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How Blockchain is Transforming the Financial Services Industry

— January 6, 2022

Thanks to blockchain, customer data can be stored and secured in one database.

Visa, Berlays, American Express, and many other companies from the financial services industry have already started to use blockchain technology for various tasks. It’s no longer about the “wait and see” approach to introducing blockchain – on the contrary, blockchain brings many benefits everyone using banks or services of an insurance company can experience.

So what does blockchain bring for the financial services industry? We will discuss the benefits in these articles, but, first, let’s make it clear what blockchain is and what it is not.

What is blockchain?

Blockchain is a digital collection of transactions (for example, in bitcoin cryptocurrency), recorded in a way to make it difficult to change, hack, or cheat the system. 

Blockchain is made of a number of blocks, each of them having a copy of the ledger where all transactions are recorded. Once a new transaction is made, this activity is added to all blocks in the chain – it’s recorded in a chain’s ledger. 

In case a hacker made an attempt to corrupt the system, they would have to introduce changes to every single block in the chain – that’s why these attacks are impossible so far. 

Blockchain databases are decentralized and managed by multiple participants. Due to its decentralized nature, no one is in control of the system – in fact, it’s run by all entities – blockchain users. As a result, for example, cryptocurrencies can’t be faked or stolen as there is no central point to attack.

Blockchain technology has gained an increased popularity and found various applications in many industries, not only in the financial services. However, one of its most prominent examples of blockchain in action that everyone has heard more about is cryptocurrencies.

Let’s first understand a subtle difference between Bitcoin and Blockchain – two concepts that are often used interchangeably. Using those as synonyms is a mistake.

The difference between blockchain and Bitcoin

Bitcoin; image courtesy of Pxhere, CC0.
Bitcoin; image courtesy of Pxhere, CC0.

Blockchain describes a technology, a distributed database that makes a foundation for Bitcoin. Bitcoin is cryptocurrency or a digital currency and is powered by blockchain technology. Bitcoin users can transfer funds to each other without any involvement of a third-party – a bank or government, all done anonymously. Investors normally use various apps Coinbase or its alternatives to invest in cryptocurrencies such as Bitcoin or Ethereum.

Here is the point – Blockchain technology goes beyond Bitcoin. In fact, Bitcoin is blockchain technology in action, one of its use cases or applications.

While cryptocurrencies are mostly associated with Bitcoin, there are many other cryptocurrencies which value is increasing these days – for example, some are trading Bitcoin for Ethereum, another most popular cryptocurrency. By using blockchain technology, one can even develop a new blockchain – the cost of developing a new blockchain ranges between $150,000 and $200,000 (without marketing expenses).

The applications of blockchain in financial services

There are many other applications of blockchain, especially in the financial services industry. They are not so popular as cryptocurrencies, but all of them are already shaping the future of banking, insurance companies, and brokers. Let’s have a quick look at the main benefits.

  1. Faster and cheaper money transfers

By using blockchain, financial institutions can speed up the transfer of money from one point to another. As there is no central governing body in the process of moving the funds, the cost of performing a transfer is much lower – often, close to zero.

With blockchain, consumers no longer have to wait a few days for a money transfer to be performed (especially, in the case of cross-border transfer) – money can be transferred in a matter of seconds.

  1. Automating contracts

As banks and insurance companies are spending a huge amount of time on preparing, sending, reviewing and approving contracts, introducing self-executing contracts has eliminated a lot of repetitive tasks for the employees of financial agencies.

Blockchain has made it possible to introduce smart contracts that are approved automatically when certain conditions are met. There is no intermediary involved in the process. As a result, there is a huge saving in terms of time. Smart contracts work within “if/when… then… ” rules. Releasing funds to a bank client or registering a vehicle can be examples where smart contracts could work great.

  1. Enhancing security

Due to the way blockchain works, it is impossible for hackers to steal sensitive information related to a transfer when money travels from one account to another. As a result, banks have managed to increase the security of digital payments and boost trust of their clients.

Everything that happens on blockchain is encrypted. For example, if someone alters your signature on one blockchain unit, it become invalid – the rest of blockchain units will have a different signature recorded.

  1. Speeding up KYC process

Know your customer (KYC) process is a routine check financial institutions make when a customer wants to use their services for the first time. KYC is an identity verification process and is done to prevent money laundering and fraud. 

As this process is usually time-consuming and connected to some costs, financial institutions have started using blockchain to reduce the hassle around KYC. 

Thanks to blockchain, customer data can be stored and secured in one database. Financial institutions running KYC can assess the information such as customer ID recorded on the blockchain ledger. By its design, blockchain makes this data trustworthy – there is no one single authority running the distributed ledger, and, therefore, a point of weakness to hack the user data recorded on the ledger.

  1. Facilitate digital advertisement

Financial industry is relying heavily on online advertisements to acquire new customers – they create finance marketing videos that later run on YouTube to build awareness about products or invest in Google search ads to get customers who are actively looking for financial products in the biggest search engine. 

Handling lead data is often done through an intermediary such as Facebook or Google. Consumers are getting more worried about their privacy and how Google or Facebook is processing information about them. They also install ad blockers more often to get rid of annoying banners and popups. This makes it more difficult for banks and insurance brokers to reach their target customer.

Blockchain can offer a solution to the decreasing effectiveness of online ads. With blockchain, banks and brokers can bypass Google and Facebook and interact directly with consumers. Instead of paying to these social media powerhouses, financial companies can reward users for their attention by paying to consumers directly. A micropayment can be done to a user account for clicking and reading an ad, or installing an app of a financial institution as well as performing other key steps leading to the awareness about a product.

  1. Reduce expenses

Businesses are extensively using expense management software to track expenses, set up automatic business rules checks, and prepare reports. Financial brokers, tech companies, and banks are constantly thinking of other ways to make their organizations more efficient in terms of expenditure. 

That’s exactly what blockchain can help with. There are various applications of blockchain in expense management. In fact, the majority of the use cases we have described in this article lead to more cost efficiency. To recap, here are the most important ones:

  • decrease the cost of an online transaction
  • spending less time on routine checks and free up time on the activities bringing ROI
  • cut costs on contract management
  • increase the transaction volume

Wrap up

The capabilities of blockchain are vast and go beyond what many would associate blockchain with – cryptocurrencies. The financial services players can already see the benefits of introducing blockchain – starting from automating contract management and finishing on reducing the cost of processing a transaction. Those players who underestimate blockchain technology, might lose to competitors who are already counting ROI with the solutions blockchain has brought to their business. Time to accept the change!

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