As the pace of innovation in banks gains momentum, the banking industry is increasingly leveraging the potential of blockchain technology to adapt to the new digital marketplace. Rapid technological disruption in fintech is persuading even the skeptics among us to place our faith in a new model of financial transaction that eliminates tedious manual processing, long delays in payments and transactions, and the high fees for intermediaries. Thankfully, the benefits of blockchain don’t end here, and it seems like the perfect technology for banks and fintech to transform their businesses.

The blockchain ecosystem is so appealing to the antiquated global banking landscape that recent forecasts estimate that the fintech blockchain market size will grow from USD 370.3 million in 2018 to USD 6,228.2 million by 2023, at a Compound Annual Growth Rate (CAGR) of 75.9 percent during the forecast period. As an advancing technology, blockchain is set to pave the way for a more collaborative banking environment. It is expected to lead to greater participation among key stakeholders to resolve longstanding banking issues, such as high costs of operations, manual documentation, and the inherent risk of cyber attacks.

Unlocking blockchain in banking

As consumers, having bought into the promise of blockchain, we expect the technology to truly empower us as we make the switch to a more transparent and efficient banking platform that is finding its way into many wide-reaching uses and applications, both within and outside the fintech industry. Several compelling benefits of blockchain have spurred banks to roll out a plan of action to implement it as a strategic approach to digital transformation. Here are just a few advantages for banks that are seeking to adopt blockchain as their new business model:

First, since blockchain is a decentralized ledger that allows every participant in the network to view information, the real-time tracking of transactions eliminates the need for reconciliations. It, in turn, increases process efficiency and opens up new opportunities for revenue generation. Second, automatically executed smart contracts enabled by a blockchain platform, are gradually phasing out intermediaries and manual documentation. Third, eliminating the need for a non-authenticated third party facilitates collaboration between all participants, thus ensuring that decisions are based on consensus. Fourth, verification ensures the integrity and security of data, reduces lag time, and mitigates the risk of fraudulent transactions.

In my view, above all, blockchain delivers the intangible benefit of enhancing customer satisfaction through its transparent and reliable model that has ushered in significant changes into the payment environment. The technology has not only reimagined the traditional payments model, but has also reduced the cost of each transaction.

Blockchain: A gamechanger for all

Though blockchain is a complex and nascent technology, organizations across industries are trying to understand how best to implement it. At Mphasis, we work with clients to apply blockchain technology to resolve multiple business issues.  For example, an interesting blockchain initiative we undertook was to set up an easy fund transfer system for one of our clients. The application of blockchain to implement this peer-to-peer payment network resulted in saving time and money for the client. In today’s banking environment, the SWIFT (Society for Worldwide Interbank Financial Telecommunication) money transfer system does not support the secure transfer of money at a lower cost. That’s where blockchain comes into the picture as a truly disruptive technology, as it is a more efficient cross-border payment system that speeds up the process, eliminates intermediaries, and drastically cuts down transaction costs. It also enables banks to validate cross-border payments in real-time, thus changing the way the global remittance industry works. Blockchain enables verified banks to participate via a consortium of banks as it reduces the number of participants, and ensures the protection of data on a private platform.

In another use case at Mphasis, we collaborated with a client to implement Know Your Customer (KYC) through an identity solution on blockchain. The cryptographic protection of customer identity with blockchain technology has created a trustworthy decentralized monitoring system to collect and validate KYC information for customers in the banking and fintech industries.

While global enterprises are hugely optimistic about leveraging the power of blockchain for various innovative applications, they are also aware of the steep challenges that exist to blockchain implementation and adoption. Due to the distributed nature of the technology, there is always a potential for compliance-related complications which could result in heavy fines for banks. Regulatory loopholes and the threat of illicit activities such as money laundering necessitate that blockchain solutions adhere to the legal framework specific to a particular jurisdiction. However, it is connected to the automatic enforcement of smart contracts that could, in the long run, make its legal validity across geographies a challenge for both governments and enterprises. Experts opine that the legal enforcement and validity of smart contracts could also pose an obstacle when an organization declares insolvency.

Thus, despite being a highly secure system, blockchain is riddled with unique risks that could make it vulnerable to security threats, and this could delay its widespread implementation across enterprises and industries. However, despite these challenges, blockchain is here to stay and will emerge as one of the most robust and radical technologies, especially in the banking sector. The need of the hour is for banks to focus on implementing a roadmap to leverage blockchain to address their unique pain points effectively.  Only when business leaders have absolute clarity on the potential challenges and opportunities that the technology presents, will blockchain evolve into a true force to reckon with in the future digital economy.