Blockchain technology has already created a lot of noise in almost every industry sector but the loudest uproar about this transformative technology is continuously heard in the BFSI industry. As an expert blockchain consultant, I can tell you that blockchain technology has introduced many opportunities for the financial sector, allowing banking and insurance companies to build enhanced fortified trust and greater transparency in each financial transaction.
Before I dive into the core aspects of how blockchain technology is transforming financial services software, let me introduce you to a few informative and encouraging statistics and numbers given by tech giant IBM. According to IBM.
- More than 91% of the banks worldwide have already invested in the blockchain.
- About 66% of financial institutions have said that blockchain has enhanced their productivity and their business is running at scale.
- 73% of central banks surveyed believe retail CBDCs should be accessible at all times and usable for all types of payments.
Enhancing Transaction Security and Transparency
One of the biggest blockchain benefits that I have witnessed over the past is its ability to secure and make all transactions transparent. Every transaction that you record in the blockchain becomes immutable and nobody can alter it under any circumstances, Thus, it becomes a tamper-proof record that prevents fraud or unauthorized changes.
I can cite the example of Ripple here, which is a leading blockchain technology-based solution helping banks and financial institutions implement the real-time gross settlement system. It secures cross-border payments, with increased transparency by recording every transaction on an open ledger that limits the number of intermediaries required.
Minimizing the Operational Costs
Traditional financial services software relies heavily on intermediaries for processes like clearing and settlement, which adds time and costs. Now, if you are using the blockchain, you can remove all such intermediaries, enabling direct interactions between parties. This results in faster processes and reduced operational costs.
Again here, I’m going to quote the example of a top-notch multinational financial institution JP Morgan Chase that uses its blockchain technology Quorum, (now acquired by Consensys) to make seamless peer-to-peer payments across banks. It has helped the company to digitize the clearing and settlement process, enabling it to save tens of millions of dollars every year in operational costs.
Fraud Prevention and Compliance
Whether it is the banks or insurance companies, the biggest challenge for the BFSI industry today is fraud prevention. However, blockchain provides an immutable ledger ensuring a safe way of recording transactions, making it virtually impossible to alter or forge data. In addition, the technology provides a transparent and auditable record of transactions that will allow one to adhere to regulatory standards.
Let me explain this point with the example of IBM Blockchain which comprehensively aids banking software solutions to improve their fraud detection capabilities and also ensures compliance. The banks can identify suspicious activity automatically by using blockchain technology within their networks, which would ensure AML and KYC compliance.
Revolutionizing the Cross-Border Payments
Financial experts view that cross-border payments have always been a significant concern for banks and financial institutions due to their slowness and expensive nature. More than that, the bigger issue is regarding complying strictly with the state laws and banking regulations of the particular region with respect to taxation.
However, I believe that blockchain technology has been considerably successful in solving this problem as all concerned parties can make real-time and direct communication with one another without involving any third parties.
I came across the example of Stellar, which is a blockchain technology for making effortless international transactions. Stellar allows users to send money across borders almost instantaneously, reducing transaction fees and delays. It means users can make real-time payments to reduce costs and time.
Automating Insurance Processes with Smart Contracts
Now, let’s talk about the insurance industry, which has boomed over the last few years. According to Business Research Insights, the Insurance software market is expected to reach around $13 billion by 2032 at a CAGR of 3.60%. Now, you may ask me what role did blockchain play in boosting the insurance sector market.
Well, the answer in one simple sentence is Smart Contracts. Smart contracts are an integral part of the blockchain and self-executing agreements that contain predefined rules encoded within them. They automatically execute, thus eliminating the need for intermediaries and manual interventions, when certain conditions are met.
I can put forth the best smart contract blockchain platform example as Etheral. Suppose, a user needs to pay a premium for a policy. In that case, the smart contracts can automatically release payments before the due date. The entire procedure turns out to be seamless, efficient, and error-free because there is no chance of any dispute among the involved parties, leading to enhanced trust building.
Improving Credit Scoring and Lending Practices
Users use banking software solutions aiming to improve their credit score, which is a vital parameter that determines how much loan they can take and at what interest rate. Now, using blockchain you can increase your credit score and at the same time, this technology streamlines the lending process. Yes, it adds more inclusiveness and transparency by storing credit histories on a decentralized ledger. Lenders can access accurate and tamper-proof data, ensuring fair assessments.
I can cite the instance of Bloom, a popular blockchain-based credit scoring application that enables users to possess control over their financial data along with the lender having ensured access to creditworthiness information. Blockchain propels financial inclusion by enabling fair opportunities for underbanked populations.
Tokenization of Assets
Have you heard about asset tokenization? It is a process of converting physical or digital assets into tradable blockchain-based tokens for liquidity. So, the biggest benefit for the users is that they can streamline and optimize democratized access to investment and boost liquidity.
For instance, tZERO is a blockchain trading platform that allows the trading of tokenized securities. It allows you to gain fractional ownership in any asset, including real estate or fine art. It further improves the access of investments to more people and lowers barriers to entry.
Streamlining Identity Verification
Blockchain-based identity verification ensures the security of data and the privacy of users. Instead of relying on centralized databases, individuals can securely store their personal information on a blockchain and share it with institutions as needed. This has brought a major boost to financial services software security.
Civic, an identity solution powered by blockchain technology, streamlines the verification process for financial institutions. Users retain control over their data, while financial organizations reap the benefits of diminished risks associated with identity theft and fraud.
Enhancing Peer-to-Peer Lending
P2P lending platforms are increasingly incorporating blockchain technology to enhance trust and transparency in the lending process. Blockchain ensures fairness for lenders and borrowers as all transactions are recorded on an immutable ledger.
It’s Salt Lending, a blockchain-based company, offering crypto-backed loans with borrowing in a secure setting for the users, where opportunities to lend present a means of loan performance tracking from lenders without an intermediary.
Simplifying Trade Finance
Trade finance often involves complex paperwork and manual processes. Blockchain simplifies these by automating workflows and providing transparent records of transactions.
Marco Polo, a blockchain-based trade finance network, connects buyers, suppliers, and financial institutions. It uses smart contracts to streamline payments and ensure transparency, speeding up trade finance processes significantly.
Conclusion
Though I put a full stop to this article here, there are many more ways blockchain technology is transforming the financial services software industry. This includes strengthening data security, accelerating settlement in financial markets, prompting financial inclusion, simplifying financial trade, and much more. Its ability to enhance security, reduce costs, and optimize processes makes it a prime candidate for extensive adoption throughout the industry.
From secure transactions and cross-border payments to asset tokenization and fraud prevention, blockchain’s potential is immense and diverse. So, whether financial sector or any other industry, blockchain technology is no longer the new wave but the strategic asset to survive the competition of the advanced digital landscape.
Author Bio:
Niraj Jagwani is a seasoned blockchain consultant and financial services expert, specializing in decentralized solutions and fintech innovations. He helps businesses leverage blockchain technologies to drive growth, enhance security, and streamline financial operations.