With the launch of mobile banking, financial services have entered everyone's smartphones, and people can open accounts or transfer money without leaving home. However, even with mobile banking, cross-border payments are still too expensive and time consuming. The emergence of Bitcoin tells people that this process can actually speed up significantly.
The role of blockchain in financial technology
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The blockchain is essentially a distributed public ledger and an ideal tool for dealing with money transactions. No wonder Nakamoto calls Bitcoin "digital cash."
In addition, the blockchain allows for value transfer over the Internet, which is very important for financial institutions.
Blocks that cannot be tampered with make transactions safer and can get rid of intermediaries, saving companies a lot of money. The bank knows this very well.
In general, financial institutions are dealing with money transactions, but at the same time they also have some characteristics.
For example, investment banks mainly serve the securities market, while retail banks handle deposit and loan business and provide services for individuals and legal persons. Investment banks have a small number of transactions, but the transaction volume is high; retail banks are just the opposite.
Now, with the help of the blockchain, investment banks are working hard to create a world of instant transactions without intermediaries. They are also interested in the automated billing process and are therefore actively exploring the possibilities of smart contracts.
It is worth noting that the cases launched by JPMorgan Chase and Bank of America are still in the testing stage and have not been extended to the entire banking system. This is because the assessment of the economic benefits of innovation takes time.
If management decides to introduce a new technology, it will not happen immediately, because it usually takes a long time to make decisions.
Why retail banks need blockchains
For retail banks, blockchain is also a valuable innovation. McKinsey reports that DLT technology can be used in three situations: remittances, KYC fraud prevention and risk assessment.
Currently, cross-border payments will process $600 billion a year, with commissions of up to 10% per transaction. In contrast, the market value of the encryption market is only $260 billion.
However, according to McKinsey's survey, the use of blockchain in cross-border payments can save financial institutions about $4 billion annually.
Another problem with the banking system is money laundering. After all, personal data is often manipulated during the KYC process.
According to a study by Javelin, banks lose between $15 billion and $20 billion a year simply because of identity fraud. At the same time, global anti-money laundering expenditures (AML) exceeded $8 billion in 2017, a 36% increase from 2013. These numbers are growing every year.
McKinsey said the ID on the blockchain would save the bank another $1 billion in operating expenses. As for the damage caused by fraud, it can be reduced to 7-9 billion US dollars.
Another scenario in which the blockchain can play a key role is to create an interbank database with a customer scoring system. Simply put, banks can exchange customer information between them.
This will enable them to calculate the risk and reduce the potential loss of loans to borrowers who are insolvent.
What is preventing banks from implementing blockchains?
Despite the many advantages of using blockchains, there are still no successful cases of extending the DLT system to the entire banking infrastructure.
Strict consumer loan regulatory frameworks and lack of cryptographic regulation do not allow for the development of innovation. Because no bank will take risks with its own reputation, and it will not act when the rules are unclear.
Sergey Sevantsyan, an expert in the field of cryptocurrency, believes that the main obstacle for banks not to rush to implement blockchain is their strict supervision of licenses for all financial activities.
“Banks are not eager to enter the new world. There is no regulation there. They were like a wild west a year ago. Another reason is that innovation is expensive. In fact, in addition to development, there is a need to budget for lawyers.”
That's why retail banks still follow the old business model and also do some blockchain testing in their business processes.
The blockchain does allow banks to reduce the cost of KYC procedures, making it possible to conduct fast cross-border payments at low cost; it also allows banks to more effectively assess the risk of lending, thereby reducing the cost of financial institutions.
But because of the lack of a regulatory framework, banks are not 100% innovative.