The Role of Blockchain in Financial Services Industry
The introduction of blockchain technology has brought about one of the most game-changing innovations of the financial services industry. The distributed and decentralized public ledger promises to cut down fraud and ensure swift and secure transactions and trades.
Moreover, blockchain technology ultimately aims to manage and reduce the risk within the interconnected global system. In fact, blockchain technology in the financial services sector will hit a market value of $22.5 billion by 2026.
But how are they planning to do this? What does blockchain technology bring to the table? What are its various applications in the financial services industry?
Read on to find out!
Benefits of Leveraging Blockchain Technology in the Financial Services Industry
The various benefits of blockchain technology in the financial services industry are as follows.
Since all financial activities are happening on a public ledger, all the data is transparent and can be accessed by everyone on the ledger. Numerous copies of the ledger are existent throughout the network.
That means a new block is added whenever a transaction happens, and everyone present on the network will receive a copy. It can expose inefficiencies in the system, such as frauds, reducing risk to financial institutions.
With the increase in the number of online consumers in the past few years, the number of scammers has also seen a prolific increase.
That is because, conventionally, when information flows through different financial intermediaries, there is a chance that it might be intercepted, resulting in fraud.
To avoid this dilemma, blockchain technology introduces a faster transaction method that is much more traceable than traditional banking.
Now that investors are moving away from financial advisors due to high costs, blockchain technology can provide consumers an opportunity to lower their financial services-related expenses.
With financial technology companies now working hand-in-hand with the financial service companies, investors will now be given an option to open an account with a digital assistant to make independent financial decisions.
How Does the Financial Services Industry Leverage Blockchain Technology?
Here are a few examples of how blockchain technology is leveraged in the financial services industry.
Transferring money to another country has always posed many problems for consumers and financial institutions alike. Billions of dollars are transferred internationally in a year, and this entire process is expensive and prone to errors.
That is where blockchain enters the picture. With many major banks opting for blockchain technology for their international payment system, blockchain technology is slowly gaining traction.
Consumers can now leverage blockchain technology to complete electronic transfers, eliminating the need to physically go down to the money transfer facility, stand in a queue, and pay transaction fees.
For instance, look at Bitcoin, which leverages blockchain technology to transfer money from one place to another without a central governing body.
A secure payment transfer is not the only advantage blockchain technology offers. It can also be leveraged to track transactions and ensure that all financial information is accurate.
Here is how that is made possible:
It is much easier to track ownership with blockchain technology since it is almost impossible to alter. Once the transfer of ownership of something is done, one can always refer to the ledger to verify the information.
- Automation through smart contracts
Transactions are generally time-consuming and complex, and, at times, expensive. Blockchain technology can eliminate this woe by offering an opportunity for automation. That is mainly because of an automated feature called smart contracts.
This feature can automatically track transactions when the buyer pays, and the seller delivers.
Moreover, the automated system also addresses any problems that arise during the process, reducing human error to a great extent.
For instance, let’s say an insurance company needs help speeding up the claims process. With blockchain technology integrated into their systems, the claims would be reviewed by the code programmed into the blockchain. If the claim is valid, smart contracts will automatically execute and pay the client in question.
Add Transaction Security
Financial companies are generally prone to fraud. As digital payments pass through processors and banks, there is a considerable risk that this information might be stolen in the transaction process.
The use of blockchain technology will eliminate this risk since it uses a cryptographic algorithm to process and record blockages in a transaction.
This added transaction security is the perfect way for financial companies to reduce risk while processing transactions.
Before we proceed, let’s understand what financial inclusion is first. In essence, financial inclusion refers to the equality in opportunities to leverage financial services to access timely, appropriate, and affordable financial services and products.
Blockchain technology’s role in financial inclusion is providing services at a low cost so that startups can compete with major banks and financial institutions.
Since blockchain technology uses digital identification and mobile devices, it is free from minimum balance requirements, banking fees, and limited access.
Customer Data Storage
With frauds and money laundering happening extensively, financial companies need to go through an identity verification process with their clients. It can be time-consuming and expensive, but it is critical and cannot be looked over.
The alternative to this situation is the introduction of blockchain technology, which stores customer data acquired from the KYC (Know Your Customer) process that a new client undergoes. As a result, all this data is stored safely and securely in the blockchain.
Other companies can leverage the same data without the customer undergoing a KYC process for every new financial account they make.
With traditional banking systems becoming obsolete, blockchain technology is significantly impacting the financial services industry.
Although blockchain technology is still in its early stages with respect to its development and integration into the financial services industry, it is set to take transaction processing and interoperability to a whole new level in the coming years.