In the field of financial services, Blockchain has undeniably come to create disruption, first with the advent of cryptocurrencies as an alternative system of transactionality, currently creating more than $ 100 billion in global transactions. Under this imminent reality, financial institutions have two options; or reject the benefits of technology or adapt and integrate it into their systems. But is it beneficial for them?
We asked Gutemberg Dos Santos what are the deficiencies of the Banking system?
There are already several centuries of development of the traditional banking system, in which the storage and transfer of securities is given in a secure environment, although history has shown that the centralized system where all financial flows converge is susceptible to bankruptcy in the face of crises economic. Many countries have suffered at least once the loss of their savings with a ¨corralito¨ in Argentina, or ¨bank transfer¨ in Ecuador, or ¨crisis of subprime mortgages¨ in the United States with worldwide effects, which casts doubt on the guarantees that these organizations can provide.
Blockchain not only offers the transfer and storage of value more reliably and cheaply, but also eliminates the need for bank deposits to be centrally insured by the state.
On the other hand, the frauds, restrictions and vulnerabilities of the traditional banking system occur in almost all bank branches globally, such violations have a lot to do with the deficiencies of the system and, of course, also with employees who lend themselves to such maneuvers. Here we list some deficiencies:
1. If a person makes a transfer to another from his bank, but both entities are not interconnected, the transfer processes are too slow, correspondents must be used to facilitate the transfer, which makes interconnection more complex due to more expensive consequences.
2. The Swift System is based on each bank maintaining accounts with each other (directly or through correspondents), but this electronic system is not cheap, therefore, it is not used for sending small transactions, in addition there is a restriction on liquidity by always keeping money available in the correspondent bank or in its counterparty that could be used to work it in another way and produce better returns
3. The risk that the transactions will be reversed by the issuing bank due to some situation despite being accepted in the Swift system is a problem and cause of fraud.
In order to guarantee the prompt settlement of transactions and eliminate counterparty risk, central banks are added to the system, but as we know, such banks have jurisdiction and competence only in their territories or regions.
What are the advantages of using Blockchain technology in the banking sector?
With regard to the aforementioned deficiencies, the need for a third party to eliminate uncertainty and facilitate interbank settlements, only presented to banks centrals and network of intermediaries as a practical solution, this until the advent of Blockchain as a reliable communication channel.
If we start from the fundamental concept of Blockchain, it works with its network of decentralized nodes among which all the information is distributed, its main functions being to incorruptibly record transactions and to verify and store them.
In the event that the SWIFT (centralized entity) system crashed or made an error, your entire network would fail; With Blockchain, (decentralized) all its nodes have a copy of the transactions made, despite the fact that several nodes fell, the Blockchain network would continue uninterrupted.
Among the many benefits of applying the system we have:
Improvement of bank liquidity management;
It allows to increase the efficiency of the reconciliation of accounts and data, which today are already the basis of most of the business models of world banking institutions;
The transfer of securities to tokens will optimize management systems, increase the volume of investments.
Distributed registries will be able to replace the bureaucracy with a system of safe operations in real time.
In addition to secure and immutable transactions, distributed records can exclude intermediaries and therefore save a lot of money for the business.
The use of smart contracts will also help reduce risks and increase the security of transactions.
Helps banks to increase the efficiency of business processes and optimize the work of the administrative office.
Decrease in the cost of international financial transactions;
The absence of barriers to make payments and transfers (including international ones), the time to make a transfer is small, the cost is low.
In mortgage loans: fixing mortgage loans in the blockchain will allow creating a smart contract for each transaction, which can be verified in real time. This will significantly reduce the time spent on risk assessment as any auditor will be able to see when payments were made.
Valuation of goods and immediate verification.
The ability to enter information about the opening of a deposit in the registration block (including the client’s personal data, the size of the deposit and the name of the bank). When replenishing or closing a deposit, the changes will be reflected in a new block.
Since records on the blockchain cannot be removed or falsified, unscrupulous bankers will not be able to destroy customer bases during the collapse of their organizations. This occurs by revoking licenses, as a result of which investors lose their right to insurance compensation.
In monetary terms, Blockchain technology according to Mckinsey reports can save banking institutions in the international transfer market around 4 billion USD. According to Javelin, the loss due to fraud for false identity or personal information amounts to between 15 to 20 million USD annually and global spending against money laundering grew by 36% from 2013 to 2017 according to Wealthinsight.
Blockchain, according to Mckinsey, will save banks more than 1 billion in transaction costs and reduce fraud losses by 9 billion.
Who is using Blockchain in the Banking sector?
Today, many of the largest banks are actively developing and spreading Blockchain technology, for example, Santander Bank, Citi Bank, UBS, Deutsche Bank, among others.
The most striking examples of the main banks are:
JPMorgan, through its interbank network project, is the largest in the industry, attracting more than 250 banks. In turn, HSBC in 2019, launched a project to buy and sell with Forex, managing to reduce costs by 25%. Bank of America has leveraged the technology to patent a number of blockchain developments, including a patent for a mechanism under which large organizations can store their clients’ cryptocurrency funds and cold storage devices. The Spanish Santander Group was one of the first to launch the Ripple-Net service with support for “Santander One Pay FX” for cross-border transactions. Furthermore, each of the four state banks in China is introducing blockchain-based financial applications. This follows from the White Paper of the Industrial and Commercial Bank of China (ICBC). It intends not only to use for transactions of its 4 large companies Alibaba, Tencent, JD and Baidu but also for cross-border trade. Not to mention China’s national cryptocurrency that will be used for internal government spending initially.
Despite all these implementations, the regulatory framework of many countries remains uncertain or is on a “Sandbox”, which means that banks avoid risking their reputation if blockchain developments are linked to cryptocurrencies. In spite of everything, the benefits to the user are still evident, it only remains to wonder if we are prepared to adopt it.