Top 7 blockchain use cases in banking and finance

Introduction

The potential of Blockchain technology has caught attention worldwide. It has a huge crowd around it that are looking for opportunities to adopt and leverage the benefits of this disruptive technology in their business. 

The BFSI sector is taking the lead for adopting this technology for gaining the benefits in the near future. The main focus of setting up banks was to create connected groups of people together and allow transparent and secure communication between them through trade and commerce. Blockchain is a tool that helps to accomplish these things on a global scale. 

Facts and Figures

• The Blockchain market is forecasted to grow at 62.73% CAGR through 2026 reaching $52.5 billion
• By 2026,  the largest North American Blockchain tech will be the Hybrid blockchain worth $6.7 billion.
• The largest revenue will be derived from Blockchain-as-a-Service, Cloud computing, and System Integrations.

These figures clearly portray that the blockchain market is envisioned to have a higher revenue by 2026 and the growth in banking and finance will continue to grow. Though now we know that Blockchain technology is responsible for bringing in major transformation in the BFSI sector, you must be aware of the areas where the technology will streamline the process. Let’s dive into the use cases of blockchain technology in the banking sector.

1. Payments

One of the areas where Blockchain penetration is fastest is payments in banking. Payments are crucial as people primarily use their bank accounts for transactions. 

Banks have been on the bandwagon of digital transformation for quite a long time that motivated them to adopt disruptive technologies for seamless payments and issuing their own digital currencies.

With Blockchain, banks will leverage benefits such as:

1. High-level of security while transferring money
2. Quick and safe transfers
3. Operating in real-time
4. Ability to serve round the clock instead of being time-specific
5. Feasible and faster cross-border payments

Some popular examples include Australia’s Westpac and Estonia’s LHV banks that have successfully integrated blockchain technology into their processes.  

2. P2P transfers

The concept of Peer-to-Peer (P2P) payments is simple where it involves a transaction between two parties. The money is sent from someone’s bank account to the receiver’s account using net or mobile banking. 

But P2P payments have some major concerns such as:

1. No international money exchanges
2. Refunds are difficult to initiate or are non-existent in most cases
3. Prone to human errors such as sending the money in a wrong account
4. Fraud and security

Adopting blockchain technology for P2P payments brought a promising transformation by replacing cash, credit cards, vouchers, checks, and gift cards with digital wallets that offered:

1. Instant transactions globally
2. Inexpensive money exchanges
3. Elimination of fees and chargebacks
4. High-level security by preventing frauds and data alteration
5. Offers both cryptocurrency and fiat transfers through Blockchain

Mobile app developers are looking to embrace the potentials of blockchain technology in building robust and exceptionally secure P2P mobile apps as:

1. P2P networks are faster and reliable
2. It has a little chance of downtime
3. P2P networks are simple and cost-effective
4. Easy to establish and maintain
5. Highly secure

One of the popular examples of P2P apps that uses Blockchain technology is Bitwala that focuses on facilitating seamless money transfers mostly on cryptocurrencies such as Bitcoin. 

3. Clearance & settlement

Currently, as per the traditional financial infrastructure, a bank transfer takes a couple of days for the settlement. With the decentralized blockchain technology, banks could settle directly and keep track of the transactions in a much better way than the existing protocols such as SWIFT.

One of the logistical challenges that numerous banks face is moving the money globally. A bank transfer has to undergo various complex processes and bypass intermediaries such as custodial services before it reaches its destination. It is mandatory for the banks to reconcile their bank balances across the global financial systems that involves a wide array of funds, asset managers, traders, and more.

The SWIFT protocol has the role to only process payment orders. The actual process has to bypass intermediaries that come with associated costs and time.

With Blockchain technology, banks can track all the transactions transparently and publicly. Blockchain enables banks to simply settle the transactions directly on a public blockchain. They don’t need to rely on any kind of custodial services and regulatory bodies such as SWIFT. 

4. KYC and Identity Verification

Every bank account holder wants their money to be safe from cybercriminals and fraudsters. But, the authentication and the authorization process is so typical that banks suffer a lot on the efficiency front. 

Blockchain technology adoption is paving a way for the banks to remove these tedious steps by registering once with the blockchain and avoiding repeated verification for other services if they too are using this decentralized hyperledger. 

KYC is benefited with this adoption. The typical onboarding process of the customers is quite expensive and consumes a lot of time. KYC includes a lot of verification right from financial background to other personal data. With Blockchain, customer databases are automatically updated with relevant information and facilitates sharing between loan officers and banks in a secure manner.

Leading Fintech development companies can help banks with their world-class fintech services to employ better and cost-effective solutions that serve their client purposes and relieve them from spending hundreds of millions of dollars on KYC procedures. 

5. Fundraising

Today the current scenario of fundraising through venture capital is quite complicated. 

The typical fundraising process has the following steps:

1. Business owners put decks together
2. They carry out a lot of meetings with their partners
3. They get into negotiations over valuation and equity
4. Waiting for the results

Blockchain accelerates fundraising process by providing several alternatives such as:

• Initial Exchange Offerings (IEOs)
• Equity Token Offerings (ETO)
• Security Token Offerings (STOs)

For fundraising, STO is the most popular model and is legally protected. It needs to pass a due diligence process. To get a robust, legalized, and secure crowdfunding platform, it is recommended to consult a leading crowdfunding platform development company.

Examples:

• The pioneers of STOs are Switzerland and Malta and leading companies are Scerri and Concise offering such services.
• Neufund is a popular ETO trading platform.

6. Trading 

In the finance domain, most of the trading activities are still practiced on papers such as credits, bills, invoices, and more. Though there is an online order management system available, the process consumes a lot of time for accomplishing the tasks.

With blockchain, this traditional trading process will be digitized and results in less time consumption in a manual process, bureaucracy, and paperwork.

The adoption of Blockchain technology in trading brings in:

• Transparent pricing
• Alternative markets
• Faster and seamless payments
• Immutable transaction recordkeeping
• Real-time updating
• Seamless integration of users through a consensus
• Accessibility

7. Hedge Funds

Hedge fund comprises a group of investors and a fund manager with limited partners. These people in Hedge funds involved are usually traders instead of ordinary investors.

Hedge funds focus on increasing investor returns and reducing the possibilities of losses. 

From the past couple of years, hedge fundraising has doubled due to cryptocurrencies. A decentralized hedge fund offers an open platform for investors and fundraisers that is more transparent. This blockchain-based hedge fund is based on crypto. 

The reason to adopt blockchain-based hedge fund model is:

• Sovereignty of fund managers over money
• Enable fund managers to work within single entity

In a nutshell

Undoubtedly, blockchain has the potential to bring in a major digital transformation and technology shift in the banking and finance sector to disrupt their traditional financial processes.

Today, the market is witnessing blockchain wallets that are seamlessly and securely carrying out money transfers digitally and there is more to come in the coming years. Blockchain wallets will be leveraged by large enterprises, SMEs, and startups to offer the potentials of blockchain to customers globally.

Blockchain has become the  most significant trend in the banking sector and is expected to offer digital experiences with ease, making it one of the top desired tech to adopt by banks and fintech for money transferring and purchasing.

To start with Blockchain, you need to know where this tech can be embraced in your process. You can consult a leading Blockchain development company and start with Blockchain today!