MARKNetwork Blockchain Use Case: Banking Ecosystem
How will blockchain integrate into existing Banking ecosystem?
The big banks of the US have been flourishing for a decade now. The net income of the insured banks of Federal Deposit Insurance Corporation touched the $47.9 billion revenue figures in the third quarter of 2018. Furthermore, the Problem Bank list count of FDIC got down to 104 from the soaring figure of 888 in 2011. With just 8 US banks filing bankruptcy in 2017 the financial state of the banking institutions is definitely showing improvement.
The health status of banking institutions is defined on the basis of growth, capital adequacy, profitability, and asset quality.
In the current scenario, operational expenses are the major resistance faced by the banks for multifold growth. According to the reports, the total operating expenses of HSBC aggregated to 34.88 billion U.S. dollars in 2017. The operating expenses are a subset of non-interest expense which proliferates the efficiency ratio indicating low efficiency. So even if the profits are higher, the banks are being drained out by the inherent inefficiencies of the system.
Blockchain shows potential to tackle the existing operational inefficiencies well. The adoption will reduce the efficiency ratio and at the same time will improve the speed and security aspects of banking services.
The volume of Interbank Transactions
According to a study conducted by the Central bank of Egypt (CBE), the overnight interbank volumes in Egypt alone exceed 7665 Million EGP. The interbank market is quite active. The transactions are spread across the spot and forward exchange market. The spot exchange market alone witnesses daily transactions worth $25 million to over one billion dollars.
The interbank trading is driven primarily by Deutsche Bank, Citibank, JP Morgan Chase and HSBC creating a centralized system that governs the transaction costs, speed and security.
The existing interbank transfer process is complex leading to slow transaction processing. To manage such a complex ecosystem the operational costs become higher which inflates the transaction costs. The recordkeeping process is inefficient leading to headaches. The blockchain is a centralized ledger that facilitates immutable record-keeping and high-speed/low-cost transactions across the globe. As the blockchain system will be transparent enough, it will also eliminate the middleman layer who inflate the transaction costs without actually adding any value to the chain.
The government of China recently announced its China Construction Bank Blockchain project that will stream the banking transactions using blockchain.
As per a report, the aggregate remittance sending cost was recorded to be $30 billion. This is close to the total budget of non-military foreign aid of the US. The average remittance fee remained no lower than 7.01% in 2018. By just reducing this remittance fees, the world can save $16 Billion every year.
While the cost of sending remittance from G8 countries remained stable, it witnessed a modest increase in G20 countries. On an average for sending $200 across the border, the sender needs to pay a $14 remittance fees. According to a study conducted by Ripple, the remittance system in place is more than 50-years old which is inefficient considering the $180 trillion worth of remittance being sent across borders annually.
The pace at which the number of remittance transactions is growing, the system is in need of a technology that reduces the transaction times from 1-3 days to a few minutes. Cross-border payment services is an ideal use case of blockchain technology for its speed, security, and transparency. Banks like ICICI are already embracing blockchain for building an efficient remittance system. Santander became the first UK bank that executed internal payments between Europe and South America using blockchain.
Elimination of banking frauds
The banking industry across the globe is exposed to diverse frauds due to the nature of transactions. The losses due to fraud were recorded to an aggregate figure of $2.2 billion in 2016 by the American Bankers Association (ABA) Deposit Account Fraud Survey Report. Debit card frauds, online frauds, check frauds and more sophisticated frauds happen every passing day.
To combat the frauds, the banking system is attempting to embrace blockchain technology. The adoption will help build a single source of truth that cannot be altered. Banks need a robust database that will protect the crucial consumer information like SSN numbers, credit card details and other personal information.
Blockchain will help eliminate the frauds from the existing system.
Today banks are facing a number of challenges in defending litigation claims. The risks associated are regulatory notices, unavailability of key witnesses, documentation management, reputational risk and privilege to protect the legal advice. The system is currently severely scattered.
The Smart contracts developed on blockchain can help banks mitigate the risks associated with litigation issues. The litigation parties will be bound by a smart contract and the money will be kept in an escrow. Only when the smart contract conditions are met, the payments will be processed instantly without any disagreements. Leading banks like JPMorgan Chase are running pilot blockchain projects for instant payment processing.
Documentation Sharing and Storage
The traditional banking system is under attack by specialist startups. These fintechs are using technology advantage to move quickly which is putting the traditional banks on the back burners for the end users. With the financial world going online, instant document access is becoming crucial for effective customer service. Apart from these documents need to be stored securely to prevent any kind of hacks like Equifax.
Currently, traditional banks are using paper-based documentation. By just eliminating the paperwork, the banks can save 25% of their operational expenses. The existing process is not only inefficient but exposes the customers to risks like hacks. The blockchain is an ideal solution for the banking system to record all the customer data and store the documents as tokens to ensure instant availability without losing control over the data.
Esteemed banks like Bank of America are utilizing blockchain to improve the document storage and transmission in a highly secure manner.
The current banking system is turning hostile towards its users by charging exorbitant fees and providing a sluggish infrastructure. The blockchain is an ideal technology that can address all the concerns of the banking industry, the end users and the stakeholders. At MARKNetwork we are building platforms for financial institutions to identify the challenges and assist them to fix the same with customized high-end blockchain solutions.
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