Blockchain in Banking – Key Use Cases, And Real-World Examples

The banking industry represents a sizable portion of the global economy. Banks are the world's largest and most established financial intermediaries.

The banking business has changed considerably as a result of recent digitization.

Customers can now access ATMs, electronic money transfers, electronic clearing services, real-time gross settlement, internet banking, debit and credit cards, and mobile banking as a result of technical improvements.

Because the banking industry is heavily reliant on technology, blockchain, which was invented in 2009, has the potential to make a big upheaval.

Blockchain technology can provide numerous benefits to the banking industry, including improved security, transparency, efficiency, and cost-effectiveness.

Blockchain technology can also support new business models and services such as peer-to-peer lending, cross-border payments, and digital identity verification.

The global blockchain market size in banking was valued at USD 259.0 million in 2020 and is projected to reach USD 8271.7 million by 2027.

These stats suggest how blockchain in banking can transform the entire industry and create a more inclusive and sustainable financial system.

In this article, you’ll learn why implementing blockchain in banks is important, different ways banks can use this technology, some real-world examples, and challenges the banking sector is facing in blockchain implementation.

What is Blockchain Technology?

Blockchain is a decentralized, distributed ledger system that enables secure and transparent transactions between two parties, eliminating the need for a trusted intermediary.

The ledger comprises a series of interconnected blocks, each containing a list of transactions.

One of the unique features of this technology is that once a block is added to the chain, it cannot be changed, making it tamper-proof.

Blockchain technology also uses cryptography to ensure that only authorized people can access and validate transactions.

With these capabilities, the blockchain concept in banking has the potential to revolutionize the banking system, increasing security and efficiency and potentially reducing costs.

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Importance of Implementing Blockchain in Banking

The banking industry has been the main center of various economic activities, such as lending, trading, transaction settlement, payment processing, etc.

However, despite the sector's rich history, it has found itself struggling with the challenges of adapting to the swiftly evolving digital landscape of the modern era.

The banking sector is advancing steadily at this time, but simultaneously, it needs to be faster to move forward.

While many advanced technologies have been introduced, many banking processes still need to be entrenched in paperwork, creating inefficiencies that consume valuable time and resources while posing security risks.

Banks require robust solutions to address such security concerns and fortify defenses against evolving cyber threats.

The need to track credit history and mitigate risks is also increasingly pressing, necessitating innovative approaches to address bad debts and enhance regulatory compliance.

What’s more challenging is that banks face stiff competition from the Fintech industry in this digitized landscape, which swiftly keeps pace with digital transformation and implements agile solutions.

The solution to all these challenges lies in balancing traditional methods and transformation. This is where blockchain solutions in banking come in.

Blockchain technology helps banks modernize their operations while prioritizing the trust and transparency that define their core mission in the financial ecosystem.

If banks don’t follow this digital transformation and embrace cutting-edge technologies like blockchain and AI, they will risk becoming obsolete.

Now that we know why implementing blockchain technology in banking systems is important let’s examine how this technology actually works.

How Does Blockchain in Bankings Work

The banking blockchain has proven to be a more accurate, fast, and secure banking process. Blockchain banking is quicker and more secure than any other type of banking.

The technology works easily and is trusted by both the person making the transactions and the bank itself.

The following way can make transactions through the use of blockchain:

• Suppose a person, “Alex”, wants to send some money to “Jack.”
• He would ask for the transaction to be made using a ledger.
• His payment will be shown in the system as a block or in the form of digital currency.
• The block in which the transaction will be made will ask all its participants or members to permit it.
• Once all the members have agreed to the transaction, the digital currencies will be transferred from Alex to Jack.
• Also, a non-editable receipt or record will be stored in the ledger as history.

In short, unlike traditional banking, which relies on a centralized system, where a customer’s information and transaction history are stored in individual bank databases, blockchain in banking creates a shared, secure ledger of transactions.

All participating banks have access to this constantly updated record, eliminating the need for several potentially conflicting databases.

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Several Use Cases of Blockchain in Banking

There are many ways bank institutions can use blockchain technology in the banking sector, revolutionizing old banking processes and paving the way for enhanced efficiency, security, and transparency.

Here are some main use cases of blockchain in the banking sector:

Faster Payment Processing

Implementing blockchain in banking can result in faster and more secure transactions. Moreover, the transaction processing fee has also been reduced, making it customer-friendly and easily accessible.

This faster and cheaper transaction would make it easier for businesses and individuals to develop and launch new financial products and services.

By building solutions like the best UPI payment app integrated with blockchain technology, banks will have the advantage of eliminating the third party from the process, making the transaction method easier, faster, and safer.

