leverage blockchain to strengthen their business.

With blockchain, it becomes possible to make banking systems decentralized, and thus, more transparent. Faster transactions, better customer identity management, and effective protection against cyber-attacks are some of the key benefits that blockchain banking offers over traditional banking.

If you want to know more about the implementation of blockchain in banking or discuss your blockchain project for the banking industry, Teqnovos is here to help you out. We are a leading blockchain development company with several years of experience in developing robust and scalable blockchain solutions.