With 38% of the value of the global blockchain market, the BFSI sector (banking, financial services, and insurance) continues to be the largest blockchain adopter. In the past, the fintech and cryptocurrency industries have amassed the majority of the value created by blockchain. Blockchain has, nevertheless, been very popular among the established financial institutions in recent years.
One of the main factors influencing blockchain’s rising appeal among traditional financial services providers is the quick, transparent, secure, and affordable transaction processing it offers.
Given the recent sharp decline in bitcoin value and the overall volatility of the crypto market, it may seem contradictory that the BFSI blockchain sector is growing. However, there are two crucial truths that the financing companies need to remember:
- Blockchain is not cryptocurrency.
- Along with automating crypto transactions, blockchain also gives you access to smart contracts, which can be applied to a variety of business processes. In turn, smart contract development services use cryptocurrency as a form of payment for blockchain transaction confirmation.
As a result, increased blockchain development services adoption for applications like automated digital identity verification, document sharing, and securities tokenization increases demand for cryptocurrencies and maintains the viability of the cryptocurrency market. Notably, numerous BFSI behemoths have already used blockchain for a variety of general and sector-specific use cases, including JP Morgan Chase, Goldman Sachs, and Banco Santander. Their methods and successes encouraged the industry to move away from using blockchain simply to improve the consumer experience (by accepting cryptocurrency payments, for example) and toward embracing the technology’s potential to improve internal business procedures. Let’s look at some of the most common blockchain applications in the BFSI sector to discover how the technology may boost staff productivity, make financial operations more efficient, ensure data security, and increase income.
Blockchain For International Interbank Payments
Due to the elimination of intermediaries like commercial banks and clearing houses, etc., blockchain in banking has the potential to significantly boost cross-border settlement speed while lowering its cost. The use of blockchain by the major banks that came together to adopt it for cross-border money settlement demonstrates how it can speed up transaction processing from days to seconds and lower processing costs from 5 to 2 percent. To conduct international transactions via the blockchain network, cryptocurrency acts as a fiat-crypto-fiat bridge in this instance, not as a standard payment currency.
Automating Business Processes With Blockchain
Financial services organizations can boost employee productivity and realize considerable operational cost reductions thanks to blockchain’s smart contract-based automation of financial transaction execution and recordkeeping. The outstanding benefits that blockchain-supported automation offers increase with the process’s complexity and document-intensiveness. For instance, smart contracts were shown to provide up to a 5x cost reduction and a 3x increase in the speed of claim processing when used for insurance claim settlement. In reality, practically any legally enforceable financial agreement’s provisions can be codified in smart contracts to operate as guidelines for the automatic implementation of specific business actions.
Blockchain For Managing Financial Documents
Another crucial area where blockchain has the potential to help financial organizations is financial document management. The technology can offer end-to-end traceability of any user actions involving the production, editing, viewing, copying, and routing to outside parties of financial documents. The storage and distribution of financial documents is made safer and more visible, which increases client confidence in financial institutions.
Using Blockchain To Detect Fraud
Employees pose the majority of the fraud threats that the BFSI business must deal with. Almost 52% of the fraud instances reported by US financial institutions in 2021–2022 included internal workers. By providing immutable, timestamped records of all business transactions and manipulations with financial data and documents, blockchain aids in the timely detection and prevention of illicit user activity. To eliminate human intervention and guarantee incorruptible fraud checks, the logic for automated fraud detection can be incorporated in smart contracts. Fraud detection can be carried out totally automatically and with excellent accuracy if your blockchain is combined with AI.
Using Blockchain To Verify Digital Identities
Since 2017, the volume of identity theft has surged by 5 times, causing $56 billion in losses by 2021. Financial institutions are compelled to look for a strong strategy to combat identity fraud and minimize financial and reputational threats.
Unique client data can be encoded as a decentralized identification or NFT, encrypted, and stored in a distributed ledger that cannot be altered with the aid of blockchain technology.
Using Blockchain To Comply With KYC/AML
Maintaining KYC/AML compliance is another use where blockchain can be highly valuable for providers of financial services. Automation of compliance checks enabled by smart contracts removes labor-intensive and error-prone human customer identity verification in accordance with KYC/AML regulations. The tamper-resistant feature of the blockchain protects the reliability of the data provided by a company’s clients, assisting in preventing unwanted access to the financial services.
Using Blockchain In Business Decision-Making
Making decisions about strategic commercial transactions is not always simple, given the intricate governance structure of the major financial institutions. Blockchain can facilitate group decision-making and foster trust among stakeholders in the organization. A very safe and incorruptible e-voting mechanism is what the blockchain technology delivers at its heart. Financial services firms can acquire legitimate voting and boost managers’ productivity and engagement with the use of tokenized governance rights and algorithm-based vote verification and counting.
Accessible Services Via Blockchain
Traditional BFSI market participants must address the underserved population and make their services affordable for those in the lowest income group as a result of the worldwide shift towards greater financial inclusion. DeFi excels in this area while traditional finance falls short. Due to blockchain’s high degree of accessibility, DeFi has become very popular. Major financial services are now easily accessible around-the-clock and without regard to one’s location or credit history thanks to technology. It is clear that traditional banks and financial service providers are not yet fully prepared to transition to P2P rails. To extend client coverage and raise the affordability of their services, a rising number of financial institutions are embracing blockchain-based solutions or collaborating with DeFi platforms. BFSI organizations are motivated by both social commitments and practical considerations. Entering the rapidly changing DeFi sector and expanding their customer base creates new revenue prospects and aids in risk diversification.
Are You Ready To Harness The Power Of Blockchain?
Blockchain could appear to traditional financial services companies as an overhyped, purely cryptocurrency-focused technology that doesn’t match their existing internal procedures. In actuality, blockchain can be successfully used in a variety of BFSI-specific use cases outside of the frameworks for cryptocurrency payments and investments. The solution demonstrated genuine economic value in a number of areas, including fraud prevention and document management. Decentralized financial solutions are likely to become more prevalent in the near future as traditional BFSI enterprises increasingly migrate to blockchain.
