Banking on the Blockchain: Why Consumers Are Migrating En Masse

Blockchain as the greatest disruption of the century isn’t far from transforming and subverting the traditional financial and banking systems across the globe. Germany’s government now allows banking institutions to offer services related to cryptocurrencies and Ukraine is on the same path too. As per a World Economic Forum report, many financial firms have started investing in blockchain solutions to reduce friction and costs in their complex array of functions and processes held together by several intermediaries.

Should we call this mass migration a mere fab? Or is it the consequence of a lingering sense of dissatisfaction and distrust in the traditional banking infrastructure? Let’s condense the reasons and findings further before we discuss the million-dollar baby and its delights.

Why is the DLT Shift Necessitated in Traditional Banking?

According to the Financial Services sector analysis of PwC’s 2014 Global Economic Crime Survey, about 45% of financial intermediaries such as stock exchanges, payment networks and money transfer services suffer from economic crimes every year. Now consider this percentage taking in consideration the fact that trillions of dollars a day are moved and millions of people served in this very ecosystem marred by inefficiency and redundancy. Bankers find rising regulatory costs a top concern the ultimate burden of which is borne by the consumers:

  • Despite baking systems claiming to go digital, antiquated processes are still gift-wrapped in humongous paperwork and record books.
  • Banking solutions are exclusionary. Millions are still unable to access basic banking, credit services, and financial tools.
  • The centralization in banking institutions makes it resistant to change and vulnerable to cyber-attacks and system failures.
  • Consumers have always been at the receiving end of such undemocratic services with no control or say in how their information is used, their funds utilized or what services they are granted access to.

The banking system is vital to any economy and the inherent shortcomings in such institutions directly impact its economic health. In 2008, the US government let the banks live by infusing 1.2 trillion dollars of the taxpayer’s money into a handful of banks.

Such reckless behaviour by the governments ensued mass distrust and led to the innovation we now call Bitcoin. Blockchain emerged as an accompanying (yet, underlying) technology to Bitcoin and gained far-wide usages and applications in several industries as a trustless system facilitating P2P transactions over a decentralized network.

Do the banks and other financial institutions see Blockchain as a probable solution to the inapt existing infrastructure?

Capgemini, a consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications.

There are quite a few emerging trends that point to the mass consumer migration to blockchain technology as an answer to several issues including contracting, settling, clearing of transactions, record-keeping, identity verification among others. Trustless transactions via a cryptographic consensus-based and cleverly coded network hold the potential to subvert existing organizational systems:

  • A banking study conducted by IBM in 2017 stated that 15% of banks and 14% of financial market institutions intended to implement full-scale, commercial blockchain solutions.
  • The same study concluded the fact that 70% of the early-adopters and trailblazers intended to go the blockchain route to create new business models and break down current barriers.
  • 80% of banks surveyed identified trade finance, corporate lending and reference data as having the greatest potential.
  • The likes of JPMorgan, Citigroup and Credit Suisse are currently investing in blockchain technology to streamline their business.
  • In 2016 alone blockchain companies were able to raise $200 million through Initial Coin Offerings and $400 million from traditional venture capitalists. This number has grown incredibly as we approach the end of the decade.

The above trends point to the fact that once blockchain technology is adopted en masse it can be further scaled to achieve the network effects required to reduce inefficiencies in the current banking system.

How is Blockchain Transforming Banking: The Use Cases

The current consumer mood, especially post-pandemic, is all for fast and secure digital banking without the regular hassle and red-tapisms involved in traditional banking services.

In other words, banking and financial services are all set for a makeover transcending from manual papered formalities to a secure, transparent and decentralized system over a blockchain. It can prove to be a great collaborative tool. Here’s how:

  1. Clearance and Settlement: Banks take a few days to clear and settle transactions and are dependent on a network of custodial services and intermediaries. Blockchain tech is already assisting banks in overcoming this logistical nightmare of moving money globally, via a distributed ledger in a transparent and trustless way.
  2. Payments: 90% of the European Payments Council members believe that blockchain would change the industry fundamentally by 2025. By removing third-party verification,  cutting short transaction processing time and reducing transaction costs, blockchain banking via its decentralized channels is transforming payment solutions. Banks, when decentralized, can stand in league with fintech startups in terms of the ease and speed they offer.
  3. Purchase and Sale of Assets: Financial markets are a complex network of brokers, exchanges, clearinghouses, depositories and custodian banks built on an obsolete system of ‘paper ownership’ that is slow, and prone to error and deception. Moving to the blockchain would mean the removal of middlemen and transfer of asset rights lowering the exchange fees and reducing instability. As per a source, moving securities on a blockchain could save from $17 to $24 million each year in global trade processing costs.
  4. Immutable Database: The information about digital assets stored over the decentralized network would be immutable.  Decentralization would ensure the cryptographic transfer of property rights. Tokenization of real-world assets, which is being implemented in several organizations currently, is another use case that can help accelerate banking processes.
  5. Raising of Funds: Fundraising via venture capital is a complicated process. Blockchain offerings such as Initial Exchange Offerings (IEOs), Security Token Offerings (SEOs) and Equity Token Offerings (ETOs) are popular and legally protected options available to consumers these days. Companies in Switzerland and Malta like Scerri and Concise Ltd have already pioneered such services. Neufund is a well-known trading platform today.
  6. Loans and credits: Centralized systems of processing loan applications involve several institutions and might prove erroneous and dangerously concentrated when it comes to handling sensitive customer information. Blockchain can make processing the applications secure, efficient and quick, and decentralized. Low-interest crypto loans, a brilliant use case by Vauld, let’s crypto users thrive on the core elements of blockchain banking by offering services that make blockchain technology usable as of today.
  7. Identity Verification: Identity Verification is a strenuous process each time a consumer asks for a new banking service. Moreover, online verification is a must for online transactions. Several countries and companies are working on developing solutions based on the popular blockchain innovation Zero Knowledge Proof. One-time registration of identity on the blockchain reusable for infinite times with any number of service providers isn’t a very distant vision all thanks to the decentralized network that would also let consumers control who sees their info and how they wish to be seen.
  8. Accounts and Audit: Accounting Digitization has been a turtle walk due to strict regulations related to data integrity and validity. A blockchain can work as a digital notary verifying all the transactions. The smart contracts inherent in such applications would automatically settle invoices and streamline the traditional book-keeping systems.
  9. P2P transfers: P2P services at present are marred by certain geographical and structural limitations. All these limitations can be overcome by the decentralized network of blockchain that would enable quicker P2P transactions globally.

The banking Industry should be, and in some parts, already is, a forerunner in the race for the adoption of blockchain tech, given its varied and vast potential of its applications in payments, trade, investment and other such banking functions beyond just Bitcoin or any other cryptocurrency. It holds stupendous promise in the near future and can be called the foundation of next-generation banking services based on cryptos and DLT infrastructure, in alignment with existing and emerging technologies.

We’ve barely just begun with blockchain banking!

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