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George Spencer

October 20, 2021

Use Cases of Blockchain in Banking & Finance

The power of Blockchain technology in transforming businesses has now been recognized worldwide. But years ago it first made its presence felt in the banking and finance sector. It is still regarded as a financial technology because of its close association with cryptocurrencies like Bitcoin

The market adoption of Blockchain technology across the industries is predicted to grow at 62.73% every year. No doubt, the banking and finance sector is on the frontline in adopting Blockchain to develop custom finance apps. By now most banks and financial institutions in the US and Europe have embraced blockchain technology. 

There are many reasons behind the overwhelming popularity of Blockchain in the banking and finance industry. There are several widely succès use cases of Blockchain in the finance sector that set up milestones for other industries to follow. Here we are going to explain some of these use cases. 

Payments, Particularly International Payments

Digital payment solutions have become popular because of the speed and ease of sending money to another account. But digital payment solutions from banks and financial institutions now got an overwhelming push from blockchain technology. When it comes to cross-border payments, Blockchain has brought never-before ease. 

International payment and money transfers are quicker and least expensive because of Blockchain. While third-party remittance costs around 5-20% of each transaction, Blockchain only takes 2-3% of the transaction amount. The only downside is that crypto-based international payments can be subjected to certain security vulnerabilities and corresponding norms. 

Stock Exchange and Share Trading

Stock market trading generally involves several third parties to complete the transactions. The brokers facilitate the transactions, and the stock exchange works as third-party mediators for buying and selling stocks. 

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Because of the involvement of so many third-party mediators, traditional stock market transactions involve several steps and stages, taking huge time to complete buying and selling. Blockchain-based stock trading applications can do away with these intermediaries and steps, leading to faster purchases and sales and lower transaction costs. 

Quicker transactions in a fast-changing market like the stock market can help traders rip in the opportunities when they are ripe and get rid of stocks showing volatility.  Already Nasdaq, the second-largest stock exchange globally, has started using blockchain for stock market trading. 

Smooth and Accurate Claim Settlement

Blockchain as a distributed ledger technology can allow insurance companies and banks to settle claims and transactions directly and keep monitoring them. On average, a regular traditional bank transfer takes several days, and insurance claims take several months for settlement. 

However, the logistical challenges and complications involved in dealing with several intermediaries for processing a simple money transfer consume great resources, and the process is error-prone. In the case of insurance claim settlement, the complications go manifold, involving more risks and resource consumption. 

This is where a decentralized ledger system like Blockchain can come to the rescue by enabling banks and financial institutions to keep track of every transaction in a transparent and accessible manner, leaving no scope of tampering or fraud. Banks no longer need to depend on the so-called trusted intermediaries and regulatory protocols such as SWIFT to facilitate transactions. Public Blockchain allows them to facilitate and settle all transactions directly.

Smooth Asset Sales and Purchases

By just doing away with the intermediaries and the corresponding protocols for transferring asset rights, blockchain ledger technology can reduce the asset transfer fees and solve security vulnerabilities. This is why banking securities and other assets moved to Blockchain are estimated to save millions of dollars every year. 

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Generally, sales and purchases of financial assets such as debt, stocks, commodities, etc. are carried out by tracking the ownership and holding of assets. The transfer of rights for assets from the seller to the buyer involves a network of professionals, protocols, and systems such as brokers, exchanges, central security depositories, custodian banks, etc. Apart from keeping all these parties in sync, the traditional paper trail managing the processes and contracts further slows down the process and increases the risks of errors. 

On the other hand, carrying out these transactions electronically involves a trust deficit on the custodian banks. This is where Blockchain as the impartial, openly accessible, and fully transparent ledger system that offers a balanced solution, doing away with the shortcomings of both third-party intermediaries and the trust deficit of a bank application. 

Blockchain can truly transform financial debt and security markets by offering a fully decentralized and transparent database of all assets. The distributed Blockchain ledger will create cryptographic tokens to facilitate the transfer of assets through cryptocurrency transactions. Several blockchain companies are on their way to creating token-based solutions to allow the transfer of assets like gold and real estate. 

KYC Documentation and Verifying Customer Identity

Since banks and financial institutions need to deal with cyber-attacks and security vulnerabilities more than any other industry, verification of customers through KYC documentation is an important step. With the emergence of Blockchain-based shared and transparent databases, such verification and documentation became easier than ever before. Once a customer is verified, documented and registered with accurate credentials, one doesn’t need to go through multiple authorisations and KYC verification across multiple banks. 

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All traditional processes with a huge amount of paperwork can be completely avoided through streamlined customer documentation shared by multiple banks and financial institutions. The streamlined documentation shared and made available through a distributed database can also reduce the risk of manual errors and falsification of documents. 

How credit rating companies share credit ratings across banks and financial institutions can be applied to KYC documentation using blockchain technology. Such a unified solution covering the entire KYC process and documentation can save huge costs and manual resources for every bank and finance company.