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Blockchain Technology Use Cases in the Banking Sector

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2nd Aug, 2018
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Blockchain Technology Use Cases in the Banking Sector

The blockchain technology has successfully disrupted many industries, and the banking sector is one of the main beneficiaries, dare we say. The fintech sector is truly up and running, and companies everywhere are building blockchain solutions. With use cases such as international payments, KYC, and optimized cash management, the blockchain is truly the next big thing when it comes to the finance.

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According to surveys, 90% of executives surveyed said that their firm was looking into using blockchain for their operations. Due to the decentralized nature of the blockchain, it is easier to form a global banking network where international transactions and other operations could be carried out easily. Santander, a Spain-based bank, reports savings of USD 20 billion a year if blockchain is incorporated. Different consortiums and organizations have started taking collective steps toward blockchain adoption. Talking about the current scenario, there exist many potential use cases for blockchain in the banking sector. What follows is a brief description of each of these use cases, their comparisons with traditional methods, and their benefits.

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Know your customer (KYC) regulations

As of now, banks and other financial institutions spend up to USD 500 million per year to comply with KYC regulations. KYC is intended to reduce or completely eradicate terrorism or money laundering, with comprehensive background checks of all bank customers, in accordance with some requirements. The current scenario is that every company has their own independent KYC procedures. With the introduction of the blockchain, the independent verification of a particular client could be accessed by different companies, so that the whole KYC process need not be done again.

For instance, if Carl opens an account in Axis bank, and has a KYC done over there, his details are stored in a blockchain node on the global network. This way, when he wants to open another account in Citibank, the staff then need not carry out the KYC process all over again; instead, they just read the data from the blockchain, and Carl’s identity is confirmed.

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Blockchain Applications in Supply Chain

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Payments: local and international

Low security and a lot of intermediaries in the payment processes are two factors hurting this area in the present scenario.  more and more commercial banks are looking to introduce blockchain into the payment process, without waiting for central banks to make a move. For example, UBS of Switzerland has come up with a utility settlement coin, which is a digital currency for use in international financial markets.
The blockchain firm Ripple developed a payment application that settles transactions, even international, instantly, and partnered with a consortium of 61 Japanese banks for the same. According to Ripple, this app would make it extremely easy for banks to settle round-the-clock transactions and payments. The customers will just require a bank account, phone number, and a QR code/barcode to use the application.
While Ripple was created in an attempt to solve the problems related to international payments, Stellar Lumens (XLM) was created to solve Ripple. Stellar was initially built keeping Ripple’s system as the base with the aim to make the global economy much more inclusive. But, looking at the complexity of the said system, Stellar redesigned itself with a brand new system.

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For Ripple, banks and MNCs need to transfer the XRP token through the Ripple network, whereas Stellar allows individuals to trade money directly with one another using XLM (Lumens) as a medium, and “anchors” to take care of the fiat currency aspects.
Basically, suppose you need to transfer money overseas, using Ripple, your bank will directly send the Ripple to the recipient’s account and the payment is made at whatever exchange rates and fees the bank decides. Whereas, using Stellar, the currency conversion takes place first, after which an “anchor” helps in transferring the converted currency to the recipient’s account. Anchors are basically money transferring companies, and you can pick the anchor of your choosing.
All in all, Ripple allows MNCs and large banks to make cost-effective international transfers and currency conversions, Stellar allows individuals to make much more cost-effective currency and money transfers. Stellar is a non-profit with the goal of increasing the inclusiveness in the global payment system.

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Syndicated loans

This is one area of banking where multiple institutions have come together to form consortiums to facilitate blockchain adoption. Credit Suisse is one of those 19 institutions, which are working towards putting syndicated loans on the blockchain using distributed ledger technology, more commonly known as blockchain technology. Currently, this is an area which is still quite behind in terms of the technology used. Fax communications, large delays in settling loans and other hurdles are faced while processing syndicate loans. What blockchain technology aims to do is create a method of communication between different institutions, so that loan ownership changes can quickly be reflected across all of them. The aforementioned consortium already has plans to put out one or two loans within the next year on this blockchain concept.

Fraud reductions

The current banking scenario, even after cutting-edge innovations in security, is not safe from fraudulent activities. Due to being based on centralized databases, banking systems are susceptible to cyber-attacks and hacks, as all the information is stored in one place. Frauds and malicious activities lead to huge losses for both banks and their customers. What blockchain technology can accomplish here is that due to its distributed nature, it substantially reduces the risk of network failure due to one or two nodes being taken down or hacked. Storage and encryption of every single byte of data is carried out on the blockchain, in addition to the verification process. In the event of a data breach or hack, each node which has access to the transaction data is made aware of the breach and can take remedial steps immediately.

Financial inclusion

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Access to basic banking services is still a herculean task for many poverty-stricken and underdeveloped nations of the world.. More than 200 million small business owners still do not have access to basic financial institutions, and financial inclusion will only help in making them independent.
Blockchain technology can help in a few different areas here. As discussed earlier, use cases like KYC are already a step in the right direction. Low-cost transactions, seamless international payments, and easy loans are just a few of the many banking processes that can be made easier using blockchain, thus helping us achieve financial inclusion.

Master the Technology of the Future – Blockchain

The blockchain technology has indeed a bright and exciting future. As real-time, open-source, and trusted platforms that transfer data and value without hassles, they can help not only reduce the cost of processing payments, but also help develop new services, products, and solutions that can generate new revenue streams.

If you’re interested to become a blockchain developer and build smart contracts and chain codes, checkout IIIT-B & upGrad’s Advanced certificate program in blockchain technology.


Radhika Maloo

Blog Author
Radhika is Senior Program Manager of the Emerging Technology Vertical at UpGrad. Previously, she has worked for organisations like BCG and Government of India. She's an alum of London School of Economics and Political Science.
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Frequently Asked Questions (FAQs)

1What are the benefits of using cryptocurrencies instead of traditional currency?

Cryptocurrencies are digital or virtual tokens that rely on encryption to protect transactions and limit the generation of new ones. They are decentralized, which means they are not controlled by governments or financial institutions. They're frequently traded on decentralized exchanges and can be used to buy and sell products and services. Traditional currencies are primarily utilized within the regulated sector for transactions. Traditional currencies are regulated and issued by governments or financial entities. Physical assets, such as gold or silver, are also used to back traditional currencies. It is more commonly used and accepted, and it may be used for a broader range of transactions. Cryptocurrencies are still young and do not have the same level of acceptance as traditional currencies.

2What are the risks associated with investing in cryptocurrencies?

Bitcoin and other cryptocurrencies are risky investments due to their volatility. Cryptocurrencies are also vulnerable to a variety of threats, including hacking and theft. Selling or trading bitcoins can sometimes be tricky, especially during times of market volatility. One of the biggest concerns of using cryptocurrency is that it could be stolen. Digital wallets, which may be hacked, are frequently used to hold cryptocurrency. If your cryptocurrencies are stolen, they may be able to spend them without your knowledge. Another danger of using cryptocurrency is that its value fluctuates rapidly. This implies you might not be able to recoup your investment if you try to sell them for the same price you paid for them.

3What are some similarities between blockchain and drives?

A blockchain is a decentralized digital database that records all cryptocurrency transactions. A storage drive is a computer that stores digital data in the form of files. Between blockchain and SSDs, there are a few key parallels. For starters, they are both data storage technologies. They are also decentralized, which means they are not controlled by a single central authority. Both of these technologies are in constant flux. Finally, they're both critical to the development of new applications and businesses.

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