Blockchain and Retail Banking

In the past few years, the banking industry has changed a lot. It would not be a mistake to say it was a revolution that revised the sector.

Now all banks have adopted the Retail Banking Business Model due to several factors that work well, such as a huge customer base, risk management, Profitability, etc. Retail banking has grown at a tremendous rate.

The rise in competition, the IT revolution, the emergence of Fintech industries, and evolving customer expectation has made banks adopt new strategies and techniques.

At present, retail banks have made great strides in digital transformation. It results in better customer experience, lower operating costs, and minimum costs for banking transactions. Additionally, the trend for internet and mobile banking is emerging rapidly.

The banking sector has implemented AI and voice assistance services to provide users with a personalised experience. For the security of the depositors, the banking system has introduced biometric and KYC technology.

There is no doubt, Retail banking has become an attractive banking segment today and provides several advantages. Although using all evolving technologies, it has some loopholes in the present system that need to resolve.

As our blog title mentioned, “Blockchain and retail banking: A Connecting Bridge,” you can understand that blockchain is the technological solution that can fix those issues in the present banking process.

In short, Blockchain technology is a decentralised, distributed, and public ledger used to record transactions across many computers within a network. Because of its design and properties, blockchain is secure, transparent and nearly impossible to alter. 

It comprises blocks of information that form a chain of records that must be verified and validated by all network participants before they can be added to the chain.

Blockchain technology is quickly gaining momentum and adoption.

In the financial industry, this technology underpins trust in the security and reliability of currency transfers.

Technology offers numerous advantages.

Let’s check out a few:

Administration: The ledger exists in multiple copies across the network. Each time a new transaction and block are added, Everyone within the network receives a copy, as soon as a new transaction and block are added. There is no single entity controlling the ledger, but all users get the same information.

Continuation: Transactions on a blockchain can be tracked accurately and chronologically. As every person within the network has a copy, it’s quite impossible to erase or alter transactions or add any unverified information. To accomplish this, hundreds or thousands of computers would have to be attacked simultaneously, which is highly improbable.

However, some industries like automobile, telecom, entertainment, and a few others have implemented blockchain technology in their system.

Compared to other industries, retail banking appears to be hesitant when it comes to blockchain. 

There are numerous government agencies, investment banks, and infrastructure providers experimenting with this technology in hopes of reducing costs and increasing transparency using an electronic ledger.

For example, investment banks anticipate a world in which execution, post-trade processing, and settlement are instantaneous, eliminating many middle- and back-office operations. Even they are focused on the potential for smart contracts to increase automation.

Large investments are being made in the blockchain sector. As per a report, the venture-capital funding for blockchains reached $25.3 billion last year.

Yet, No initiatives have been implemented at a large scale in the financial sector, and entry into the banking industry is difficult because of high regulatory requirements. However, in India, the Reserve Bank of India (RBI)informed that its new regulatory sandbox environment has been proactive in guiding blockchain-based applications.

India Banks are looking to introduce blockchain technology to fix issues in the processing of Letters of Credit(LCs), GST invoices and e-way bills.

Further, there are 15 banks, including four public sector banks like SBI, Canara bank, BoB, and Indian bank are part of a company called Indian Banks’ Blockchain Infrastructure Company Private Limited for using blockchain technology to provide various financial services.

Blockchain and Retail Banking: Let’s Understand the Bridge

While blockchain technology has arguably received the most attention from investors, banks, and telecom companies, its potential in retail banking seems to have gone largely under the radar.

Research suggests that blockchain offers significant opportunities for the digital transformation of the retail payments industry.

Let’s check out the cases highlighted below that shows how it can be leveraged to offer a better user experience along with security and privacy protection.

#1- Money Transfer:

Transferring money within a country doesn’t seem to be a problem for users. However, when it comes to out of countries there are many problems and challenges for consumers and financial institutions.  

Moreover, payment processing tends to be clunky, opaque, and highly mediated. This results in high costs. A transaction fee is usually two to three per cent of the transaction value and can vary from up to ten per cent.

Did you know?

By 2022, Cross-border payments are expected to reach $26.6 trillion worldwide.

Payments are experiencing increased competition as a result of the emergence of numerous fintech. To improve the cross-border payments experience, now The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is working with banks through its global payments innovation initiative. 

