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  • Here’s How To Use Smart Contracts To Reinvent Banking

    smart contracts in banking

    A couple of years ago, Blockchain was moving out its legs and presenting itself as the backbone of cryptocurrencies like Bitcoin. During those days it was hard to imagine how influential and revolutionary it would become in the coming years. Today, most industries are looking forward to adopting this technology, including healthcare, fintech, automotive, donations, etc.

    Further, the next hype around the blockchain is the use of smart contracts and the opportunities they offer to deal-makers. As for now, blockchain-based Smart Contracts aren’t only about digital transactions- you can even buy, sell, and exchange any tangible and intangible assets.

    Meanwhile, the potential of blockchain-based smart contracts in the banking sector is quite significant. And thus, an acute question is the following- how to use Smart Contracts in banking and develop a transparent and efficient bankchain.

    Currently, numerous myths, speculations, and inadequate buzz surround Blockchain and Smart Contracts. So, let’s clear the clouds and see what is unique about smart contracts, how they could prove to be beneficial for banking, and how they could transform the way the modern financial institutions operate.

    A Comparison Between Physical Contracts and Smart Contracts:

    In the banking industry, every process/action and deal need to adhere to terms and conditions mentioned in a contract. This contract defines rights and duties. However, there is one issue with standard contracts written on paper, they seem to be outdated given the advancements of technologies and increasingly developing digital era. The issuance of such contracts is time-consuming and inefficient. Also, they are easy to forge and destroy. Moreover, humans play a crucial role in the enforcement of paper contracts. It’s the people who sign contracts and monitor whether all the conditions mentioned in it are getting fulfilled. But the issue that hinders this process is that humans are not as attentive and agile as machines could be.

    On the other hand, when using Smart Contracts for Banking, you won’t need to ponder over these irritating imperfections. A smart contract is a software that defines rules and conditions around an agreement (contract) as traditional agreements do, but when the condition get fulfilled, unlike paper contracts, it gets executed automatically.

    Although both types of contracts (agreements) provide guarantees to the parties involved and ascribe duties, Smart Contracts are more efficient. They can reduce risks, lower the administrative costs, and make the enforcement processes execute more efficiently.

    As we have discussed a little bit about why traditional contracts don’t seem to be a viable option in banking, now we will be focusing on how Smart Contracts in banking can be used to streamline and strengthen the sector’s drawbacks.

    How Can Financial Institutions Benefit From Smart Contracts?

    Smart Contracts in banking can be applied quite easily. And then, clients can participate in the exchange of money, shares, property and anything else of some value. But, why would banks prefer Smart Contracts over traditional ones? Let’s understand a few significant benefits:

    • Reduce risks
    • Real-time and faster transfers of digital currency
    • Decrease costs due to fewer intermediaries
    • Establish trust and transparency
    • Eliminate inefficient processes

    Opportunities Smart Contracts In Banking Services Industry Offer?

    Capital Markets and Investments:
    • Corporate Finance; IPOs (Initial Public Offers) and private equity
    • Structured Finance; leveraged and syndicated loans
    • Robust stock exchange market infrastructure
    Commercial and Retail Banking:
    • Trade finance; supply-chain documentation, invoicing and payments
    • Mortgage Lending
    • Crowdfunding and loans startups and SMEs
    Insurance:
    • Automated claims processing in motor insurance, crop insurance, etc.
    • Fraud Prevention in luxury goods
    • New Products: insurance for the sharing economy, peer-to-peer insurance, autonomous vehicles, cyber insurance, etc.

    The Future of Smart Contracts in Banking:

    A few banking startups have already made their way in the market. One of them is Polybius. It’s a digital bank that runs on the ethereum-based blockchain solution. They were able to gain some growth due to their ICO campaign. Supported by Ambisafe Software, their ICO campaign was quite successful- surprisingly, they had collected BTC 12, 380 (approx. $31,00,000).

    Indeed, we can expect a shift towards blockchain and smart contracts in baning. It’s likely that global banks would resort to paper contracts but gradually incline towards cryptocurrency solutions and Smart Contracts.

     


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