How Blockchain could disrupt Banking?
What is Block Chain?
Blockchain: In simple words, it is a digital ledger in which transactions made in bitcoin and other cryptocurrency are recorded chronologically and publicly.
How Bank Transactions are Made?
Nowadays all the bank transactions are made digital so that it became easy to perform a transaction. But going digital is also a major drawback because bank transactions are vulnerable to hacking. Another major drawback is more time taken for a transaction.
If you want to send money to a friend who lives in other state or another country, you need to go to the bank if you do not have an online system and wait in a long queue’s and fill out the form with details of Payee and make a transaction. If you have an online banking you need to enter the details of the payee and you can send it through IMPS or NEFT. If your payee is in the same bank as your’s it is easy to send the money. First, they will deduct the money from your account and add the money to your friend account. It is so simple, but if your friend is another bank customer then your bank deducts the amount from your account and will deposit in your friend’s account of another bank. Then it sends a message to the respective bank to increase your friend’s balance with the amount you have deposited and it’s done.
Usually, this service takes some seconds to hours to do these transactions and these are all closed transactions so that no other members can see what is going inside.
BlockChain Disrupts Normal Banking Transactions:
Blockchain Technology provides a cryptographically secure way of doing transactions without involving third parties such as banks. All the processes are fully automated in the blockchain and it reduces the time taken for a transaction and also they are more secure.
Blockchain system comprises of :
- Immutable Ledgers
- Decentralized Peers
- Encryption Processes
- Consensus Mechanisms
- Optional Smart Contracts
Generally, a blockchain is a spreadsheet which consists of information containing all transactions. All the transactions will be done in numbers and letters considered as a hash. So this will gives more security to a transaction.
Blockchains will disrupt the traditional banking transactions mainly in four ways. They are Payments, Clearance and settlement systems, Security, Loans and Credit.
Payments: There are no third parties involved to approve the transactions at many points, Blockchain will make payments easier compared to the bank transactions. Also, the fees levied on the transactions that are carried out through Blockchain are less compared to the traditional bank transactions.
Clearance and Settlement Systems: Blockchain will reduce the operational costs that are involved in the transactions as it has distributed ledgers and this will make easy for the clearance and settlement systems between two financial systems.
Security: As all the transactions are carried out in the form of numbers and letters there is more security to the transactions which are carried out through the Blockchain. The traditional bank systems are more vulnerable to hacking and the transactions are also made public so that there are no hidden processes are involved.
Loans and Credits: Issuing loans and credits will become easy because there is no more involvement of others when issuing the loans. This will also result in issuing loans at low-interest rates.
Watch Here How Blockchain is Changing Money and Business:
Here is a detailed explanation of the above scenario which will give more insights into the topic of why Blockchain disrupts the traditional banking methods.
When it comes to Payments today, trillions of dollars slosh around the world via an antiquated system of slow payments and added fees. The typical cost per transaction for a money sender averages to 7.68%, which come from per-transaction fees associated with payments, like wire fees or hidden exchange rate markups. Facilitating payments is highly profitable for banks, providing them with little incentive to lower fees. Cross-border transactions, from payments to letters of credit generated 40% of global payments transactional revenues during 2016.
For example, If you’re employed in America and need to send a part of your check back to your friend in London, you would possibly got to pay a $25 flat fee for the wire, and extra fees adding up to 7%. Your bank gets a cut, the receiving bank gets a cut, and you’re charged hidden rate fees. Your family’s bank won’t even register the transaction till every week later. Blockchain will remove all these hidden charges that are levied upon the transactions.
When it comes to Clearance and Settlements System, the average time taken for any bank system to clear a bank transaction will be three days because there are many processes that will take place during a transaction. It has bypass many complicated systems between two banks and reach another account. Many banks are using SWIFT system to perform the transactions.
Picture Source: Google
So your transaction will have to bypass the above system to reach the other account. But Blockchain will remove all the above systems and make transactions more powerful in less time.
When it comes to Security, to settle and clear a transaction it has to involve multiple intermediaries and there is a chance of breaching the security in between. The blockchain is designed to be immutable, tamper-proof and democratic. It comes from Decentralization, Cryptography and Consensus. The data is decentralized and there is no way of failure of a transaction, if you want to change one node it will result in changing the other nodes before they are mined. If any fraudulent behaviour is identified the nodes will identify this and delete that node.
All the data is hashed in the cryptography method and hashing takes any input value and applies a mathematical algorithm to produce a new value of a fixed length. Hashing is like a password protection, a unique ID for sensitive data. This will gives more security to the transaction.
When it comes to Loans and Credits, Traditional banks issues loans based on the past credit score, debt-to-income ratio and other asset properties. They will make you fill out a form and check the above criteria and issue loans. To get this information they will have to access the credit score provided by any major firms and based on that information, banks price the risk of a default into the fees and interest collected on loans.
This system is often hostile to the customers. Surveys suggest that one in four members are awarded poor credit score and the banks will take this into account and no loan is issued to them and the data is also highly vulnerable. Alternative lending on the blockchain offers a cheaper, more efficient, and more secure way of making personal loans to a broader pool of consumers. But with a cryptographically secure data, decentralized registry of historical payments, consumers could apply for loans based on a global credit score through blockchain.
So taking these points into consideration Blockchain technology can disrupt the banking in many ways. As all the payments are converting into digital and blockchain is in developing stage so many people are converting into this technology for payments and money transfer.