Most probably, blockchain would be able to fix certain inefficiencies that are present within the current process. In recent years, some major banks have adopted blockchain technology for international payments, which saves them time and money. Blockchain money transfers allow consumers to complete electronic transfers with mobile devices without visiting a money transfer facility, standing in line, or paying fees.

#2- Fraud Prevention:

Scam prevention is one of the major reasons behind the connection between Blockchain and Retail Banking.

In recent years, retail banks have invested significant efforts in automation and standardization, introducing real-time information sharing, and building predictive models to fight fraud, protect data, and prevent money laundering.

Since these initiatives have increased efficiency, onboarding times and costs have increased, reflecting significant changes in operating models and manual labour.

Blockchain has a potential solution for this. The blockchain-based technology allows customers to create a digital fingerprint for onboarding or account opening, which can be used as an identifier like an actual fingerprint.

A blockchain stores information in a ledger with transaction information within each block,  along with a unique identification number that refers to the previous block. Every person within the network receives a copy of the transactions.

Furthermore, blockchain technology allows customers to control and share their data without the involvement of a third party. There are several operating systems and browsers that provide key stores to protect private keys, as well as wallets and other alternatives that are resistant to cyberattacks.

These features make blockchain technology resistant to all attacks, such as distributed denial-of-service attacks, hackers, and other kinds of fraud.

Retail banks can conduct business more cost-effectively without fear of cyberattacks, reducing stress and saving money.

Read how Blockchain is transforming Logistic Industry.

#3- Data-driven risk assessment:

Today, banks are looking for ways to use data to assess and manage risk in their lending portfolios.

It is common for financial institutions to make risk-management decisions based on limited data, which can only be obtained from a small number of brokerages and agencies. In some cases, the data do not even exist. The underbanked, and microenterprises may not have made enough noncash financial transactions for assessing their creditworthiness. 

Sometimes, the data doesn’t even exist. There may not be enough noncash financial transactions for underbanked and microenterprises to assess their creditworthiness. Due to this fact, banks tend to take a conservative stance when making credit decisions.

Anyways, Blockchain has the solution for this. As a result of blockchain technology, large volumes of data can be pooled and anonymized by using its encryption protocols.

Blockchain offers a secure, decentralized way to store data that can be shared among a network of computers. This makes it ideal for tracking transactions and other data-heavy processes in the banking industry.

Ideally, banks would be able to see data that has been uploaded by other banks on the network. In this way, credit-allocation decisions should be made faster, processes should be more efficient, and credit decisions should be more informed.

By using blockchain to track customer data, banks can get a better picture of who their borrowers are and what kinds of risks they may pose. This information can help banks make more informed decisions about lending and better manage their portfolios.

#4- Direct Payments:

The majority of funds are moved through financial institutions, such as banks and credit card processing centres involve a layer of complexities in every step. It not only benefits merchants but even helps individuals. 

As we know, online scams are a major concern at present, but blockchain-based payments are quick and avoid such scams. Apart they are less expensive than using banking services.

It is believed that the safest methods of payment are cash, wire transfers, and cashier’s checks; however, cash cannot be traced, wire transfers take a lot of time, and cashier’s checks can be forged. All of these issues are eliminated with blockchain-based payments.

Moreover, When customers make Payments with credit cards, they are charged processing fees, which makes profits for merchants. Blockchain payments eliminate fees by streamlining the transfer process.

The consumer sometimes pays with a bad check, resulting in a loss for the merchant and additional fees, along with a possible legal hassle. By using blockchain-based payments, merchants can feel confident that their transaction is secure within seconds or minutes.

The Future Steps:

At present, if we look at Blockchain and Retail banking, there seems to be a great improvement in both.

We are already seeing a positive impact and influence of blockchain in retail banking. With the potential to revolutionise how we do business, settle transactions, and trade across borders, it’s understandable why there are close links between these two industries. With blockchain doing so much to make the financial market more efficient, secure and transparent than ever before, more companies are looking to incorporate this technology into their business models.

However, It has been difficult for retail banks to access the technology due to scaling challenges, volatile crypto assets, and trust issues. Despite strict banking regulations and rules, more financial institutions are realizing blockchain technology’s potential. With its potential to streamline processes, cut costs and speed up transactions, it’s no wonder the banking sector is taking notice of what blockchain can do.

Anyways, Blockchain is still in its early stages, but it has the potential to revolutionize the way banks do business. It will be interesting to see how this technology develops in the coming years and how it will impact the retail banking industry.