The Impact of Blockchain Technology on Financial Institutions

Is the blockchain technology being rightly described as a disruptive technology? It definitely is because this technology is all set to change the financial world in more ways than one. The impact it will have on banks and other financial institutions is something that cannot be undermined. Researchers are now discovering the use of this technology in myriad industries, for payment processing, trading applications, supply chains monitoring, transferring money, and managing digital identities.

How does the blockchain impact financial institutions?

  • Blockchain makes use of cryptographic methods for recording transactions in a way that records once entered cannot be deleted or changed. So, it works like an open ledger of records which tracks all transactions taking between parties in a verifiable way. No other financial technology has perhaps influenced the banking world more than the blockchain. It had started as a distributed ledger technology for cryptocurrencies like the Bitcoin, but soon went onto be an alternative to traditional money-transferring channels. Financial institutions and banks are waking up to the fact that unless they leverage this technology for money transferring they are going to become redundant.
  • The blockchain technology is secure, transparent, cheap and decentralized, making it perfect for handling money matters. It can offer the high-end security needed for data exchange and money. Users will also benefit from the transparent network infrastructure that in turn means low operational costs. These advantages make blockchain more trustworthy and reliable, and the in-demand solution for financial institutions and banks. For example, BitPesa uses the blockchain to conduct B2B payments for developing nations. Even Ripple has been working on using blockchain solution for settlements and clearance by banks.
  • Blockchain technology will impact the world of finance by making way for greater efficiency, lower costs, improved customer satisfaction, and higher security. This technology is reported to be responsible for saving almost $20 billion in infrastructural expenses alone by the next two years. Banks can use smart contracts for cutting down on interactions with counterparties and intermediaries; this will automatically minimize costs of executing contracts.
  • Blockchain will pave the way for quicker money transactions; you will only need ledgers for transferring assets. Banks will be able to use this technology to accelerate transaction settlements; normally, banks take a couple of days for verifying fund transfers, but with the blockchain, customers can hope to get instant notifications.
  • Banks can make data more secure via shared ledgers as the blockchain technology will facilitate quicker money-transfers. This is not achievable through a centralized system. As a result, hackers and intruders will not be left with much time to divert payments or extract transaction information.
  • Most of the data in banks resides in multiple locations and users can change data within one or more than one institution. This can be problematic because data will be kept in different locations and different parties have the power to tweak this data stored in their respective locations. Data can therefore end up becoming outdated. When data is not organized across multiple locations, meeting regulatory norms becomes a challenge. But, with the new blockchain technology, institutions will be able to keep their data in an easily-accessible location.

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