Over the past few years, the transformation and digitalization of the banking and financial sector have been among the most-discussed topics. Most industries have adopted blockchain technology and it’s slowly making its way towards the global banking industry. It can be said that the future of the global banking world could be shaped by the emergence of blockchain technology.

Blockchain technology, also known as the Distributed Ledger Technology (DLT), is being peddled as the next-big-thing after the creation of the internet. The major benefit of this technology is that it provides a way for untrusted parties to come to an agreement on the state of a database, without any need of a middleman. One area where blockchain technology is likely to have a major impact is the banking & financial sector. Though the technology has disrupted the banking industry, it has also benefitted it. According to a report published by Research Dive, the global blockchain market is expected to greatly benefit the banking and financial sector in upcoming years, mainly because banking & financial service providers are increasingly utilizing blockchain applications in payment procedures to secure transfers and offer international exchanges at lower costs.

Impact of Blockchain Technology on Banking Industry

Blockchain technology in the banking industry has the potential to outshine the need for manual processes involved in the banking fund transfer system and assure clients a safer way of fund transfer. Although blockchain technology is currently not well accepted in the banking industry, the idea is slowly changing. This is mainly because blockchain technology has shown success in many industries and it has the potential to provide numerous benefits to the banking and financial sector. Listed below are some reasons how blockchain technology is impacting the banking industry.

1. Saving on Transaction Costs

Blockchain technology has the capability to enable banks to save a lot of money in terms of transaction costs. Blockchain is offering the option of fund transfers from one region to another without any paperwork and extra costs that banks apply. This has been the source of the upsurge of blockchain implementation by various banks since the savings on transaction cost can result in profits of millions.

2. Fraud Reduction

The heavy jump-in into blockchain technology in the banking industry can be because of the increasing rate at which normal transactions are being exposed to fraudulent activities. Blockchain technology has the capability of reducing fraudulent activities through the removal of intermediaries. Money laundering is one of the most fraudulent activities that happen within the transaction system where intermediaries, such as the stock exchange, play a major role. Blockchain technology is projected to have a great impact on the banking industry where it will also protect banks against fraud and cyber-attacks on bank databases.

3. The New Millennial Customers

Current and future generations are expected to rely heavily on technology compared to millennials. At present, the young generation of clients is growing in a well-networked environment with enough knowledge of online transactions and crowdsourced funding. This has made the banking industry adjust to Fintech in order to deal with millennials. With blockchain technology in banking and financial sector, millennials will be able to perform their business transactions easily.

4. Trade Finance

Trade finance activities mainly compose of paperwork transactions in the banking industry, such as billing and factoring with some international transfers in imports and exports. This area is witnessed to be most efficient when transactions are done with blockchain technology. The movement of trading and financial transactions all around the world can be quickly accelerated using blockchain technology under the smart contracts that overpowers the role of documentation and digitizes the transactions.

Impact of COVID-19 on Banking Industry

The lockdown imposed by various governments across the globe to prevent the spread of the COVID-19 has halted economic activity across many sectors. The banking sector is majorly affected but in an indirect way. While banking services do not rely on direct consumer contact and can be provided remotely, the connection of the sector with the real economy as provider of payment, credit, savings, and risk management services extends the adverse effect of the COVID-19 pandemic to banks and other financial institutions. Listed below are some negative effects of COVID-19 crisis on the banking sector.

1. Revenue Loss

Firstly, firms that have stopped working miss out on revenues, and thus these firms might not be able to repay loans. Likewise, households with members who are furloughed have less income or lost their jobs during the COVID-19 crisis might not be able to repay their loans. This has ultimately resulted in lost revenue and losses and has negatively affected banking capital and profits. And as rapid recovery becomes less likely, banks can presume further losses that will result in the need for additional provisions and will further destabilize their profitability & capital position.

2. Lost Value of Bonds and Trades

Secondly, banks are negatively affected during the COVID-19 crisis as bonds & other traded financial investments have lost value, which has resulted in further losses for banks. Also, there might be some losses from open derivative positions where the derivative has moved in unpredicted directions due to the crisis.

3. Increasing Demand for Credit

The banking industry has faced increasing demand for credit during the pandemic, as particular firms require an additional cash flow to meet costs in unprecedented times of reduced or no revenues. In some cases, this rising demand has presented itself in the drawdown of credit lines by borrowers.

4. Lower Non-interest Revenues

Lastly, the banking industry has faced lower non-interest revenues mainly due to lower demand for their different services during the crisis. For instance, there are fewer transactions and payments to be done with lower economic activity, and lesser security issues by corporates cuts down the fee income for investment banks.

However, blockchain technology can be adopted by and rescue the banking industry during the COVID-19 crisis. According to the World Economic Forum, although at very least, blockchain could tortuously help to mitigate the COVID-19 pandemic’s impact by refining the visibility of supply chains that have been hugely disrupted. The sharp increase in the number of employees accessing enterprise data and systems remotely will amplify concerns of data security, confidentiality, and privacy, creating a need for vigorous authentication and access control. This can be possible with blockchain, as the technology can protect data from being tampered with or stolen. Banks invested in blockchain technology can now leverage it to secure data & applications on their network.

Moreover, banks that find it difficult to provide financing on their own in the unprecedented times can participate in a blockchain technology-based shared lending network. Banks also have an option to use their blockchain trade finance platform in order to provide remote or distant advisory services to corporate customers that need assistance with meeting their current loan obligations, or other sources of financing.

A Step Forward with Blockchain Technology

Blockchain technology is steadily advancing into the world of payments to change the transaction environment. It has reshaped the financial services by:

-Driving efficiency and removing incorruptibility by establishing new financial processes & services infrastructure.

-Enabling the inflow of liquid cash and allowing participants to convert fiat currencies to support foreign exchange through smart contacts.

-Instigating cross-border payments in real-time

Blockchain technology has made small payments reasonable, taking the required labor out of the process, which makes broker intervention pointless with shrinking processing time. In the trade finance market, blockchain technology can boost the efficiency of import/export by streamlining access to documents related to trade, quicker settlement, and better capital efficiency.

The Bottom Line

The banking industry is one of the major sectors that is going to be impacted by blockchain technology. This technology will continue to impact the banking industry due to the increase in innovation in the IoT, which is revolutionizing many industrial sectors. Blockchain seems to open up new opportunities for cost reduction. It can vividly improve the customer journey and facilitate a more secure form of data transaction & identity. However, solving all the regulatory and technological hurdles required to fully realize the potential of the blockchain technology in banking industry seems only to be a matter of time.

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Abhinav Chandrayan has worked in the Writing industry for 2 years, gaining experience in Media & Advertising and Market Research Industry. As a seasoned writer, he is passionate about advancing his writing skills by reading and working on versatile domains. In addition to writing, he is also involved in filmmaking, where his film has won the Gold Film of the Year Award in the year 2016 at India Film Project. Outside of the office, Abhinav enjoys traveling, sports, and exploring different movie niches.