Blockchain in Banking

Blockchain has decentralized authority over transfers, with virtually impenetrable data integrity. Blockchain data is safe from malicious reach and is resilient towards corruption. Data integrity of crypto bits is robust by design – everyone within the network shares the overall responsibility; each member endorses and sustains all data integrity.

The core features — and advantages — of blockchain are part of a long list, but when compacted down further, we came up with the three pillars of blockchain:

  • Decentralized Management
  • Transaction Security
  • Unbreakable Data Integrity

These three main factors collectively contribute to the sharp contrast between blockchain and what we now know as standard banking procedures. Let’s see how technology like blockchain could soon entirely replace the traditional ways we deal with money.

What is Blockchain Technology?

Blockchain is a chronological record of transactions. The content within these transactions is locked consequentially, hence the ‘chain’ in blockchain.

Blockchain can handle time-stamped transfers and doesn’t have central management. Instead of running a single authority over the resources, data security is equally distributed among each of the stakeholders. Every member and contributor to the chain owns a universal ledger. Security-wise, the blockchain system is exceptionally resilient to tamper or misuse and nearly-impenetrable to cyber-attacks.

Blockchain is cutting the middle man hard. While traditional banks are heavily reliant on third-party endorsers for their transactions, cryptocurrencies are not. This is one heavy burden scratched off the list. Bank security traditionally works best with third-party help since neither the client nor their providers have other things to worry about. However, blockchain transactions are extremely secure by default. Every time a transaction is made within the chain, it is automatically endorsed by many members. Each member represents one additional lock that potential attackers need to break to get to anything of value.
While regular bank transfers are always vulnerable to breaches, blockchain security appears impenetrable. Breaking crypto data is like breaking thousands (or millions) of padlocks all at the same time. The future of cryptocurrencies is volatile. We do know that if data blocks are breached right now, it must be the work of a true magician.
The tremendous resilience to breaches makes blockchain-based fund transfers an attractive opportunity, especially when fail-safe transactions are a priority. Bitcoin has already recognized the blockchain method’s distinctive security advantages and uses it as a core engine for its crypto needs.

Blockchain Technology in Banking Industry

When trusty banking in a business relationship is a paramount priority, blockchain is an excellent alternative to the traditional choice and the integrity flaws it entails. Compared to the more reliable, secure, and exciting blockchain, regular banks seem to lag behind their rival when it comes to transactions and fund management. Security protocols of traditional banks seemed overly complicated, and they also diminish a few critical metrics of today’s business success – customer experience and satisfaction.

The contrast between the traditional banking system and blockchain is why fresh new industries like FinTech grew into an attractive investment asset. Traditional banking has inherent flaws since its inception, which is about the time money was invented. Blockchain is relatively recent but offers an intelligent solution based on a contemporary tech that practically turns known disadvantages into strong points.
Because of the immense potential behind Blockchain in banking, the old system that deals with money, consider it a severe threat. How can a newborn method present a danger to a well-established century-old tradition that most still trusts? One way is through exposing the centuries-old flaws that come with it.

Money was invented pretty much to save you the trouble of carrying your gold bars with you everywhere you go. People deposited their valuables in safes or bank vaults because otherwise, they risk losing them forever. With the emergence of tokens like the digital ledger of Blockchain, traditional banking looks more like some outlived aspect of an old western. Despite the propagation of this ancient structure into the modern world, it still is the preferred form of payment processing for most people and businesses.
Methods like two-factor authentication have risen due to the genuine threat of security vulnerabilities in online asset management. In contrast, Blockchain distributes the responsibility for data integrity evenly throughout its whole system. It does not demand a constant user verification process, which is very inconvenient for the user.

The self-organizing network approach in crypto has a clear advantage over the specialized but unreliable support of 3rd party payment processing solutions. One of the revolutionizing aspects of crypto infrastructure is that it exposes the delegators’ needless role that banks adopt in transactions. Over the past few decades, companies that support banks with payment processing solutions have elevated their business relationship into a booming industry and will relentlessly fight the light-weight decentralized infrastructure of blockchain.
Technological advancements can change the conditions and priorities of business goals so drastically that some existing establishments may feel threatened. Blockchain tech shines as a much safer and reliable alternative to traditional banking. It mercilessly exposes the unnecessary role of a middle man standing between providers with customers. Despite the burden of a 3rd party payment processor, companies like Uber or Fiverr would not have existed without it. When it comes to organizing massive project financing, maybe the middle man is not ready to be cut off from the deal yet.

Benefits and challenges for Blockchain in Banking

There are a few uses for Blockchain in banking that we believe should enter the spotlight. We often mention that crypto solutions are not for everyone, but everyone with a compatible project can benefit from using them tremendously. Here’s what we found:

International Banking

You always wanted to send some money to your aunt in Boston, but now, you live in Europe and get ready for up to 20% extra fee. Welcome to modern banking. Crypto exchange offers to drop this variable to the absolute minimum, but this offer comes with some known downsides. Blockchain still does not enjoy the popular vote it deserves. For example, anti-crypto laws that some countries run today may cause the user’s funds to become trapped or even lost.
The decentralized nature of the underlying system of blockchain tech does not allow refunds. The encoding of transaction data into blocks is an irreversible process and does not allow ‘undo’ actions. Still, the constant flow that continuously incorporates more bits into the chain is how blockchain security gains its notoriety.
Although Blockchain comes pre-packed with a robust spider web-like security structure, it does give to digital attacks. It is almost impossible for hackers to break the data block itself, but they can still force-enter customers’ digital wallets.

