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Is the Financial Sector Ready for Blockchain Technology?

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Blockchain is a disruptive technology touted to change the way people do business. Several industries have only begun to adopt this innovation. However, the financial sector has been reaping some of its benefits for many years.

Every day, financial service companies process transactions worth trillions of dollars. Economic activities, especially with this magnitude, require transparency, cost-efficiency, and high levels of security.

Unfortunately, financial intermediaries have been victims of cybercrime in the past years, leading to significant losses. They are in dire need of a technological breakthrough that can prevent costly security breaches.

Blockchain can solve the pressing security issues faced by the financial sector. Since the industry runs on continuous interactions between several actors, it requires reinforcement and transparency of transactions. Blockchain can provide encrypted and protected transactional history to ensure reliable traceability.

What is Blockchain?

Blockchain technology is a system that generates a tamper-proof, accessible, and secure ledger of transactions on the web.

This innovative protocol uses encryptions and complex algorithms to provide “irrevocable” and trusted transactions. Instead of having a central authority, it distributes a shared record of transactions within a network of users.

Being a Distributed Ledger Technology (DLT), blockchain can transform financial institutions by lowering costs, improving transparency, and accelerating transactions.

Several blockchain trends can potentially reinvent the operations of the banking sector, stock market, insurance, asset management companies, and other established financial institutions.

How Can Blockchain Impact the Financial Sector?

Faster Stock Market Settlements

Blockchain can facilitate quick stock settlements by reducing the time between transactions. It can also provide smart contracts that are more transparent and secure, making automated compliance more possible.

A real-life application in the financial sector is NASDAQ‘s issuance of private securities through blockchain. Meanwhile, the London Stock Exchange is looking into utilizing blockchain in its securities trading activities with cross-industry institutions in Europe.

Other major stock exchanges are starting to explore blockchain’s potential in streamlining dealings within the stock market.

Efficient Payment Systems

Blockchain can improve transparency, security, trust, and efficiency of payment transactions. It can also help users pay lower fees for financial services. Before, bank-to-bank payments took more than a week for the process to finish. But now, blockchain through DLT and digital currencies can facilitate instant and cheaper money transfers.

Blockchain can eliminate a financial service institution’s need for back-office staff and intermediaries since payments are processed in an instant. Companies can pass on these significant savings to the end-user.

Developers in the blockchain space are creating tools to help facilitate streamlined and safe payments to other institutions, and one way is through Bitcoin SV Hackathons.

An innovative example from the hackathon is TimeKet. This reservation and validity wallet allows secure and streamlined bookings and payments to hotels, restaurants, and events.

Systematic Asset Management

Asset management is one of the fastest-growing industries, with an expected growth of up to $150 trillion by 2025. The rise in global trading and eCommerce activities contributes to its impressive development.

The exchange of assets between entities is prone to misinterpretation, fraud, and errors. Blockchain-powered asset management and fund distribution platforms can help mitigate these risks.

Presently, a centralized digital system supports asset management and supply chain operations. It provides real-time monitoring and visibility of assets within a network.

Some companies already have centralized data management solutions and utilized distributed ledger systems via blockchain. This innovation can improve specific processes that prove to be time-consuming and complex. The DLT allows prompt, accurate, and cost-efficient cross-border direct trading and settlements.

Streamlined Insurance Claims

The insurance industry aims to facilitate fraud-free and equitable claims one hundred percent of the time. However, there have been incidences in the past of unfair and questionable claims.

Blockchain can help create a foolproof system through smart contracts and automated claim sorting and processing. Solutions such as centralized client authentication, accessible client history, and cross-industry data sharing support a fraud-free process.

Going through a manual process is the common practice in insurance claims settlement. It usually involves transactions and communication among several entities, including the customer, bank, and insurer. The manual settlement requires validation, cross-checking, and reconfirmation, making the process inefficient and time-consuming.

Blockchain technology utilizes secured and shared networks to link all parties involved in claim settlements. This way, everyone in the network can view and monitor transaction history and customer data. This streamlined mechanism allows businesses to collaborate in a safe and efficient platform.

