How blockchain works, how it could be used in banking and how banks and FinTechs could collaborate to accelerate innovation and create the future of financial services
Are you innovating fast enough to retain and attract financial customers?
Reports are that many traditional banks are falling behind competitors in innovation and losing market share – 78% of financial decision-makers have already experimented with disruptor brands and 64% of consumers are willing to switch to a secure, better-looking product/service.
Now, a fairly obvious avenue that many banks are pursuing is to collaborate with FinTechs on innovation, to create cutting-edge new technologies to attract and retain customers. And certainly one of the most promising platforms for such collaborations is using blockchain in banking.
In this post, we explore what blockchain is and how it can revolutionise banking and financial services, its advantages and disadvantages and examples of where blockchain collaborations can create the future of banking.
At its core, blockchain is a decentralised ledger technology (DLT) that records information such as ownership, relationships, identification, payment histories and transactions across multiple systems and computers in a way that ensures security, transparency, and immutability.
One of the biggest challenges and costs in traditional banking is how information is shared – it’s what slows down decisions, risk assessments etc. Blockchain completely does away with that delay by sharing all information about everyone with everyone else – it’s completely transparent: everyone on the platform can see everyone else’s ownership, relationships, identification, payment histories and transaction data.
How it does this: Each block in the chain contains a number of transactions; every time a new transaction occurs, a record of that transaction is added to every participant's ledger. This technology underpins cryptocurrencies like Bitcoin but has vast potential beyond digital currencies, especially in banking and finance.
Importantly: Blockchain itself is NOT Bitcoin or a type of cryptocurrency, it’s a ledger technology – a way of keeping records.
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One of the biggest inefficiencies in banking is the delays created in accessing information. From KYC (Know Your Customer) to ownership and transaction records, traditional banking systems have so much information hidden from entities working in the space, that it slows down how fast a company can perform actions, do risk analyses and ultimately innovate and create new products.
For example: When you apply for a loan, the bank/institution can take days or weeks to approve, purely because of all the steps involved in gathering information from different sources – proof of identity, proof of ownership for collateral, transaction histories to ascertain credit-worthiness so that you can do a risk assessment.
Not to mention how much information is stuck in legacy systems – how many title deeds are still only recorded on paper?
As a highly advanced and transparent ledger technology, blockchain solves that problem instantly. If all the information you need to make decisions is openly and instantaneously available, you could approve that loan within seconds/minutes – how much more business could you sign per month that way?
Imagine being the first bank to be able to approve new home loans in 5 minutes.
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But there is a problem. Regulation: Not all information can and should be that publicly available, according to our laws and current systems. So it’s worthwhile knowing the pros and cons…
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Moreover, traditional banking systems have been developed over the years to perform all the tasks necessary to offer banking services – there are currently platforms that perform the “ledger” function, it’s just so fragmented, opaque and secretive that it’s hindering the entire system’s ability to innovate.
All the bits of information you need are “hidden” all over the place, with various entities owning the rights and authority over each piece of information – and it’s the extra steps in having to satisfy each of these entities’ demands that slow down everyone’s movements.
That’s why some see blockchain as a threat, it’s so powerful that it could come in and instantly remove all of the “entities” power – so they actively fight blockchain from within the baking systems.
But this shouldn’t actually delay the mainstream adoption of blockchain, because the platform is not only capable of making every piece of information available to everyone – different types of blockchain setups could still protect certain entities’ rights and powers…
As a bank, you could internally start looking at FinTech collaboration to build an internal blockchain to share information within your organisation securely and at high efficiency.
And then consortium blockchains will likely need a few examples before your central banks and regulators start adopting it, so you could collaborate with other financial service providers and build one as a showcase to start exploring (and showing authorities) how it can work.
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One of the most in-demand services in finance today. Blockchain can help enable instant, secure, and cost-effective international payments and remittances by bypassing traditional banking channels and currency exchanges.
Leveraging blockchain for KYC (Know Your Customer) and identity verification processes can greatly reduce fraud and streamline customer onboarding.
These self-executing contracts with the terms of the agreement directly written into code can automate and enforce contract terms, reducing the need for intermediaries and increasing efficiency in processes like loan approvals, settlements, and more.
Also see why innovation is so vital in our look at the impact of digital transformation.
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