Few Fintech technologies have disrupted the banking industry more than blockchain. Developed as the database platform for Bitcoin, blockchain technology has matured into a viable alternative to traditional channels of financial transactions. Once banks realized that they could either find ways to utilize blockchain technology or else they would be circumvented by it, they began exploring how blockchain solutions for banking might allow them to remain relevant.

Yes, the banking industry has finally succumbed to the blockchain revolution, creating a wealth of opportunities for the innovative blockchain developer. In this article, we will look at five ways banks can benefit from blockchain technology.

A Quick Overview of Blockchain

First, however, let us briefly review what blockchain is, for those needing a refresher.

Where conventional financial transactions are facilitated by centralized financial institutions, a blockchain is a decentralized system in which encrypted transactions are entered into a ledger that is shared by multiple parties. A greatly simplified explanation of the how blockchain transactions work is as follows:

The transaction is encrypted and added to a distributed ledger. Multiple parties with access to the shared ledger verify the details of the transaction, without compromising the identity of those involved. Verified transactions are added as a permanent, irrevocable part of the shared ledger. The transaction is completed.

Because only verified “blocks” of transactions can be added to the ledger, there is no need to re-examine the authenticity of any transaction once it has been verified and entered into the ledger.

Let us now look at how blockchain is impacting the banking industry.

Faster Transactions

Since blockchain moves assets, such as money, by mere ledger entries, banks can use blockchain technology to reduce the time required to settle transactions. Rather than taking the traditional 1-3 days to verify fund transfers, customers can receive verification in hours or minutes. As the blockchain technology for banking applications matures, transactions will occur in real time.

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One of the strengths of blockchain is the elimination of duplicate data. Even though multiple parties have copies of the shared ledger, they all have the exact same copy. The same data never exists in more than one location — the shared ledger, so there is less need for the bank to reconcile accounts.

One company that has capitalized on blockchain technology to capture a share of the banking industry is Ripple, which assists banks with processing international payments. The company’s proprietary real-time gross settlement system (RTGS) is built upon a modified blockchain model.

Ripple represents just one example of a startup that is helping banks bridge the divide between legacy systems and distributed ledger systems.

Improved Security

Shared ledgers can help banks secure transaction information in a few ways. First, since blockchain enables transactions to be completed much quicker than is possible with centralized systems, there is less time for someone to intervene and divert payments, or to capture transaction information.

Second, in some models, two security keys exist for each transaction: a public key that is available to every user, and a private key that is shared only by the parties to the transaction.

The public key can be used to view a user’s account balance and transaction history, but it cannot be used to identify the account owner’s identity or to make changes to their record. The private key is linked to the user’s account number, and can only be used once. Even if a hacker could steal the private key and decrypt it, it would not enable them to make further transactions.

Further, each ledger entry, once verified, becomes an irrefutable and unchangeable part of the ledger’s chronological record, which all users have a copy of. The only way to change data in a shared ledger would be to somehow access every user’s copy at the same moment and make the same change in each. And that isn’t going to happen.

Several banks are already experimenting with blockchain to see how it can help reduce fraud and to keep data secure. As more banks become willing to explore shared ledger technology, there will be an increased need for blockchain developers to provide solutions.

Improved Data Quality

Data quality is a big deal to banks.The problem lies in the fact that so much banking information exists in more than one place. Further, some information can be changed by multiple parties within one institution, or even by parties across institutions.

With data residing in duplicate locations, and different parties having the ability to change the data in their location, there exists an opportunity for data that is used to be outdated or incomplete. This is an oversimplified explanation; the situation is quite a bit more complex, and includes regulatory requirements that are difficult to meet when data is distributed in an uncontrolled manner.

Despite an entire industry being devoted to data management for financial institutions, challenges persist. This is where blockchain comes in.

Modern blockchain technology is capable of storing any type data, and allowing that data to be accessed and changed only according to predefined rules. This technology, called smart contracts, is being used to automatically verify and enforce contracts. By moving any of the various type of banking information into shared ledgers, that information inherits all of the benefits of blockchain technology, including the security features and fast transaction speed.

Ultimately, the value of shared ledger technology for banks will lies in allowing different institutions to share a common record system. As institutions act on the same data, blockchain technology will allow for faster and more secure transactions and more reliable data.

Reduced Cost

As banks are learning, blockchain technology offers banks far more than survival — it can pave the way to greater efficiency, security, and improved customer satisfaction. In terms of cost savings, alone, banks are expecting blockchain to help reduce infrastructure costs by $15-20 billion by 2022.

By implementing smart contracts within the blockchain platform, banks can reduce interactions with counterparties and intermediaries, which can reducing costs for maintaining and executing contracts.

Another way blockchain is saving on transaction costs is in bank-to-bank transactions. Many such transactions require an intermediary for processing and administration. Blockchain eliminated the need for the intermediary and facilitates fast, secure transactions between institutions.

Banks will adopt blockchain technology, albeit slowly, for the same reasons they adopt any change: to save money or grow their customer base. Developers who can provide blockchain solutions that accomplish these goals early will capture market share.

Digital Currencies

Banks’ initial response to Bitcoin was to ignore it. When they saw it was evolving from the currency of black markets to serving niche online markets, they tried to discredit it. When Bitcoin started to gain mainstream acceptance by such giants as Microsoft, Home Depot, and the Tesla car company, banks decided they’d better get with the program.

Four banks — UBS, the Swiss bank, Deutsche Bank, Santander, and BNY Mellon have banned together to create the first digital currency to be accepted by a group of financial institutions. The group believes the new cryptocurrency will help them to clear and settle financial trades more securely and faster than is now possible with conventional channels. The banks also hope their currency will become the industry standard, which industry experts agree is much needed.

How Ignite Can Help?

The World Economic Forum indicates that blockchain technology will be used by 15% of banks by 2017. The growth of this technology in the world of finance means unfathomed opportunities for the innovative developer. But developing in the Fintech field is no walk in the park. Success requires a solid understanding of the technologies involved, and the experience to pull them together.

Ignite has the knowledge and experience to help you navigate the complex Fintech marketplace. With six R&D labs across Europe, we have the ability to develop your solution in-house, and at outsource pricing.

We specialize in custom development of Fintech solutions. Whether you need software development, or complete platform development, we can handle it.

If you are considering outsourcing your next Fintech project, contact us today?