How May Blockchain Development Revolutionize Traditional Banking?

With the rapidly changing globe, blockchain is revolutionizing almost everything. Be it a particular payment transaction or fundraising in the private sector – this advanced technology has changed all spheres of the business world.

Applications utilizing blockchain technology – the tamper-proof system of distributed ledgers that powers cryptocurrencies – are one of the many potential disruptors for the banking sector in current times.

To keep up with this innovation, major financial institutions, including investment banks, stock exchanges, and central banks, are starting to develop their blockchain-based solutions.

Traditional banks are starting to pay attention to companies like Google Inc. (GOOG), Apple Inc. (AAPL), eBay Inc. (EBAY), Amazon.com Inc. (AMZN), and many more FinTech startups.

But before we dig deep, let’s get the fundamentals right and explore what exactly blockchain technology is.

Blockchain Development – An Overview

Blockchain, which was initially created as the technology powering Bitcoin, has swiftly gained popularity for its capacity to produce a sizable, globally distributed ledger that runs on millions of devices and can record anything of value.

A blockchain is essentially a digital log of transactions, with exact copies kept on the computers of all network participants. New submissions may be made and existing ones reviewed by all parties.

A chain of blocks is used to record transactions one after another, giving rise to the term “blockchain.” Previous transactions cannot be deleted or falsified because cryptography safeguards the connections between blocks and their contents.

Blockchain technology makes information exchange faster, more secure, and more transparent while also being highly cost-effective. Additionally, it eliminates the need for third parties whose primary function in transactions is to add a level of trust and certification, such as notaries and banks.

This indicates that there is no need for a middleman or centralized authority to trust the ledger and transaction network.

Startups and the entire financial services sector are showing interest in the blockchain due to its capacity to record, store, and move assets with great ease, automation, and in a decentralized manner.

These parties imagine potential use cases and applications in a variety of fields.

Why Use Blockchain?

Blockchain is regarded as incredibly secure. This is because it stores blocks with encrypted data that cannot be modified easily.

Blockchain is also essentially cost-free. The infrastructure has a particular cost but not the transactions themselves.

Due to this, businesses mainly avoid the hassle of shelling out minor fees for every other financial transaction that takes place.

Using blockchain to easily establish trust between two parties is quite affordable.

A secure system can be beneficial for organizations that need to conduct transactions with new clients, whether they be financial or otherwise.

Blockchain can extensively be used for more than just certain financial transactions.

Copyright protection, electronic voting, incentive systems, medical archiving, and many other uses for blockchain are possible that help make the traditional processes seamless.

Traditional Banking – A Brief Overview

Traditional banking is mainly used to describe banks with a specific local banking license and a physical location. These include well-known banks like ING, Bank of America, and so on.

Today’s consumers have a wide range of options for their banking requirements.

Traditional banking has been the go-to method for conducting bank business for many years, but thanks to modern technology, users can now access banking services that may be completed online or on mobile.

Some of the common pros of traditional banks include the following:

Greater Variety of Financial Services

Traditional banks may provide customers with financial services that are not offered on digital platforms. One benefit of traditional banking is the capacity to deposit cash.

A well-developed network of ATMs is frequently made available to consumers by traditional banks.

Many thousands of devices nationwide may be found in larger institutions. If you have a bank account with the bank or one of its partners, you usually won’t have to pay a transaction fee when using these ATMs.

Additional Choices for Customer Service

Local branches of traditional banks can provide in-person assistance. The same cannot always be said for banks on mobile devices or online. Traditional banks typically offer phone and online services as well.

Relationship Banking

Customers of traditional banks have the opportunity to interact directly with bank employees.

When you require additional assistance, having this familiarity may be helpful. Dedicated relationship managers can help you navigate through your common banking concerns with ease.

A major con of traditional banks is in-person transactions that are often required at traditional banks. They seem to be pretty unpleasant. The human element is a key component of traditional banks.

As a result, depending on your needs, service levels may differ from one branch to another. For instance, certain branches might offer more financial counselors or bilingual representatives than others.

Top Ways Blockchain Development May Revolutionize Traditional Banking

Here are some of the top ways how blockchain may revolutionize traditional banking. Let’s take a look at them!

1. Payments and Remittances

Payment systems are blockchain technology’s most obvious and fundamental application. Bitcoin and other cryptocurrencies serve as a kind of virtual currency and a means of sending payments around the world.

These transactions happen instantly and only need an internet connection. Even though it may take several minutes for a transaction to be completely confirmed, the actual transaction only takes a few seconds.

These transactions are secure, borderless, and largely anonymous. It is also considerably less expensive than using credit card processors like Visa Inc., Mastercard Inc., or Discover Financial Services.

A merchant who does not want to pay the setup and continuing costs to accept credit cards can accept electronic payments made with cryptocurrencies for a lot less money. Sending money abroad is a challenging task.

