Understanding the crucial role of blockchain for cost-effective automation of business workflows, we believe that this technology can reshape banking forever.

Param Vir Singh, Carnegie Bosch associate professor of business technologies at Carnegie Mellon University, asserted: “Some of [banks] have already started forming consortiums where they are testing out use of blockchain for inter-bank transfers. I think the key applications would be in the space of payments and fraud reduction.” So, let’s analyze if and how blockchain can enhance the spheres pinpointed by Singh.

How Blockchain Can Streamline Payments

What About Banking Transactions?

Let’s examine how bank transactions work using the example of paying with a credit card.

Imagine cardholder John who’d like to pay the merchant ABC for some services. Once John pays ABC with his credit card, the company submits John’s card details to its acquiring bank. The bank submits this information to the payment card company. The latter delivers these details to the cardholder’s issuing bank that bills the cardholder. Only after that, John pays the bill issued by his bank.

In this process, the merchant’s role is to verify the conformity of the card details and the cardholder. In their turn, both merchant and financial institutions abide by the payment card industry data security standard (PCI-DSS). That’s where transaction costs come in. Only the PCI fee can be as much as $240 a year. Generally, transactions support can cost average businesses $10,000–250,000 in annual fees, which may fall between 2.87% and 4.35% of their total transaction value.

What’s the Role of Blockchain Here?

Blockchain-powered smart contracts can facilitate transactions and cut their costs. How? Smart contracts can carry the burden of verifications without attracting any third parties so that no commissions are required. As soon as all the participants’ actions are recorded on the same blockchain, the technology can access any required details to validate the remittance.

The only reason why blockchain hasn’t already taken over banking is that this industry is highly regulated. So, it may be difficult to force all of the transaction participants to store their credentials on blockchain. However, banks are likely to initiate implementation of blockchain in some niche and most cost-inefficient areas.

If you are set on crafting blockchain-backed fintech software, you can use smart contracts pre-designed within the genEOS blockchain ecosystem. It eases the development process and makes it less costly.

How Blockchain Can Reduce Fraud

How Does Banking Fraud Occur?

In 2017, banking fraud losses totaled £731.8 million in the UK, whereas globally payment fraud only was estimated at as much as $20bn.

Let’s analyze one of the common fraud types using the example of a $2bn PNB fraud fallout. One of the biggest jewelers in India, Nirav Modi, imported jewelry from Hong Kong. He didn’t invest his own money in these supplies, though. Instead, Modi claimed the second largest bank of India, PNB, to issue letters of undertaking to guarantee his payments.

With the help of two junior employees at the Bank’s branch in Mumbai, Modi got fake “letters of undertaking” without either pre-approving the credit limit or even providing his delivery details. When an overseas company requested to transfer the payment, PNB detected that Modi can’t fulfill his obligations.

Fraud Detection with Blockchain: Version 2.0

The blockchain-based distributed ledger technology and smart contracts could reduce fraud, especially that engaging multiple parties.

Let’s take the PNB example. With the help of blockchain, it wouldn’t happen because if all the parties used the same blockchain platform, their details would be accessible for all the authorized participants. It means that before issuing the letter of undertaking, the smart contract would verify Modi’s details, including the required credit limit and delivery details. Once any of these details changed, the system would send the appropriate notifications to all the participants of this deal. In this case, fraud would be either totally prevented or detected immediately.

Blockchain is Coming to Banking

Blockchain definitely attracts banks, and nine in ten bank executives state that their institutions are already adopting the technology.

Although blockchain can cut costs by disintermediating payments and preventing fraud, banks are still using blockchain only in certain cases. Mainly, this is because banking is a heavily regulated industry. Therefore, banks are only starting to explore blockchain’s opportunities and don’t yet plan to take any radical steps.