Enabled by the blockchain technology or DLT (distributed ledger technology), smart contracts in banking can be considered as a boon for a lot of issues associated with conventional financial contracts, which have geared up for this digital age. Solely relying on physical documentation in banking leads to inefficiencies and delays as well as intensifies exposure to errors and fraud. While financial intermediaries provide interoperability for finance system and reducing risk, they create overhead costs and expose to compliance requirements. And thus, there has been a rise in cases where banks (financial institutions could yield benefits from the adoption of smart contracts in their standard business operations. With the use of smart contracts in banking, not only banks can be relieved of the burdens of verification and the monitoring of data, but also can benefit from the reduced administrative costs.
Finance experts believe that DLT (distributed ledger technology) and smart contracts could go mainstream and banks will likely start using these technologies by the year 2020.
Banks and financial institution offering mortgage loans as well as using smart contracts could definitely save a fortune through decreased processing costs.
It’s because mortgages mainly depend on the collation and verification of a certain amount of property and financial data by the entities (parties) involved in the transaction. Further, this complex system adds in increased cost and delays in the process. In this sense, smart contracts can help reduce the time and cost involved in the issuance of mortgage loans through automation, access to additional sources of information like Land registry records and title deeds, and shared access to electronic versions of verified physical documents between trusted parties.
The saving can be used for the customer who could benefit from appropriate interest and lending rates, making home ownership affordable for everyone.
The possibilities to streamline banks and financial institutions’ clearing and settlement processes through smart contracts are immense. As a matter of fact, more than 40 banks operating globally have already realized the potentials and participated in a consortium. The consortium has tested smart contracts to assess whether they can help in clearing and settlement activity. And thus, many of those banks have already decided to pursue further their individual trials.
Smart contracts can help tackle the onerous administrative task of handling approvals between participants by counting up trade settlement amount and then sending the funds automatically once the transaction implanted within the smart contract has been approved and verified.
Blockchain-based smart contracts can propose plenty of benefits for an array of applications for banks. If smart contracts in banking implemented properly, latter can benefit from real-time, accurate and verified transactions, lower costs and intermediaries. However, they need to be accessible and comprehensible by businesses.