Cross Border Payment Transfer

Blockchain in the financial industry allows faster and cheaper cross-border transactions by eliminating the need for intermediaries and minimizing settlement times from days to minutes.

Trillions of dollars are wasted because of added fees and slow payments. For instance, if someone in San Francisco sends money to London, you and the receiving bank will charge a flat fee of around $25.

Institutions can easily remove these unnecessary charges using cryptocurrencies like Ether and Bitcoin, developed on public blockchains.

The crypto payment mode is quick and easy, with no transaction fees. Moreover, since the payment happens on a decentralized network, blockchain for cross-border payment eliminates the need for transaction verification, making the payment transfer faster and cheaper.

For example, Ripple offers a blockchain-based solution for real-time cross-border payments, helping banks bypass the traditional SWIFT network.

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Settlement and Clearance Systems

Generally, a bank transfer takes up to 3 days to settle a transaction. This is not just a problem for consumers but also logistically challenging for banks.

Today, a bank transfer bypasses a complex system of intermediaries from the bank to the custodial service before reaching the recipient. This is where blockchain solutions in banking come into play.

Blockchain technology and banking work as a decentralized ledger that keeps track of the transactions transparently and publicly.

This means that transactions can be settled in the public blockchain instead of relying on custodial services.

One of the biggest benefits of blockchain in banking is that it speeds up and simplifies transactions.

Fraud Prevention and Security

Banks must keep track of who owns debt, equities, and commodities to buy and sell them. They communicate with various exchanges, brokers, clearing houses, custodian banks, and other entities to obtain this information.

The presence of numerous parties, combined with an old paper ownership system, slows down the process and makes it vulnerable to inaccuracies, fraud, and data breaches.

Additionally, the possibility of technical glitches, human errors, and cyberattacks might put sensitive consumer data at risk.

In this situation, financial firms can use blockchain applications in banking to remove layers of complexity and single points of failure.

Blockchain works on a single ledger system, helping banks reduce the number of layers, reduce the chances of error, and reinforce security.

With smart contracts, banks can quickly spot and flag anomalies or suspicious transactions, preventing fraud and cyber theft.

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Loans and Credits

Banks typically underwrite loans using a credit reporting system because, when a customer requests a loan, banks assess the risk they will face in the event of nonpayment.

They make their loan acceptance decision on the credit score, ownership status, and debt-to-income ratio. Credit reports include information from a centralized system that can be antagonistic to clients.

Blockchain in banking introduces an alternative lending system that enables an efficient, cost-effective, and secure method of providing personal loans to customers.

A decentralized register of payment history makes it easier for consumers to apply for and receive loan approval.

Asset Tokenization

Blockchain for financial institutions enables the tokenization of assets such as real estate, stocks, and bonds, resulting in fractional ownership and quicker transferability.

Banks can issue tokenized assets using blockchain platforms, allowing for speedier settlement and more liquidity in financial markets.

A distributed ledger makes it easier to transfer assets using tokens that represent them "off-chain."

Regulatory Compliance

The immutable nature of this new technology in the banking sector also enhances regulatory reporting and compliance by supporting a tamper-proof record of transactions and regulatory data.

By using blockchain banks can automate the collection and reporting of regulatory information, decreasing the burden of manual reporting and ensuring data integrity while maintaining unparalleled transparency of every transaction done on the blockchain.

Customer KYC

In many cases, bank institutions can take up to three months to execute all the Know Your Customer (KYC) processing, including photo verification, address proof checks, and biometrics authentication.

Aside from the time it takes to verify customers, KYC also costs banks a lot.

Banks can use blockchain to help ease the entire process by creating a shared and immutable database of customer identities and transaction histories.

Financial firms can safely verify customer identities and track real-time transaction trails, reducing fraud risk and ensuring regulatory compliance. This helps banks to access KYC information anywhere and at any time.

Digital Identity Management

Blockchain in banking offers a secure and decentralized framework for verifying and handling digital identities, minimizing the risk of identity theft and fraud.

Banks can use blockchain-based identity management systems to verify customer identities soundly and share identity information across different financial institutions.

For example, Fintech startup ideas like Cambridge Blockchain and Tradle on blockchain for identity verification help collect data proofs and reuse the information for other banking relation processes.

Smart Contracts

Blockchain-driven smart contracts automate and enforce contract terms without the requirement of intermediaries, reducing processing times and costs.

With smart contracts, banks can use DeFi platforms for various applications, including loan agreements, insurance claims processing, and derivative contracts.

For instance, DeFi platforms like Opyn and AAVE use smart contracts to allow sophisticated transactions like borrowing and lending.

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Real-World Examples of How Blockchain is Used in Banking

Blockchain technology quickly gained significant popularity, making many big banking names invest in the technology. Here are some of the financial institutions using blockchain in banking:

J.P. Morgan

In April 2021, J.P. Morgan stated that it uses blockchain technology to enhance money transfers and reduce the payment processing and verification time required for large transactions.

