IIBF DIGITAL BANKING | NEW DEVELOPMENTS IN DIGITAL BANKING
NEW DEVELOPMENT: BLOCK CHAIN & CRYPTO CURRENCIES
In this article, we will get to read the recent developments in the field of digital banking. And as the crypto & block chain are the popular topics right now, we are going to discuss just that. So, follow the down written text to understand what is block chain & crypto currencies & what role they play in the Digital Banking.
First, let’s get the definition of Digital Banking & Block Chain done, then we will move toward the how they both are related.
Digital Banking is the banking where the services are delivered to the customers over the internet.
Block Chain is the technology which is used to store information & the advantage of this storage system is that it’s almost impossible to hack into the system.
Blockchain technology is basically an open distributed ledger which records the transactions between 2 parties. There is no need of any centralized authority or middleman as all the involved parties can share a digital ledger, which helps in processing the transactions more quickly.
Blockchain can revolutionize the way business get done over the world by improving the trade efficiency by automating and streamlining manual or paper-based operations. As a public blockchain is decentralized & doesn’t comes under a single person, it can be a great cooperation tool making it more than just the technology underpinning cryptocurrencies like Bitcoin and Ethereum.
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THE ESSENCE OF BLOCKCHAIN
Block is an immutable, un-hackable distributed ledger of digital assets. In terms of infrastructure, it is an open-source software to support the transfer of digital assets amongst market participants in real time. And most bank implementations are focused on this aspect.
To understand the blockchain, the driverless car phenomenon is a very good analogy. In a driverless car vs. the transporting cost of a taxi, you will completely miss out on the implications of a driverless car revolution if you would only compare the costs. As a driverless car just not moves its passenger from point A to B or what the passenger can do while not driving the car. Here, innovators look at it as a revolution that will impact ownership of car, transportation companies, car manufacturers & city planners.
KEY ELEMENTS OF A BLOCKCHAIN
- Distributed ledger technology: All the participants of blockchain have access to the distributed ledger & its immutable record of transactions. Having a shared ledger, eliminates the need of recording transactions more than once which is very common in the current working system of records maintenance.
- Immutable records: Although the ledger is shared among all the participants, but no one can change or tamper with a transaction after it’s been already recorded. And if there was an error while recording a transaction, a new transaction must be added to reverse the error, and both transactions are then visible.
- Smart contracts: To speed up the transactions, the blockchain has a set of rules which is known by smart contract. Smart Cards are stored on the blockchain and executed automatically. They basically contain conditions & terms for corporate bond transfers.
TYPES OF BLOCKCHAIN
It is also important to know that there are three types of blockchain that can be adopted as per the suitability of the business model.
- Public Blockchain: It is a fully decentralized blockchain that anyone can use with a minimum resource.
- Private Blockchain: It is a permission-based system where the participants would need permission from central authority to perform the tasks. Though it’s not fully decentralized but it is controlled by the intermediary
- Hybrid Blockchain: As it could be taken from the name, Hybrid Blockchain provides decentralized environment in a private network which offers great flexibility & control over the data on the system.
Now, getting a brief insight on the blockchain technology, we will see how it plays a significant part in the banking sector:
SIGNIFICANCE OF THE BLOCKCHAIN TECHNOLOGY
Below are some uses of blockchain in banking industry that will help you understand how the financial services industry will approach the concept of blockchain in the coming future:
Raising cash through venture capital is quite difficult task today. It typically follows: entrepreneurs creating rooms/spaces, having numerous meetings with partners/members, and having lengthy discussions about value & equity. All in the name of exchanging their company for cash.
But no more. The companies can use blockchain technology to shorten the above process by getting funding in a variety of ways such as:
- IEOs: Initial Exchange Offerings,
- ETOs: Equity Token Offerings, &
- STOs: Security Token Offerings
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Payments will be faster with low processing fees. BFSI (Banking, Financial Services, and Insurance sector) institutions, therefore, have the option to rely on emerging technologies by providing a decentralized channel to make payments. This way, banks can offer a higher quality of service, create new products, & can compete with creative fintech startups by providing better security and lower payment. It will also reduce the need for 3rd-party verification & speed up the processing of traditional bank deals.
SETTLEMENT AND CLEARANCE SYSTEM
When banks transport money throughout the world they have to face some logistical hurdles as a basic bank transfer has to pass through a complex chain of intermediaries, before it reaches its destination. Bank accounts are also required to be reconciled across the global financial system, which is basically a huge network of funds, dealers, asset managers, and other businesses.
In the above context, blockchain will be able to allow banks to settle transactions directly while allowing them to keep better track of them than traditional methods are allowing right now.
It is expected that Blockchain will impact significantly in trade financing especially that relates to international trade & commerce such as invoices, letters of credit (LCs), and bills. All these activities will get digitized that will eliminate the component of tedious manual system.
LOANS AND CREDITS
When we look at the future of digital banking, we’re basically looking at the future of peer-to-peer lending, along with speedy and more secure loan processes in general, and even complex programmed loans which resemble syndicated loan structures or mortgages.
Banks when process applications of loans look at things such as credit scores, homeownership status, and debt-to-income ratio to assess default risk & that would require credit reports of loanees from specialized credit agencies to gather all of information in one place.
|No.||BASIS||Traditional banking||Internet Finance Businesses||Blockchain + Banks|
|1||Experience of Customer||Provides Uniform & Homogenous service.||Provides Rich & Personalized||Provides Rich & Personalized|
|2||Efficiency||There are far too many intermediate links & involve Complex clearing processes||There are far too many intermediate links & involve Complex clearing processes||It involves Point-to-point transmission,
Disintermediation & Distributed ledger,
|3||Cost||Involves High Cost||Involves High Cost||Involves Low cost|
|4||Safety||Centralized data storage that can be tampered & Easy to leak users’ personal information||Centralized data storage can be tampered with & its easy to leak users’
|Distributed data storage cannot be tampered & Use of asymmetric encryption, Users’ personal information
is more secure
HOW WILL BLOCKCHAIN TRANSFORM THE FUTURE OF THE BANKING SECTOR
However, before blockchain becomes or integrate into the banking system, it has to meet a number of criteria. It will first have to have an infrastructure to run a worldwide network with the help of matching solutions & only if blockchain gets widely adopted over the world banking system, them it be able to disrupt the industry.
And if the blockchain do gets implemented, it will require a handsome investment. When fully implemented, blockchain is proposed to allow banks to process payments more quickly & correctly with lower transaction processing costs.
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