Disruption, change and competition are dictating the new model for the global banking industry, with financial institutions no exception to the dynamics of industrial advancement driven by fast-growing costs and great pressure.
The implementation of blockchain, defined as a digital ledger in which transactions made in cryptocurrencies are recorded chronologically and publicly, is causing a revolution for financial services stakeholders including customers, employees, shareholders, investors, suppliers, industry associates, education institutions, government and non-governmental organizations.
The banking world is involved in quick changes of digitalization, potential cost- and labor-saving instruments. The prospects for the global finance market are so appealing that many major financial institutions are investing millions of dollars to research how to implement it.
The high-priced, opaque involvement of third parties in transactions is the main problem that blockchain’s creation has solved, given it operates on a centralized, shared database. In the past, that was impossible because every transaction requires communications between two single databases and thence another authorized controlling layer was needed.
A simple example explains the concept: your relative wants to transfer money from another country to you. But it might take hours or perhaps days for you to be able to receive it. It must flow to other parties who must authorize and control the transactions. That frustrating and arduous process is vaporized under blockchain, a conceptually stored and synchronized distributed ledger that enables safe and transparent transactions across its networks. Every party involved has an identical copy of the shared ledger that is used to record and store information of the asset such as monies and properties.
Every change to the ledger will be synchronized and copied almost directly and transparently to the network where it will be seen as a block. The blocks are linked by cryptographically. Say A wants to send money to B. The transaction is represented online in a block without a middleman. After the block is sent to every party on the network, approval is given by nodes to validate every transaction. If the transaction is approved, the block will be added to the chain which revises the permanent and transparent records of the transactions. Finally, the money will move from A to B in few minutes.
The blockchain network relies on decentralized systems making it attainable for one person or group of persons to maintain control. This safe and transparent transaction is facilitated through a decentralized system of the payment process which is allowed by blockchain technology.
Before digitalization, every transaction in the traditional banking industry had to be done manually, meaning poor customer service through complex clearing processes, large amounts of manual inspections, potentially leaked personal information and high costs.
The blockchain story started in 2008 when an anonymous person or group of persons with the pseudonym Satoshi Nakamoto published a white paper proposing an electronic peer-to-peer cash system called Bitcoin Although blockchain was originally developed to support Bitcoin, now it is used for more than 1,000 cryptocurrencies – digital, encrypted currencies.
Advocates say decentralized cryptocurrencies such as Bitcoin provide an outlet for personal wealth that is beyond restriction and confiscation. But over the past several months, Bitcoin has undergone swings in value that can only be described as astonishing. Respected economist including Nouriel Roubini have called them a Ponzi scheme.
Nonetheless, the blockchain technology can be used in many other sectors such as cybersecurity, supply chains, forecasting, networking, insurance, private transport, online storage, charity, voting, government, energy, online music, retails, health care, real estate, crowdfunding and identification. These chains are disrupting the banking industry, cutting costs and reducing delays. They are secure and hugely efficient. Because they are decentralized and permissionless, they are expected to lead to more disruptions in the financial sector, especially in payment clearing.
Recently international organizations as well as developed countries and other countries have been paying close attention to the blockchain technology and are exploring their application in various fields.
For the financial sector, since 2015 international financial institutions have begun to formally plan for the technology. Goldman Sachs and other banking giants have established their own laboratories working in close collaboration with the blockchain platforms.
Major financial institutions have a relatively positive attitude towards studying and improving the processing efficiency of the blockchain technology and have placed a significant emphasis on its potential to reduce operational costs. In fact, IBM predicted that within four years, 66 percent of the banking industry will have commercialized the blockchain at a scale.
What are indigenous banks in Asia doing about this? Will they be part of the 66 percent? It is high time they start giving opportunities to the IT departments in the banking Industry to study this new technology so that we rise to be counted. Other opportunities with this new technology are a point to point payment, sharing credit data, smart contract all this using the blockchain technology.
This technology can drastically reduce manual intervention in supply chains in finance and employ smart contract or digitized procedures that rely heavily on paperwork, numerous intermediaries, high risk of illegal transactions, high cost and low efficiency. As transactions occur simultaneously each transaction will need to be verified by all the nodes in the entire network which is harmful to speed this impact will become especially needy when the nodes in the blockchain increase.
Despite the permissionless and self-governing nature, regulation and the actual implementation of a decentralized system are problems that remain to be resolved, however, it is important to note that any beneficiary technology is accompanied by risk, thus blockchain regulation is necessary and should be considered.
The financial industry is highly sensitive to technological change. To keep up with these changes, banks must invest more into research, not forgetting the development and empowerment of staff in knowing more about this new technology. Although the technology is still unregulated and could have its limitations, banks would have to improve their position in the industry.
The banks will try to improve their payment systems and overcome information communication, resulting in a better customer experience hence blockchain will become the core underlying technology of the financial sector.
Oliver Aziator is a senior banking analyst and blockchain advocate. Email him at email@example.com.