JPMorgan Chase introduced Quorum, an enterprise-grade blockchain platform based on Ethereum, to streamline numerous banking processes. Quorum has been utilized for interbank payments, trading, and compliance reporting apps.

HSBC

HSBC, the largest European-based bank by total assets, implemented a blockchain-based trade finance platform to digitize and streamline operations.

The bank uses the R3 blockchain platform to enable Digital Vault, a custody blockchain platform, to store digital assets.

This platform allows the secure sharing of trade documents, such as letters of credit and invoices, among different parties involved in international trade transactions.

This minimizes paperwork, accelerates transaction processing, and enhances transparency.

Swedish Central Bank

The Swedish Central Bank is currently experimenting with the release of its own digital currency, e-krona. The coin is based on R3 Corda distributed technology. The bank has taken a bold move towards creating a country-wide usable cryptocurrency.

This initiative explores the implications of introducing a Central Bank Digital Currency (CBDC) for Sweden.

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Challenges of Using Blockchain in the Banking Industry

Although there are many benefits to implementing blockchain in banking,  the adoption process is not that easy. Banks often face several challenges. Here are some of the most common ones:

Initiation, Implementation, and Maintenance Charge

The cost of using blockchain in fintech is substantial. This is because it requires a significant amount of software and technology to launch.

Because small businesses and start-ups typically do not have large capital, this can be an expensive issue for them in the beginning.

Along with the initial implementation expenses, blockchain for finance has significant costs that not every organization considers.

Data Privacy

While blockchain provides openness and immutability, it also raises serious questions regarding data protection.

Hacking and phishing scams, private key attacks, identity thefts, and selfish mining are all common problems when adopting blockchain in the banking industry.

To solve privacy problems, banks can use techniques like zero-knowledge proofs and private transactions.

In addition, banks should prioritize data encryption, access limits, and other security measures to secure critical banking information.

Blockchain Regulations and Limitations

It is important to note that blockchain in banking has many restrictions. These regulations can be a challenge for any inexperienced company.

This is because teams that don't know a list of regulations that blockchain needs to provide a secure and efficient user experience are usually afraid of.

Difficulty in Adoption and Education

Blockchain technology is relatively new, and not all bank workers have a solid understanding of how it works.

A lack of blockchain expertise in the banking industry might limit adoption and prevent the successful implementation of blockchain technologies.

To address these constraints, banks should invest in instruction and activity plans for their employees. This might include blockchain workshops, certificates, and partnerships with educational institutions.

Banks can also collaborate with blockchain experts and fintech companies to benefit from their experience implementing blockchain solutions.

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Future of Blockchain Technology in Banking

The future of blockchain in banking is set to undergo considerable development, prompting global banks and financial organizations to adopt the technology quickly.

With the expanding market trend and the rapid use of blockchain in the banking and finance industry, we may expect a spike in Central Bank Digital Currencies (CBDCs), which facilitate speedier transactions and promote financial inclusion.

Moreover, enhanced security features such as zero-knowledge proofs and smart contracts will protect client data and transactions while remaining compliant with industry laws such as GDPR and PCI-DSS.

Furthermore, the rise of decentralized finance (DeFi) platforms, blockchain wallets, and asset tokenization will create new liquidity and investment opportunities, requiring banks to adapt and drive innovation, efficiency, and increased financial accessibility.

If you have any questions about leveraging blockchain in your fintech business, feel free to contact our blockchain consultants!

Frequently Asked Questions

Q. What are the advantages of blockchain in banking?

Ans. The advantages of blockchain in banking include enhanced security through tamper-proof ledgers, increased efficiency by eliminating intermediaries, improved transparency with shared transaction history, and reduced errors with automated verification.

Q. What is the future of blockchain in banking?

Ans. The future of blockchain in banking holds promise for streamlining trade finance, simplifying regulatory compliance, enabling central bank digital currencies, revolutionizing securities trading, and enhancing supply chain management within the banking sector.

Q. Does UPI use blockchain?

Ans. No, UPI currently relies on existing bank infrastructure. However, future integration with blockchain could further improve security and efficiency.

Q. How can blockchain be used in banks?

Ans. Banks can use blockchain for faster and cheaper cross-border payments, secure customer data storage, efficient KYC processes, automated trade finance, and the development of smart contracts for various banking functions.

Q. What is the main use of blockchain?

Ans. The main use of blockchain is to create a secure, transparent, and distributed ledger system for recording transactions. This technology offers benefits like immutability (unchangeable data) and verifiability, facilitating secure and efficient data sharing across various industries.