Blockchain, a type of distributed ledger technology, enables the financial services industry to transform various complex business processes. Essentially, blockchain is an immutable, distributed ledger that can facilitate fast, efficient, secure, and transparent data sharing.
The financial services industry encompasses a wide range of businesses. It mainly includes companies that manage money, such as credit unions, banks, credit-card companies, insurance companies, accountancy companies, consumer-finance companies, stock brokerages, and investment funds. The back-office processes of these companies can gain substantial benefits from blockchain-powered attributes like transparency and security of data and transactions.
Currently, the infrastructure of the industry is slow, expensive, and heavily dependent on several intermediaries. Here, applying blockchain applications can improve workflow and cut overhead significantly while delivering more better, secure and private financial services to businesses and individuals. Let’s take a look at how blockchain in the financial services industry creates disruption.
The financial services industry is moving towards a more globalized economy. It needs more effective protocols to manage increasing complexity with cross-border transactions. Traditionally, these transactions may take up to days or weeks to process. Blockchain provides mechanisms to automate the verification process and eliminate third-party authenticators’ dependence of transactions, which usually requires manual processing.
In most centralized systems, there is one point of entry and one point of exit, which makes them vulnerable to diverse threats. However, blockchain provides a platform to establish a large network of peer-to-peer transactions with automated verification. It makes the network distributed among different nodes with no single point of failure.
Banking customers rarely get more than five or six percent of interest rates for savings accounts. Although the crypto market is subject to rapid fluctuations, potential returns on investments for owning digital assets remain higher. The value of a crypto project depends on how many peers are using its currency and the network. So, the more users indulging in the project, the more likely its digital assets will increase in value.
Smart contract-powered transactions require little to almost no associated costs. They eliminate the need for any domestic or international wire fees or overdrafts. With centralized banking systems, there are many hidden costs charged to support overhead and sustainability. With financial services created using blockchain, these issues remain at a complete minimum. Also, the tamper-proof, immutable ledger assists in preventing fraud, and the costs associated with legal services.
Take a look at some prominent use cases for blockchain that have the potential to optimize various financial services significantly.
This use case is worth mentioning as it is one of the most important blockchain use cases. Blockchain creates possibilities for not only a stand-alone service but the entire global economy of cross-border transactions.
Transferring funds across borders is complex, slow, and expensive because the processes are centralized. DLT platforms like Corda, Ripple, and Stellar provide a decentralized peer-to-peer blockchain network to process cross-border transactions. They provide financial organizations the capability to execute fast, cost-efficient, and secure millions of transactions across different time zones in seconds.
Blockchain provides solutions to develop applications that can revolutionize the typical three-day clearing and settlement process. The current process is extremely complex and full of intricacy. It requires to match, reconcile, and resolve all counterparty balances across the global trading system. Blockchain enables the use of smart contracts to make these processes automated and frictionless.
Decentralized PoS systems enable businesses to accept and process payments in cryptocurrencies. These systems eliminate businesses’ need to depend on costly merchant service programs and transaction fee overhead. The systems also assist companies in managing and analyzing the cash flow.
Smart contract technology contains the potential to replace traditional bonds and provide investors with Smart Bonds. Also known as bond contracts, they use blockchain smart contracts to automate bond registry services and enable instant settlements.
Blockchain facilitates the reduced cost of trading by providing a new medium to exchange digital value or assets without any third-party dependence. Traditionally, stock exchange processes are similar to cross-border payments, slow, complex, and costly. Blockchain smart contract applications enable automatic triggering of buying and selling actions on behalf of stakeholders without any intermediary requirements. Existing trading processes involve documents, copies, and databases that require navigating through the bureaucracy and reconciling. Blockchain aims to eliminate all of these existing trade finance challenges.
How will the financial services industry look like with blockchain-powered operations and processes?
Blockchain trading platforms and financial decentralized applications do not work to eliminate centralized banks. Instead, they force banks to adopt distributed ledger technology. These decentralized alternatives to financial service require banks to use blockchain to facilitate faster cross-border payments, lower fees, and automate clearing and settlements. Blockchain applications in financial services push established financial services companies to operate on peer-to-peer networks for trustless, affordable, and faster services.