Blockchain for Banks: Benefits and Implications

Pratima Harigunani
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Blockchain for banks

It was a momentous year--the Year 2008, not only due to that unprecedented financial quake that left the banking industry reeling under, but also for something that Satoshi Nakamoto was fiddling with. This new and raw concept of a crypto-currency called Bitcoin was born that year, and little did one anticipate that it would soon make almost every bank either embrace it or fear its repercussions. Even if Bitcoin as a digital currency remains nascent and parallel instead of going mainstream, the foundation that fuels it is already gathering a lot of attention, steam and bucks, especially in banks. Enter the world of a Blockchain.


Blockchain Primer

In simple words, Blockchain is nothing but an open, anonymous, permanent online ledger connected to a centralized network. It uses a new data structure to simplify the process and eliminate the need for third parties. Hence, it brings down that erstwhile dependence on people for verification of transactions. Being a distributed database, Blockchain captures inputs and places them into a block and then each block is connected or ‘chain’-ed to the next block through a cryptographic signature. It is a ledger that is easy to make, is open and accessible by anyone as long as permissions are set. Blockchain, as a continuously growing list of records i.e. blocks, that are linked and secured using cryptography, allow an application developer to create a distributed database that can be read by anyone, but can only be written to by consensus.

Pay-iT Conclave 2017


Connotations of Blockchain for Banking

These very simple words – permanent, online, open, anonymous- when pored closely and understood in a banking context, can stretch into completely-new and staggeringly-huge connotations.

It’s anonymous, so it can protect the identities of users and allow entities and people to carry out transactions at never-before levels of privacy, security and non-intrusion.


It’s permanent and digital, so that translates into putting in any number of transactions and records and chronicling them so well that the whole thread or equation accomplishes degrees of transparency and credibility that even the best of regulators can still merely dream of.

It's open, distributed and can also be programmed so transactions can be triggered automatically, contracts can become set in digital code and safe from tampering or deletion ever. Every agreement between parties can, easily and non-physically, get converted into a digital record - properly identified, validated, stored, and shared. This wipes away the role, effort and expense of intermediaries, brokers, as algorithms enable fast and free interactions devoid of previous friction and oversight.

So yes, this is possible - two entities may not know each other and still agree and assign verity to something without the presence or involvement of a third party. Blockchains can also function as  ‘permissioned’ ledgers so that everyone in the process is pre-selected, or as ‘unpermissioned’ ones that are open to all.


But What Does it Mean for Banks?

The specific and singular characteristics that blockchains have make them readily amenable for a variety of uses, and more so for banks and financial industry:

Benefit 1> They can be used as a single source of information and hence, for money transfers, record keeping and other back-end functions being the easy, digital, open, decentralised ledgers they are. For instance, most Banks need to maintain reserves with multiple counterparties at once and it would help immensely if they can settle transactions point-to-point as a straight-through process. This will mean a world that is easier, cheaper, and faster for banks and customers alike since the complex, superfluous and expensive list-keeping can finally be done away with. Now direct transactions are possible - immediate and irrevocable ones at that. So real-time settlements can finally happen. Also holding accounts with correspondent banks and managing lifting fees can now be a thing of the past


Benefit 2> The quality and speed of data becomes so high, consistent, precise and so real-time that new revenue streams can also be tapped while offering customers seamless and actually-nimble experiences. Plus, their special quality of being non-alterable, as immutable ledgers in real time, can help to track documentation and authenticate ownership of assets digitally. Business models like asset servicing, and smart contracts can flourish amazingly for many banks easily.

Benefit 3> They can reduce human intervention and make it possible for banks to execute and verify transactions with improved accuracy and efficiency.

Benefit 4> Since transactions are continuously kept as 'blocks' of records, they are secure, scalable and durable- also making the entire process far simpler and fluid than it ever was. They do not just cut paper and costs but also revitalize the ingredient of trust that is quintessential in financial information.


Benefit 5> Disintermediation takes off both the risk and expense of counterparties and enables more empowerment for users to control their information.

Benefit 6> Possibility of failure or intrusion is almost negligible with these ledgers and hence process integrity as well as transparency goes to a new realm here. These are almost immutable and hence find ready use in areas like exchanges, smart contracts and Payments.

Benefit 7> Financial entities can reap many more rewards whenthe clutter and complications of multiple ledgers is taken off and lower transaction costs can be tapped successfully. Endless days for clearing and final settlement can now be a thing of the past as transaction times become real-time and available all the time.


Benefit 8> Faster processing for swift banking experience and lower costs, with lesser complexity in business processes and operations, can be empowered with Blockchains while also creating avenues for new business models.

Pay-iT Conclave 2017Future Implications

For banks where keeping records of transactions made a major part of function and reconciling transactions across individual and private ledgers took so much time, paper and error – a Blockchain is almost a boon.

All this has started taking roots and form. In its report in 2015, World Economic Forum (WEF), picked Blockchain technology as one of its six mega-trends mentioning how 58 per cent of the respondents anticipate as much as 10 per cent of global gross domestic product (GDP) to be stored on a Blockchain by 2025.

We are already close to 2022, whereby Gartner estimates that ratified unbundled smart contracts will be in use by more than 25 per cent of global organizations. These would be mostly closely defined and with narrow impact, but smart contracts are slated to jump in popularity over time, and impact on global commerce. That is just the starting of what Blockchains are capable of.

There’s so much that will change beyond recognition, even if not soon enough, irreversibly enough.  Another watershed tipping point is on its way.

Other Interesting Reads:

Blockchain Use Cases in Banking and Finance

Anil Chopra | CIOL