The money can be intercepted or stolen, the costs are exorbitant, the processing takes a long time, and there are legal and tax considerations. All of these issues would be resolved by a blockchain-based system.

Numerous businesses have already been established to help with these remittances. Retail banking may also experience disruption.

Without the banking customer having to deal with Bitcoin directly or worry about its market price, depositors might utilize the public ledger to keep track of bank account balances, record money transfers, and confirm transactions globally.

2. Account Balances and Deposits

Banking institutions are typically used by consumers to hold deposits in checking and savings accounts. But as soon as you put money into a bank account, the bank uses fractional reserve banking to loan the majority of it out.

As a result, the bank does not hold the majority of the money that appears when you see your account balance. In truth, a bank run happens when too many clients want to take their money at once, but there isn’t enough money to go around.

Therefore, a bank account balance is essentially an accounting item. In the end, the blockchain is a ledger that records accounting transactions.

As a result, bank accounts might eventually be represented on blockchains, making them more accessible, safe, and affordable to maintain. Additionally, it might lessen the possibility of bank runs.

3. Easy Loans and Credits

Peer-to-peer (P2P) loans and sophisticated programmed loans that approximate a mortgage or syndicated loan structure are made possible by blockchain technology. In general, it may result in a quicker and more secure loan application process.

When a person applies for a loan from a bank, the bank assesses the likelihood that they will be able to repay the amount. In addition to the debt-to-income ratio and property ownership status, it considers credit score.

The bank must consult a person’s credit report provided by the credit bureaus Experian, TransUnion, and Equifax to obtain the aforementioned data. There are many vulnerabilities created by consolidating all the data in these three organizations.

It will then factor the risk of default into the fees and interest that will be charged for loans. Consumers are averse to this centralized structure. The fact that almost one in three Americans have poor credit makes it very difficult to obtain loans with reasonable interest rates.

An alternative technology, such as blockchain, provides a more affordable, effective, and secure way of offering personal loans to a larger consumer base.

Consumers will be able to obtain necessary loans based on a worldwide credit score thanks to a decentralized registry of prior payments that is cryptographically secured.

4. Secondary Market Trading and Clearing

Clearing and settlement of deals are necessary for anything from the simplest purchase of company stock to the most complicated over-the-counter currency swap.

Verifiable ownership transfer and recording of the asset or contract being transferred are required.

Exchange fees and clearing fees are now included in the price of each trade and, given the volume of orders, can grow significantly over time.

All kinds of asset classes, including stocks, bonds, derivatives, commodities, and real estate, would experience a significant reduction in transaction costs and clearing costs if the ownership of shares could exist on a blockchain and any change in ownership could be instantly validated and confirmed.

A distributed ledger system that is more secure, reliable, and less expensive to maintain and conduct transactions in one day may replace such illustrious organizations as the New York Stock Exchange.

Recently, Overstock (OSTK) disclosed that it was building T0, a blockchain-based asset market, to issue some of its corporate bonds to investors directly.

Bitcoin exchange based in New York According to Coinsetter, a blockchain-based platform will be launched to clear over-the-counter transactions that can be resolved in T+10 minutes.

To put it into perspective, the settlement period for purchasing stock on a U.S. exchange is T+3 days.

5. Primary Market Issuance and IPOs

Can primary markets exist if secondary market trade can be on blockchains? Yes, it is the answer.

Consider yourself a business looking to raise money by issuing new shares to the general public through an IPO.

At present, this would be a highly costly endeavor involving the underwriting and sale of your shares by an investment bank (or a syndicate of such institutions). This may cost up to 9% of the capital being raised or more.

Consider the possibility that you may independently issue shares of your business and then sell them on the blockchain for cash. Then, using the blockchain, these virtual shares can be traded on secondary markets that also exist.

If the public accepts this scenario, it might significantly upset both asset markets and the investment banking sector.

Wrapping Up

The financial sector is taking blockchain technology very seriously because it has huge potential to significantly impact the traditional banking sector.

The blockchain’s tamper-proof, decentralized, and unchangeable characteristics tend to make it the ideal solution for optimizing a variety of processes without making a hole in your pocket.

These processes primarily include payments, securities issuance, retail banking, clearing, and much more.

Although those applications as payment and monetary systems are unsettling, a more considerable upheaval might result from other applications of these exceptional and potent traits.

With the changing times and growing trends, putting one’s trust in blockchain to enhance the banking industry is undoubtedly the way forward.

Not only will it benefit individual end-users to make their experience seamless, but the blockchain is also likely to influence the entire system as a whole.

Turn to RV Technologies today and get started with your dedicated blockchain solutions. Being a seasoned blockchain development company, we help you understand all the nuances of traditional banking and how they will transform with blockchain. This way, you can get the best results with ease!

Get in touch with our technical experts today!