Enhanced Compliance Process

Know-Your-Customer or KYC is a vital step performed by financial service institutions worldwide. It entails verifying a customer’s identity and suitability to enter financial transactions.

KYC aims to avert money-laundering activities, bank fraud, and other illegal business activities. Local regulators require financial institutions to comply with the KYC process and report irregularities.

Though crucial, the KYC process can be labor-intensive, time-consuming, and prone to human errors. KYC platforms that run on blockchain technology can provide a viable solution to these issues. It can streamline operations by providing banks with real-time KYC updates and eliminating workload duplication.

Blockchain can also provide a digital and centralized ID and information source to automate customer identification. This solution allows banks and other entities to exchange documents and data efficiently. Customers can enjoy automated bank transactions while maintaining their data’s integrity and privacy within the law’s bounds.

New Investment Opportunities

Blockchain opens opportunities for more people to invest as it fosters a more liquid investment market.

Through tokenization of market assets, financing is more manageable and more achievable. To “tokenize” means that ownership of an asset, a building, for example, can be divided into smaller, digital tokens that act as shares. These tokens are tied to the asset’s value, making it fungible, unlike NFTs.

Tokenization can allow unlisted small and medium enterprises to join the investment market. Since blockchain mitigates risks and provides a safe platform, potential investors will be more confident dealing with smaller companies.

Additionally, eliminating intermediaries reduces transaction costs, making investing more affordable. Having one shared ledger among all parties allows proper tracking of multiple investments.

What’s Keeping the Financial Sector from Utilizing Blockchain?

Undoubtedly, blockchain has enormous potential for changing the financial sector’s landscape. However, not everyone in the industry is ready to adopt this DLT into its systems. While there is an exciting buzz about how blockchain can provide safer and more efficient record-keeping, there are still hurdles to overcome.

Difficulty in Organizing a Network

Integrating blockchain into business processes is not as easy as purchasing, installing, and using the software. The foundation of blockchain is the collaboration within a group of entities.

Convincing relevant parties across various businesses to join the network can be daunting. Organizing the required group is probably one of the biggest challenges of bringing blockchain to the mainstream.

High Implementation and Maintenance Cost

The initial investment required to initiate a blockchain system can be expensive.

Companies that want to adopt this technology need to spend a significant amount on software and hardware. Several banking institutions and financial intermediaries may not have the budget to integrate blockchain into their systems. In addition, the steep maintenance costs may decrease the company’s profitability.

Required High Level of Computer Skills

Blockchain is a complex system that requires high levels of computer literacy.

Employees who are not technologically savvy may not be able to keep up with the platform’s demands. Companies will then be forced to hire an additional workforce or train current ones to launch and maintain the system. These can be costly endeavors for any company.

Government Regulations

Blockchain is a relatively new technology, and there are still no clear government policies to regulate it. The legal guidelines about digital assets have not been laid out yet, making investors quite hesitant.

Furthermore, some sectors question its decentralized nature since investors cannot identify who issued the securities. While some welcome these revolutionized ways of doing business, others are still skeptical about them.

Should the Financial Sector Adopt Blockchain Technology?

Despite the challenges that loom over the financial sector when it comes to adopting blockchain technology, there is still a great potential for a successful implementation. It is essential to remember that it is not a black or white proposition. There can be a middle ground where challenges and solutions can meet.

Although this innovation is relatively immature, it has strengths that need some tweaking. The best way to implement it is to create viable platforms and observe what difficulties may arise.

It is also crucial for the financial sector to collaborate with regulating bodies to create policies that benefit everyone in the system. Only with good governance can people start to have confidence in the system. It is vital to have regulations that will not stifle the innovative nature of blockchain.

The financial sector is now interconnected more than ever. Every day, there are millions of transactions that fuel the world economy. Having fast, efficient, and cost-effective financial dealings can help give businesses a much-needed boost.

Blockchain technology has benefits for the financial sector that can outweigh the challenges. What it needs is a chance to show its power.

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