The age of innovation in the global banking and finance landscape, propelled by the massive adoption of technologies and digitisation, only gives us a glimpse of what the convergence of these new-age tools and solutions can do for both service providers, as well as consumers.
Thus, the conversation around the integration of Blockchain into banking systems is not just about how another new technology is being adopted by the financial services sector, but rather about how much smarter the processes in these sectors can become. Blockchain, or the decentralised ledger technology, promises to completely transform the banking industry by making some of its core processes much more efficient, secure, and transparent.
Breaking the chain: Leveraging blockchain to facilitate a shift from antiquated systems to agile processes
India’s centralised banking system can benefit a great deal from blockchain technology as it will not only help banks automate their inter-organisation processes but also substantially improve existing operating systems. When these operating systems are powered by blockchain technology, banking processes will require the minimum intervention of regulating bodies, while for banks themselves, monitoring assets and performing compliance-related tasks will become much simpler, quicker, and efficient as compared to the current systems.
Blockchain may be a new technology, but its ability to mitigate fraudulent activities, especially with respect to financial transactions, has gained significant attention from the financial services industry, considering how criminal activities affect financial intermediaries like stock exchanges and money transfer facilitators each year.
Since most banking systems across the globe are built on a centralised database, they are also highly vulnerable to cyber-attacks. This is because an attack directed at a single point can cripple the entire system, thereby enabling hackers to breach and tamper with it. However, the blockchain is essentially a distributed ledger where each block contains a timestamp and holds batches of individual transactions with a link to a previous block. Hence, this technology can eliminate some of the major cybercrimes being perpetrated online today against financial institutions.
Blockchains can store any kind of digital information, including computer code that can be executed once two or more parties enter their keys. Therefore, another major implication of this technology is that it will allow financial institutions to create smarter contracts, which can be programmed to create additional contracts or execute a pre-determined set of financial transactions once a certain set of criteria has been fulfilled. Such self-executing smart contracts will be particularly helpful for banks to execute loans, manage loan repayments, and even undertake recovery actions in cases of defaults.
Furthermore, banks and financial institutions end up spending millions of rupees each year on ensuring compliance with Know your Customer (KYC) and customer due diligence regulations alone. Although intended to verify the source of a transaction and identify instances of money laundering, KYC verifications are repeated every time an organisation needs to validate the details of a client, making it a delayed and cumbersome process. With Blockchain, however, one organisation can access the independent verification of a client undertaken by another organisation, thereby eliminating the need to verify the details all over again. For banks and financial institutions, then, the benefits such as reduction in administrative costs for compliance departments would be significant to overlook for financial institutions.
Then there’s the payments space where blockchain’s potential for disruption is simply massive, as it can facilitate greater security and lower costs for banks to process payments, whether between two or more organisations, clients and or even between banks. The transfer of value, especially when it comes to cross-border transactions is often an expensive and lengthy process. Blockchain can make this entire process quick and seamless through a digital ledger system with end-to-end verification undertaken through a decentralised system.
Regulators in India, while worrying about the potential threats of virtual currencies, have largely overlooked the potential of its underlying technology–Blockchain and the decentralised ledger system. These technologies have the ability to address several key issues faced by India’s banking and financial systems, and we need to find ways on how to capitalise on this opportunity and make the most of it.
The views expressed in this article are of Kumar Gaurav,Founder and CEO, Cashaa.