Banking, the sector that centralizes the flow of currency system plays a pivotal role in balancing a country’s economy. The traditional does have many drawbacks and the system can improve it by adopting blockchain technology. In this article, we’ll discuss how blockchain can transform or reshape the banking/financial sector in an effective manner.
What this article covers?
- A brief note on blockchain technology.
- How traditional banking/financial sector works?
- Drawbacks of the existing system.
- How blockchain technology transforms the banking sector?
- Benefits of the new technology in banking and the scalability.
A note on blockchain technology!
In banking, lots and lots of transactions happen on daily basis and organizing them isn’t that simple. To check and validate every transaction is a nightmare and is well vulnerable to errors and misrepresentation. Obviously, a ledger is kept to record all the transactions as everything is digital nowadays. Blockchain technology is a distributive ledger system used to validate every transaction within the connected network. Well not everyone can validate the transaction, only the connected nodes in the system will able to perform the task.
So, an external user or an intruder cannot hack into the system and do any fraud activities. So a transaction will only be completed by validating many conditions and is perfect for a transaction-based system.
Coming back to our main topic, the banking and technological transformation, we can now move on to learn how the banking system works currently. To learn about a platform one must understand how the current system works and how far is it restricted or prior to integrate new technologies.
How traditional banking system works?
What exactly is a traditional financial institution? How the banking system does maintain the flow of money to balance the economy and make it available to people of the corresponding country? Well, a traditional financial institution offers services to start new accounts, loans, and much more to people by means of banks, credit unions, etc. And the traditional model offers these services by following certain regulations or the rules imposed to follow correctly without any failure.
So, the working part, everything in this system is centralized and every government norms are applicable. And the medium of currency used in the system is the fiat currency declared by a government and the value is also maintained by them. The banking system thus usually work basis on this regular fiat currency and this is used for the reserve part.
The currency notes are printed as per the demand and supply process. And there is no capping in advance in the system. Well, as everything is centralized, the transaction obviously passes through human interactions. Due to this nature, cheating often happens in the banking system and such manipulations of numbers, exchanges, and much more are happening in this context. Many such instances or incidents happened in the past period of time.
The money deposited in the accounts can be withdrawn or used for other purpose using credit/debit cards or else visit the bank directly. Now, that the technology is advanced internet banking is an option and just need to pay it from your online account itself.
And once the depositors request to withdraw the amount from their respective accounts simultaneously then, the banks will fail and everything goes south afterwards. So, that’s how the traditional banking systems work and now let’s analyze the drawbacks of the above system.
Drawbacks of the traditional system
In the above part, we’ve mentioned how traditional banking system works. But it does have many limitations and these limitations paved a way for new technology.
- The system is vulnerable to manipulation
- Additional and overcharges are imposed on the transactions, withdrawal, etc.
- The system is not transparent in nature.
- Vulnerable to hacking, malware attacks, etc.
- Limited to a certain side or part of the world or even to a country.
The limitations can be swept off to a minimal rate using blockchain technology.
How blockchain transforms the banking/financial industry & its benefits?
As mentioned earlier in this article, blockchain is the best way to get away from all such limitations. How exactly does blockchain help you to change the course of the industry?
If all the transactions and processes are integrated via blockchain then, everything is going to be simple.
- You no need to manually validate every transaction in the
- Nodes validate these transactions with a certain set of rules.
- These rules or conditions can be re-written in the form of codes and is included in the system in the form of “smart contracts”.
- Transactions or another sort of process do not have to check one after the other separately and eases the time.
- Manipulations cannot be done as the validations are accurate.
- Even the one who owns the network cannot alter any data or undone once a block is added in the blockchain.
- The ledgers are highly secured and loss of data isn’t an issue anymore.
- The transaction fees and other charges levied on the customers are kept minimal.
- The quick transaction is an important advantage of the blockchain system.
- One can easily send money across the country without any delay.
The above part highlights the majority of the benefits of using this technology. One important aspect is instead of fiat currency here cryptocurrency is used. Cryptocurrency is nothing but digital money without any form used for transaction purpose. That’s not it, there are more advantages,
- The whole system is decentralized and no regulations to follow.
- Global phenomena and anyone from any place can access the data, i.e., transparent.
- Complete transaction data is available to the public and anyone can access this information.
- However, these data’s are not liable to alterations as the nodes connected to the particular network need to validate the data.
A good model, isn’t it?
Still, there are uncertainties in the proposed system like; banking system highly depends on the cards. Take a scenario; you’ve visited the nearest ATM to withdraw a certain amount of money using your debit card. In the existing, the money can be easily withdrawn using the ATM machine. What if the system is blockchained? It practically takes a lot of time and one needs to wait for approval or validation. The money will be received only after completing the validation process.
Likewise, there are many such disadvantages in the proposed system. One needs to identify such drawbacks and as the system is open source in nature, appropriate experimental changes can be brought into the system. By developing such alternative models every such issue can be easily addressed.
So, the future looks perfect and splendid!
Sajin Rajan is a CEO of Epixel Solutions which is a US based Software development company. He has more than 10 years of experience in the software field. He always brainstorms about emerging technologies and how they can be integrated into real-world applications. His areas of interest include blockchain technology, IoT, AI, etc.