Financial Institutions throughout the world have been facing security threats for a very long time. The influx of transactions carried out by the banks and the dependability on the central server makes it vulnerable to security leaks. Most of the tasks carried out in the banks are manual and require authorization from the single point of contact which makes it prone to attacks. The centralization of the database and limited traceability of the transactions make it difficult for financial institutions to track the initiation and authorization of a particular transaction. To combat the prevailing issues, blockchain has emerged as a highly advanced technology to handle the security and data privacy concerns of financial organizations.
Blockchain is a decentralized, distributed ledger technology (DLT) where the data is stored in different blocks and every user in the chain has access to the new and previous records. To process the authorization, all nodes in the chain have to authenticate the transaction which makes it highly secured and reliable. The records in the chains are immutable and cannot be overridden by the new transactions; instead, every update done in the system is stored on the blocks to track whenever needed. Blockchain can address most of the current issues faced by the finance organizations and that’s the reason, the world across many institutions are moving to adopt blockchain technology. Some of the leading banks and financial institutions of the world are researching the distributed ledger system of Blockchain and publishing their results for better examination.
Smart Contracts in Blockchain
Financial transactions involve several intermediaries who have to process the transaction to authenticate it. It gets risky when the participants are not trustworthy and due to the recurring nature of transactions, it can become a cumbersome process. Smart contracts are lines of codes that automate the transactions which involve the intermediaries and streamlines the complex processes. It is like a self-executing protocol to fulfill the previously agreed agreements discussed between the members. The smart contracts can reduce the reliability of the middlemen and create more transparency in the system by making the processes automatic and thereby reducing the time lag in processing the transactions. A common example of a smart contract is an automatic refund of failed payments and commission payment after a sale.
Benefits of Blockchain to Finance Organizations
The detailed principles of blockchain will have both quantitative and qualitative benefits to the finance organizations. The major changes that will the technology lead the organizations through are discussed below:
Enhanced Data Integrity: The data of an organization is the most crucial resource and by protecting the legacy data of the customers and transactions, blockchain can help by increasing the data accuracy and security of the system. The records in the blockchain are immutable and every user can check the data blocks before authenticating the transaction. This helps in improved auditing of the transactions and building trust among the parties. Blockchain can help in creating a single source of information for customer identification which will reduce the time lost in data collection and risk related to “know your customer regulations”.
Increased Efficiency: Financial transactions have to be reconciled multiple times and because of the single ledger system, it leads to a decrease in the efficiency of the system. In Blockchain, the ledger is distributed among all the users and every block added can be viewed by the participants in real-time, this feature eliminates the need for data reconciliation and out-of-sync ledgers. Transparency among all the parties is an added advantage of the finance blockchain.
Improved Customer Experience: Blockchain increases the overall efficiency of the system and reduces the reliability of middlemen. The smart contracts help in automating the process and the decentralized ledger reduces the time taken to process the transactions and need for recurring reconciliations. The new adaptive system helps in serving the customer in a fast and efficient manner and strengthens the relationships. The high security and computability of Blockchain also help in reducing the disputes raised by the customers.
Lower Operational Costs: The smart contracts can reduce the transaction fees by eliminating the need of third parties to execute the refunds and will minimize the time of capital disbursal to the customers. The overhaul of the banking and finance system by Blockchain will increase the efficiency and lower the operational costs which can be utilized by the banks in increased capital flow to the account.
Order and Invoice Management: Financial companies spend a lot of capital in the management of orders and invoices and still there are erroneous entries to be taken care of. Blockchain with its real-time ledger update can help all the parties involved in checking the inventory, order and fulfilment status and can automate the payment process to the respective parties.
Blockchain has disrupted the financial companies with its easy to use a system and high-security network. Many banks across the world have started using the blockchain for various use cases and are reaping the benefits of the secured and high computable technology. According to the CEBNet report, 12 major banks of China have enrolled for Blockchain and many banks in Russia, UK, and the U.S are experimenting with the use cases. The investment in the Blockchain market is expected to surpass $12.4 Billion by 2022 and the finance companies will make a major contribution by adopting the technology. About $ 2.1 Billion was the size of investment in 2019 and the compound annual growth rate is above 75%.
Some finance companies are researching to understand the scalability of the technology for advanced use cases and are paving their way to implement them in the future.