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Top Blockchain Use Cases in Banking

Blockchain technology is showing the potential to fill several gaps plaguing traditional banking systems ranging from effort duplication to clunky and tedious KYC processes

Emmanuel Alonge
Emmanuel AlongeDec 08, 2022
Top Blockchain Use Cases in Banking

The digitization of banking operations has come a long way. Every era has seen the introduction of new technology and processes that have improved the delivery of banking services. Interestingly, blockchain technology has now thrown its hat in the ring alongside other technological innovations that have revolutionized the banking industry.

Blockchain technology is showing the potential to fill several gaps plaguing traditional banking systems ranging from effort duplication to clunky and tedious KYC processes, delayed settlement, financial exclusion, and more. Unsurprisingly, key industry players are beginning to recognize blockchain’s promise and are tapping into it albeit gradually.

Let’s take a quick look at how ambitious banks can take advantage of blockchain to future-proof their operations, deliver a better customer experience and stay relevant.

1. Cross-border Payments

Central and commercial banks around the world are already tapping into blockchain technology to facilitate cross-border payments, for good reason. Transactions executed on the blockchain are less expensive than those powered by traditional finance systems due to the number of intermediaries involved in the latter: the source bank, central bank, correspondent bank, and recipient bank.

On the other hand, blockchain eliminates the need for that many intermediaries, ensuring that remittance costs come in at around 2-3% while those of regular money transfer channels could fall anywhere between 5-20%. In fact, according to a study by Accenture, blockchain-based payments can help banks save up to $12 billion a year.

Additionally, since blockchain transactions don’t require authorization from multiple third-parties, they are faster and more seamless. They are also safer and more readily accessible round-the-clock. Enabling quicker, safer and easily accessible money transfers improves the customer experience, something companies in the banking, financial services and insurance (BFSI) industry also value.

2. Tokenization and Digital Currency

Blockchain affords financial institutions the ability to create digital representations of physical assets or transact with such digital tokens, a process tagged tokenization. One of the most popular use cases are digital currencies.

Cryptocurrencies such as Bitcoin, Ethereum and stablecoins have seen some of the most adoption among regular consumers. However, banks have also been exploring the creation of their own digital currencies. Across the world, several central banks have either already launched their central bank digital currency (CBDC) or have solid plans to that effect. CBDCs can create more efficient payment systems, drive financial inclusion and expand access to the digital economy.

Commercial banks are also taking a dip in the cryptocurrency pool. For instance, the U.S. Bank J.P. Morgan launched its own digital currency, the JPM Coin, a few years back. The coin is hosted on JPM’s private blockchain but the bank has plans to extend it to other platforms. It’s a stablecoin pegged to the U.S. dollar and facilitates instant transfer of funds between selected JPM institutional customers. This typifies one of the advantages banks stand to leverage by looking into digital currencies.

3. Know Your Customer (KYC)

The cost of maintaining stringent anti-money laundering and KYC standards is high. A Thomson Reuters survey revealed that major global financial institutions spend up to $500 million annually on KYC, with 10% of the world’s leading institutions expending at least $100 million annually on the same process, while the global average annual cost of KYC stands at around $48 million.

Beyond the exorbitant financial costs of complying with KYC requirements, current processes are also time-consuming. Banks often require up to 24 days to fully onboard their customers, according to the same Thomson Reuters report referenced earlier, while a Forrester research showed that the onboarding process could take anywhere from 2-34 weeks. This stifles efficiency and negatively affects the customer experience.

Blockchain-powered KYC processes introduce cost-saving advantages and greater efficiency by enabling faster access to customer information. A blockchain-based registry housing critical customer details, for instance, will remove information bottlenecks and effort duplication. It will also enable secure customer data sharing between financial institutions and easier KYC automation to ensure lesser compliance errors and avoid repetitive verification and authorization.

4. Syndicated Lending

Syndicated lending refers to a situation where multiple financial institutions pool their resources together to finance a loan for a single borrower. With requirements like complying with Anti Money Laundering stipulations (AML) and various other banking regulations, processing a syndicated loan could take up to 19 days.

This lending process requires the banks involved to share customer information for compliance procedures. For banks that opt for blockchain technology, what would have been a complex process of vetting the customer becomes simpler since one of the institutions can carry out the process and make the results available to others on the blockchain. This would simplify compliance processes, cut costs of customer vetting and speed up the delivery of the loan.

5. Financial Reporting

Regulatory reporting is one of the requirements banks must meet to ensure satisfactory compliance. Ensuring that this process is as seamless as possible comes at a huge cost with close to 40% of financial institutions having to spend a whopping $40 million while the others fork out 5-$30 million. Another study showed that some banks spend as much as 50% of their time on preparing regulatory reports.

Blockchain addresses some of the costs associated with providing accurate and up-to-date financial reports using its open distributed ledger system. Records on the blockchain are immutable, easily traceable and retrievable. This means maintaining accurate records and making the required information available on demand to regulators becomes easier for banks.

Bank on Blockchain

Understandably, many banks are skeptical about integrating blockchain technology into their processes because it’s uncharted waters. Also, many have to contend with restrictive regulatory frameworks yet to make room for the adoption of blockchain.

However, the potential of this technology to improve banking operations is undeniable. The way forward is for banks and regulators to familiarize themselves with the workings of blockchain and gradually begin to make room for its use in key banking operations.

At Bitpowr, we offer ready-to-deploy blockchain infrastructure that financial institutions including banks can plug into to simplify cross-border remittances, expand their customer base and grow their revenue. Reach out to us to learn more.

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