The banking system and other traditional financial services are known for their legacy systems. Some have systems that are up to forty years old. With new technology, specifically blockchain, many of these financial organizations are learning to embrace blockchain. This is helping them improve their current and outdated systems and also save money. Ironically, this is more-than-likely the main reason they are doing so. After all, a bank is in the business of money. It does remain to be seen if those savings will trickle down to the consumer. However, there are many reasons why the financial industry will adopt blockchain.
5 Common Benefits of Using Blockchain for Financial Services
Blockchain uses a distributed ledger which means banks can trade at a much cost-effective and faster rate. It also makes them significantly more efficient. Other benefits include:
In a fast-paced world, transactions using blockchain are done within minutes and even seconds in some cases. However, some do take up to a week as transactions differ. Blockchains make settlements more optimized for the user. This saves banks a considerable amount of money and time for all the parties involves in the transaction. A large amount of the back-office and middle-office staff at banks can be removed since many transactions settle faster and even instantly. Due to this, banks and other financial institutions and an essential need to explore the options available.
Many banks and other financial institutions are continuing to experiment with the idea of instant settlements. One example is if it’s possible to use blockchain to automate securities settlements instantly. This could allow the direct swapping of cash from a buyer to a seller, resulting in an instant settlement. With transactions being able to be settled instantly, it can remove a significant risk in case the other party can’t meet their obligations, as this creates an increased expense for many banks.
Improve Optimization of Capital
Blockchain ultimately removes the need for any trusted intermediaries. It makes the peer-to-peer transaction a possibility for many as the intermediary is no longer needed. Apply blockchain to the financial industry could render intermediaries that charge fees useless. This includes custodian banks or clearers.
Blockchain provided for better optimization of capital. This technology reduces banks operational costs. When a financial institution shares a blockchain, the blockchain and surrounding ecosystem’s fees could be higher than those for an individual when it comes to managing transactions. However, these costs are usually shared with participating banks, which shows a significant reduction in costs.
Improved Smart Contracts and Performance
Using smart contracts can improve the performance of a contractual term. This means smart contracts execute everything automatically once any per-set conditions are met. It’s essential that these contracts are rooted in local law. Hence, they comply with current regulations and other jurisdictions if the need arises. Complex financial transactions can reap the benefits of blockchain as there are automatic settlements under smart contracts. These are under the control of a specific set of incorruptible business rules.
See an Increase with Financial Solutions in Times of Crisis
Blockchain allows for more innovation in terms of more solutions during a crisis. This means more products to offer those in times of need. It’s also decentralized, meaning there’s less of a chance it’ll succumb to any sort of financial collapse. It reduces costs and adds more efficient services where current technology can’t. This can mean more products and services to help offset an individual’s financial crisis. It also offers more global applications without tampering by governments, individuals, or other financial institutions. It provides more lending, stabilized currencies, and decentralized exchanges for ease of use.
Improve Transparency and Reduce Errors
One of the many key features of blockchain is that any data that is recorded is immutable. It can be tracked in real-time with an audit trail. Because of this, blockchain eliminates errors due to handling and reconciliation. Also, transparency is increased across the financial industry. This leads to banks reporting and monitoring to be improved upon as it gives regulators access to the blockchain.
The majority of banks are testing the waters of blockchain. Many are focusing on using different blockchain networks to see which one offers the best solution for their needs and improves the financial industry. As technology moves forward, finding a new way to innovate is essential for the industry. This helps banks improve on their products, services, and costs. Unfortunately, for those that don’t move with the progress or innovate, they’ll eventually be uprooted by newcomers to the industry. This is currently being seen with many blockchain startups in the FinTech industry with new ways to handle your finances.
Cryptocurrencies and Banks
While blockchain is making headways in the banking world, banks are far from receptive when it comes to dealing with crypto startups. Most will simply refuse if a startup has anything to do with cryptocurrencies. Many prefer to stay away from crypto as they see this as a beacon for money laundering and other criminal activities.
However, some banks will allow crypto companies to open bank accounts. The process does take six to twelve months, and the fees are usually much higher than a standard account. While needing a bank account seems pointless with crypto, they’re required to pay employees and taxes. On the plus side, some market disruptors welcome startups that deal in crypto.
As blockchain continues to advance, many financial institutions are using this technology to offer new and more novel services and products to their customers. With all these benefits, the financial industry can continue moving forward with new systems and technology and replace their outdated legacy systems to increase their customer experience and help those that couldn’t typically be helped. With faster rates of transactions and transparency, blockchain offers considerable benefits for adopting this technology across all institutions in the finance industry.