Top 5 Ways Blockchain is Changing the Banking Industry

October 26, 2017

Blockchain is the technology behind the controversial bitcoin cryptocurrency. It is a decentralized and distributed ledger used to record transactions across many computers, resembling a hive with connected blocks in a database. Cryptography tools ensure that each holder can only edit the blocks he owns with private keys.

Today, blockchain is just several steps away to overcome the challenges and launch its full functionality in banking industry. The potential savings of automation have tempted major institutions to invest tons of resources in R&D. Certain key features that blockchain possesses such as high-level encryption of information will enable this frontier software to transform many industries including banking.

IBM is currently developing blockchain-based tech for major European banks, such as Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Societe Generale and Unicredit. It will help to facilitate cross-border trade and to enhance business opportunities for small, medium enterprises. New solutions will facilitate the processes and make them lower-priced. The technology is being developed on Hyperledger Fabric, an open source blockchain framework, and is planned to launch by the end of 2017.

A recent World Economic Forum report envisions that by 2025, 10% of GDP will be stored on blockchains or blockchain-related technology. According to expert predictions, it can take another five years to make the documentation in trade industry run digital. When it comes true, blockchain technology can then be applied to trade finance by its full capacity.

Blockchain Targets to Transform Financial Industry

Shared databases will transform bank business. Multiple parties will get the access to the same digital ledger. Banks are highly aware of these changes happening and want to be part of the blockchain wave. In the first half of 2017, blockchain companies have raised over $240mln venture capital, with the biggest share of banks’ contributions. According to KPMG’s Pulse of Fintech Q2 report, last year’s figure amounted to $367mln.

Following the trend, Switzerland’s UBS has also issued “utility settlement coin” for financial markets, which will be convertible into cash. A growing number of companies, led by Ripple in Silicon Valley are already shaping the path to compete with SWIFT. Can SWIFT withstand the challenges put forward by blockchain?

So, how will banking mostly likely be impacted by blockchain technology?

#1 Decrease in Cyber Crime

Each year many banks and financial intermediaries, such as stock exchanges and money transfer services suffer from machinery and cyber hacking attacks. Blockchain has the potential to find the best treatment for the flaws of centralized databases. Each part of distributed ledger possesses time-stamp, which won’t let hackers step to the next block. A number of start-ups are elaborating blockchain systems for customer verification, including Cambridge Blockchain, Tradle, Credits and Blockstack. 

#2 Easing of KYC Requirements 

Banks allocate up to $500 million each year to stay in compliance with due diligence standards. They identify their clients according to Know Your Customer rules in order to reduce money laundry and maintain high reputation. Blockchain solutions with cryptographic protection would enable them to verify each client and share the same information with other financial institutions upon request. 

#3 Increasing Efficiency of Money Transfers

Nowadays, a wide range of clearing houses and intermediaries are engaged in processing the transactions. The breakthrough of blockchain will eliminate these linking chains and make the exchange of value of information processed faster and more efficiently. Higher security standards and savings on cost will be the rewards of blockchain application. According to Accenture estimates, the giant banks could save $10bn by applying blockchain technology.

#4 Increasing Security of Stock Exchange Platforms

Trading platforms can soon become more secure and execute within milliseconds with blockchain-based technology. Operational errors will more rarely happen resulting in improved efficiency and boosted trust among new and existing investors. Australian Securities Exchange already shifts most of its post-trade clearing and settlement to the blockchain system.

#5 Introduction of Smart Contracts

Digital information can be accessed in blockchain provided two or more keys are in place. This feature will enable smart contracts of the future. Syndicated loans will also be born. Several parties can be involved at the same time ensuring timely and mutually beneficial terms for contract parties. The payments can then take place instantly upon delivery. “If you are shipping goods from China, as many as 50 people need to access the data,” says Simon Whitehouse at Accenture. Paper documents still being sent by fax or post around the globe, are calling for advanced solutions now.

This distributed ledger technology (DLT) promises to create big data banks that are not subject to change. Almost every big player in banking industry is testing Blockchain now. They collaborate with fintech startups to create special solutions to meet their needs.

Goldman Sachs and Morgan Stanley have already carried out research on blockchain technology. Global banks even step further to patent their bockchain-based tech.

Among 200 global banks surveyed, 15% are going to implement blockcahin technology by next year. IBM states that in 4 years’ time 66% of banks will shift to blockchain in trade finance.


But there are still some obstacles yet to be faced by blockchain.

Firstly, banks need to ensure that the solutions they develop have to be in compliance with local and international regulations. They will therefore need to cooperate with legislators to bring the blockchain solutions to life.

Also with blockchain, banks will potentially create new systems, processes suggesting a completely new business model. Whether the bank can adapt quickly and manage these changes will affect their ability to integrate blockchain into the financial supply chain.

about author

Ani is a PhD Candidate and has worked as a Business Consultant and Financial Analyst. She has facilitated training sessions for Chartered Accountants (in her homeland country Armenia) throughout last 5 years. Ani has an academic type of personality with passion for research in the areas of Investing and Asset Management worldwide.