The sudden surge and decline in the value of Bitcoin suddenly made blockchain technology a hot debated topic. As an open and distributed ledger, blockchain technology records cryptocurrency transactions between two parties in a secure, verifiable, and permanent way. As its name indicates, the technology is actually designed as a chain of blocks. Each block contains both transaction data and a timestamp. Also, it contains a cryptographic hash of the previous blocks.
Hence, no user can modify the list of records without modifying multiple blocks. But they can easily access the distributed and digital ledger managed by a peer-to-peer network without any restrictions. As block chain technology keeps transactions data unalterable, it is currently being used by both banks and non-banking financial companies to store and exchange unique monetary data in a secure and efficient way. Within a short span of time, blockchain technologies have already started transforming various financial services. Lets understand the impact of Blockchain on financial services.
Assessing Impact of Blockchain on Financial Services
Combating Financial Crimes
A large percentage of banks and financial institutions still rely on centralized databases. The centralized databases are more vulnerable to targeted security attacks than distributed databases. Also, a single data breach enables the cyber criminals to access all financial records and customer data stored in the centralized database. Many financial institutions have started used blockchain to store financial data in a permanent and unalterable way. As a distributed ledger, blockchain further helps the financial institutions to eliminate chances of financial crime and frauds.
Processing Payment Securely
Most financial institutions explore ways to process both local and global payment quickly and efficiently. They even look for ways to reduce cost of processing transactions that involve multiple parties – buyers, sellers and banks. Blockchain enables financial institutions to process payment in a faster and more secure way. Also, the technology helps financial institutions to curtail overall payment processing cost significantly. Many financial institutions are already used blockchain-based solution to address common payment processing challenges.
Creating Smart Financial Contracts
A financial institution can use blockchain to store varied financial data and record various financial transactions. The cryptographic hash included in individual blocks further allows the parties involved in the transaction to access and verify the information through their private keys. But they still lack the option to make changes to the information or data. The financial institutions can take advantage of blockchain technology to create smart contracts based on varied parameters or conditions. The smart contracts will remain unalterable while facilitating timely execution of financial transactions like product delivery and invoice payment.
Improving Claim Processing
The insurance companies have to address a number of challenges to process claims timely and accurately. Many insurance companies even explore ways to automate claim processing end to end. Blockchain makes it easier for insurance companies to automate claim processing by creating smart contracts. Also, the insurance companies can use the technology to address common claim processing challenges like elaborate document verification and assessing accuracy of claims.
Simplifying Identity Management
Most financial institutions nowadays spend huge amount of funds to identify customers and upgrade know-your-customer (KYC) policies. Blockchain technologies help financial service providers to verify and identify each client in an accurate and cost-efficient way. Blockchain technology requires each user to identify himself through a number of options. Once a user identifies himself, his identity is captured and stored in blockchain. Hence, a financial institution can identify a customer accurately without performing independent or additional verification.
Accelerating Share Trading
Often investors purchase and sell shares and stocks through middlemen like brokers. Also, they rely on a stock exchange to conduct share trading accurately. The blockchain technology will enable investors to purchase and sell shared without involving any middlemen. The buyer and seller can validate a transaction and complete the settlement process directly through the secured and decentralized ledger. At the same time, blockchain technology improves trade accuracy by eliminating middlemen.
Implementing Robust Rewards and Loyalty Programs
Most financial service providers nowadays implement loyalty and rewards programs. But they often find it challenging to trace and validate transaction precisely while calculating reward points. Block technologies help financial service providers to trance and validate various transactions in a transparent way. As blockchain keeps the transaction data unalterable, it becomes easier for the financial service providers to validate each transaction and deliver reward points to the customers.
According to a number of studies, a large percentage of financial transactions will be stored on blockchain by 2025. However, many financial institutions are yet to leverage blockchain technologies. They even explore ways to address the challenges associated with blockchain-based technologies. Hence, the usage and impact of blockchain technologies differ across regions.