Stock Markets

Third-party influence has a distinct impact on a lot more sectors than banking. The advantages of Blockchain devaluate the role of the middle man during transactions. Similarly, they can improve trading success by eliminating the extra fees related to brokers or dealers. Blockchain tech can clear the way between customers and providers, clearing the communication channel between the two entities to exchange information more effectively. With the looming dread of third-party responsibility, the market opens a path for smaller investors with clear ideas and honest intent. Clients adore transparency, and this technology provides the means for business people to connect to them directly.
One of the apparent disadvantages of using Blockchain in the stock market or banking is, naturally, security. While your digital assets are well-protected with something called a ‘private key,’ losing the item will most likely result in losing all the assets in the associated account. The blockchain system is robust, maybe even too vital to humans. We are the usual suspects in every standard vulnerability test protocol. There is no error like the human error, and the cryptographic nature of bit encoding is a direct response to this constant liability.

Trade Finances

Stock market operations, including trading, come with a trailing tail of paperwork and other related marvels of bureaucracy. Those are irreplaceable mechanics and cannot be bypassed. However, thanks to blockchain’s processing power for standard pipeline processes like invoices, credit notes, or transactions (which is immense) can be streamlined. Blockchain is an elegant solution to trade finances because it rationalizes and simplifies the mandatory part of any trader’s agenda.

Your Digital Identity

Contemporary banking is rich with authorization checkpoints, set to fulfill the intense security protocols associated with banks. Security checks at every access point make fund management sluggish and inconvenient to the users.
Blockchain encodes all transactional data into the internal network itself. The need for constant verification is not necessary — a check can be performed only when necessary, which is rarely a case.
Because of the emphasis on operational transparency, blockchain tech seems particularly interesting for business relationships between partnered companies that don’t trust each other entirely. Since trust is a paramount factor in business but, at the same time, extremely hard to achieve, blockchain presents itself as a convenient icebreaker tool.
One downside to the impenetrable data structure of blockchain regarding user verification is the transparency factor. Since your transactional data is readily available in the chain for future reviews, private data better not enter the blocks. 

P2P Transactions

P2P started as a service aimed at individual needs, but when it became relevant on a business level, many eCommerce opportunities become available. Small companies and shop owners could promptly set up a digital wallet and start selling.
We suspect that P2P could have been one of the underlying factors that helped eCommerce become the massive business ground it represents today. When shopping online, most people reluctantly share their credit card information with random sellers, so P2P emerged as a preferred choice since it protected shoppers’ private data, and they really appreciated having their personal data secured.
P2P has always sparked interest in various entities ever since the arrival of controversial software like Napster. In banking, P2P is a preferred method of funds exchange between private parties. This direct type of payment, founded and pioneered by PayPal, initially fulfilled the individual’s need to simplify acts like donations or relatives sending money to each other. Soon after the peer-to-peer money network proved an emerging need, it expanded into massive support to eCommerce projects, exemplified by contemporary giants like eBay.
The nature of P2P in currency transactions excludes the unnecessary third party’s involvement along with the extra fees. Money transfer through PayPal happens momentarily and without added charges. In comparison, a regular overseas transfer cost extra, take longer to process, and we’re not even sure how much longer. Many cogwheels need to turn before we get the answer of that question. 

Conclusion

Marketers don’t usually have the knowledge base to consider blockchain as a possible solution. Additionally, since this is not a solution for every business, the question falls to the informed decision made by experienced blockchain advisors. Blockchain consultation is much needed in today’s market, especially since most business owners are not aware of the degree to which solutions like these suits their business challenges.
One clear disadvantage of blockchain in banking is its severe devaluation during currency conversion. Traditional banks feel threatened by alternative currencies like blockchain, and they naturally develop defensive mechanisms to suppress them.
Business people need to know more about the business potential behind techs like blockchain. If they don’t—their competitors might.

A rather unnecessary obstacle to blockchain’s natural growth remains some country’s specific restrictive regulations toward digital currencies. Prejudices have always decelerated the potential development of technology, and blockchain is no different. It took years for Bitcoin to surface as a relevant factor. People’s natural fear of the unknown is a notable factor – blockchain can change the market for good, but it needs more trust. The technology is ready to solve problems now before people came into a unanimous agreement of its benefits. The mental barriers and the burden of old traditions will continue to hinder its natural evolution, but not for long.
Some of the widely-accepted techs or trends of today began as taboos. When lightbulbs were first invented, people were terrified of them, and then they couldn’t live without them. We believe that—similar to electricity—blockchain tech will eventually receive its consumers’ absolute recognition. When that happens, we will be here. Follow our blog page for updates on this and many new exciting technologies for business.

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Author

Andreas Maier | CEO

Andreas is a result-oriented CEO who brings nearly 30 years of experience gained in the high-tech industry. His experience ranges up to leading positions in Fortune 100 companies such as rentalcars.com (PCLN) or Intrasoft International, a leading EU based R&D software vendor. He holds a Ph.D. in Neural Networks from the University of Cologne, Germany.
In the past Andreas has successfully founded and co-founded several startups among others XXL Cloud Inc., eShopLeasing Ltd, and WDS Consulting SA. His expertise is strongly focused on modern headless Commerce and the optimization of processes in IT ecosystems.