How does blockchain technology transform the banking/financial sector?

How does blockchain technology transform the banking/financial sector?

Nikhil Ravindran
24 Jul, 2019

Banking or the financial side keeps the economy of a country balanced and currently, it’s too complex! The existing system is having too much of loopholes as well as the system can be manipulated easily. Blockchain is perfect to replace the existing system and the limitations shall be thrown away in the air. Here, in this article, we’ll discuss how blockchain technology is going to transform the banking/financial industry.

You might be aware of the present banking system and certainly, you have faced difficulties in it. But the term "blockchain technology" might be new to you, so, let us understand the basics first.

What is blockchain technology?

Blockchain technology in simple words can be defined as a distributive ledger system that emphasis on validating the transactions within the network without any failure.

  • A decentralized platform, not a bunch of people co-exists to look after and control things.
  • The trustful network, it’s the network that validates and verifies a transaction instead of a regulated team.
  • No regulations to follow, there are no particular rules to follow and its regulation-free.
  • Transparency, complete network is open to the outside world and transactions are visible to anyone with a system and internet connection.
  • Secure, even though the system is transparent, the transactions cannot be altered by an intruder.
  • The lightning speed, the system is quick and reliable enough to make multiple transactions without any scalability issues.

The nodes or computers connected in the network validates each and every transaction and then, updates to confirm the transformation is done or not. So, how exactly this technology transforms the industry and alters it in the best way? Let’s see the existing system first, and then go for the transformation part.

Banking – The existing model explained!

The traditional banking or financial system currently follows an advanced version but with many limitations. Let’s see how traditional system works.

  • Everything is centralized, and there are many regulations to follow in a strict manner.
  • Government rules are applicable to the system.
  • The government approved currency is used as a medium for transactions or any money related processes.
  • The financial system works in accordance with the regular fiat currency flow.
  • Here, this fiat currency is considered as the reserve and they’re printed as per the demand without any supply-cap.

Basically, this is how the traditional way of banking looks like and it does have many flows too.

The drawbacks – A knot of a hitch in economy!

The traditional system is not a failure but it does have many loopholes and drawbacks. Here are some of the notable flaws in the current financial model.

  • Manipulations and cheating is a regular visitor in the existing system.
  • The figures of transactions can be manipulated easily and finding them are too difficult.
  • Such incidents happen often in the past time.
  • Counterfeit money is yet another issue, and tunneling often causes the economy to fall under legal instability.
  • A bank or a financial institution fails once every depositor withdraws the amount at a single time.
  • Hacking is an issue and needs physical money to balance the economy.

These all issues cannot be easily addressed using the present techniques and if one came up with such a solution it ain’t going to be reliable or scalable. Digital transactions came up and were promising. But still, the drawbacks keep on pushing the doorstep.

So, what’s the perfect solution?

Blockchain – transforming the banking solution?

How exactly is blockchain the solution for the above concerns or drawbacks? If the banking sector is going to be integrated via blockchain you may call it “a complete automated system” that doesn’t request transactions to verify each and every time.

With blockchain technology, when you make a transaction, the nodes connected within the network will verify it with pre-set conditions i.e., if you want to make a transaction to someone, the process looks like,

  • You make a transaction request initially, and then, is broadcasted to the network of nodes.
  • The nodes then check whether the sender does have enough amount of money or not using the previous transaction history.
  • It is then made sure the receiver end is also capable of receiving the same amount with that of the concerned request.
  • These aspects are highly technical in nature, and a blockchain technical guide can help you out easily.
  • Then, the nodes again validate to proceed further with some complex algorithm.
  • The conditions used to regulate a transaction can be written in the form of codes and added up as “smart contracts”.
  • If the necessary conditions are satisfied the system accepts the transaction request and completes the transaction once the nodes validate it.
  • The transaction is then completed and added as a new block.
  • A block contains many such transactions and these blocks added up as a chain linked to the pre-nodes to form blockchain.
Benefits that must be noted!

With such an efficient system, the numbers cannot be altered or an intruder from the outside world cannot hack into the system. Also, the system is transparent, if you make any changes in the existing system that change has to be approved by the nodes, and validate it again. If found any manipulation, that change will be canceled!

No need of a back-end team to check each and every transaction as the conditions are written in the form of codes. These codes will run each and every time a transaction is initiated. Only after meeting these conditions a transaction will proceed further.

No one to blame for, and it transforms the entire scenario in a simple way. There are such many benefits for such an initiative and banking seems to be happy to adopt such technology. Sooner or later, this might happen!

On the contrary side, it does have certain limitations but, that parts will also be cleared in the future. Currently, this is just a proposal under developing stage, and as you know blockchain is limitless, everything will settle up quickly.

Banking or financial sector is thus a perfect platform to plug in the new modules of the blockchain, and it’s effective!

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