How Blockchain Will Change The Banking System

Over the years, new technologies are coming up and transforming the world to great extents. Banking systems these days have evolved as compared to how it was 20 years ago. All thanks to the internet and digitalization. But, what’s next to make the Banking System even better and robust? Technocrats have introduced the term called “Blockchain” which can do wonders in the banking and finance sectors. Since most of us are new to it, let’s know what it means? How does it function? And what wonders it can do in today’s Banking Systems! Surprisingly, it is not spelt as BITCOIN.

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What is Blockchain?

In Banking terms, Blockchain resembles the digital ledger of transactions without the need for any centralized body in between such as banks. In particular, an individual record in the digital ledger is termed as block, and all individual blocks are linked together as a single list known as chain. Therefore, this technology is termed as Blockchain. Still, if you didn’t get an idea of what this technology is, don’t worry let’s dig deeper. It is important to realize a few things about Blockchain first: 

  1. Blockchain is early like the internet was 20 years back.  
  1. It is not a use case of the internet such as e-commerce or email. Blockchain is fundamental and parallel to the internet.  
  1. It sounds incredibly simple but on the contrary, complex to understand.  
  1. This technology has the potential to change our lives in the next 20 years as the internet did 20 years back.
Current Banking Systems

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Everything you own including money is an entry in a ledger. For example, let’s say you want to send the money from Mumbai to say, New York. The money doesn’t fly from one place to the other. It is the ledger entry that happens in your account and the parallel ledger entry which happens in your friend’s account and the money is transferred. Consequently, in the current banking system other than these two ledgers there are a bunch of other ledgers in-between owned by banks, money transferring agents, insurance companies etc. Now, each of these ledgers must be reconciled. In addition to this, these ledgers owned by banks and other entities will cut their share of profit and pass on the transaction further. To perform this process, a time delay occurs, and obviously, the cost is also incurred. Due to this centralized banking system, Rs100/- sent from Mumbai will reach New York 5-6 days later and also will be reduced to say around Rs96/-.

Blockchain coupled with Banking System

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Let’s understand what happens when Blockchain steps into the banking system. Imagine instead of this broken system we had one universal ledger. All the entities i.e., the banks, money transferring agents, insurance agents, the regulators, etc are the participants in that ledger or in particular nodes in that ledger. So, every time any entry had to happen every single participant of that ledger have to authenticate that entry to determine if it is a right or wrong entry. Doing this you need only one real-time entry. Therefore, fast and secure.

As far as Banking is concerned, Blockchain is a universal digital ledger having a list of transactions. Banking coupled with Blockchain has many advantages some of them are:

1. Hassle-free money transfer

These days sending money from one country to the other has a complex process. In particular, the sender has to go to the transfer office, wait in line, do the currency conversion formalities, and much more. Similarly, the same process is followed on the receivers end. In addition to this, there are additional money transfer charges as well. Ultimately, this process takes 3-5 days of time delay on average. But, using Blockchain both parties can have the transactions using an electronic medium. It provides hassle-free transactions without any time delay and also at much lower transaction fees. Thus, cost-effective.

2. Super Security

Security is the primary issue in the banking atmosphere. But, with Blockchain coming into the picture it promises security as a primary output. The universal ledger is the heart of the blockchain. Whenever a transaction has to happen a block is added into the chain of already existing blocks i.e., transactions. On the other hand, implementing this process requires complex cryptographic algorithms which is hard to hack. Every block added is immutably linked to the other block present and so on. Due to this, it is difficult for any hacker to hack. If any hacker comes in and wants to change one block or transaction, he or she needs to change the entire chain of blocks which is nearly impossible to do. Hence, super security.

3. Transparency  

Usually, tracing any past transaction history is a headache in the current banking system. Blockchain technology makes these transactions much more transparent and easier to trace provided the access is given. Since it is a distributed ledger all the participants in the network share the same copy of documents. Any update or change in any of the documents cannot be done without the agreement of each participant in the group. Thus, any transaction i.e., data in the Blockchain is accurate with greater transparency, and consistent as compared to the current chaotic paperwork process.  

Image source: istockphoto

Furthermore, Blockchain technology is revolutionary and will give rise to industry 4.0. In the coming 20 years, it will make our life simpler, safer, and will change the way we do transactions of any goods or services. The Blockchain technology so far has given rise to popular cryptocurrencies such as Bitcoin, Ethereum, etc. Moreover, along with the banking sector Blockchain will also shine in other industries as well such as agriculture, life sciences, health care, retail, manufacturing industry, and much more. Tech giants like Google, Microsoft, IBM are becoming the early adaptors of Blockchain.

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