Blockchain technology promises features that could bring new norms to almost every use case. When we look at the specific features of blockchain such as speed up transactions, increase security and transparency, and cut costs, it makes sense that the banking sector should be the first one to adopt this technology. But at the moment, this hasn’t happened yet.
Early enthusiasm for blockchain technology among capital markets, infrastructure firms, and corporate banks has not been widely mirrored in the retail sector. Commercial and wholesale banks, such as Indonesia’s Saim Commercial Banks, have launched hackathons, innovation labs, and collaborations with fintech.
Retail banks have introduced millions of people to e-banking. When it comes to blockchain, most of the retail sector have remained reluctant to adopt this technology. This cautious approach is still understandable as there is no large-scale financial industry’s initiative that can be viewed as an example. Furthermore, strict regulatory requirements for the banking sector are a high barrier to entry.
Despite these issues, a few retail banks have tapped DLT technology to increase resilience in their businesses. Let’s take a look at some blockchain use cases in retail banking.
Blockchain for Retail Banking
Currently, the retail banking sector is in a red ocean as it is losing trust with its customers. The 2008 financial crises have elevated this untrusted environment around banks. But banks can pretend to a brighter future and disrupt their usual way of functioning, thanks to the blockchain technology.
Retail banks can leverage blockchain’s three key strengths—data handling, disintermediation, and trust—to provide better offerings. A publication by McKinsey and Company, an advisor to the world’s leading businesses, identifies three key business applications of blockchain for retail banking. These applications are remittance, KYC/ID verification, and risk assessment.
The World Bank has estimated that the overall market for remittances cross-border payments is forecasted to grow to $747 billion in 2020 with developing countries maintaining their share. This massive international transaction volume continues to hinder the working efficiency of banks due to the time taken and the fees involved. Fees are commonly 2 to 3 percent of transaction value and can be as much as 10 percent.
Blockchain technology offers solutions to these issues, and that is why several tech companies including giants are now incorporating this technology into their platforms which will enable retail banks to process faster transactions with minimal fees. An estimate by McKinsey says that blockchain applied to cross-border payments could save about $4 billion a year.
Ripple is the most known company in blockchain space focused on cross-border payments. The company connects banks and payments providers through its global payments network RippleNet.
Customer ID verifications are essential for banks to have a check on anti-money laundering standards. The current ID verification systems are cumbersome as customers have to submit hard of their documents and personally visit banks. Furthermore, a customer has to repeat this lengthy ID verification process for every new service and bank, since the identity verification systems are not integrated.
Blockchain comes to aid this problem by providing immutable customers’ data recorded in the ledgers that can be accessed and verified by all the member banks on a network using a private key. This removes the lengthy KYC and ID verification process and thus, simplifying the opening of accounts and other processes for the customer without having to fill multiple forms and questionnaires.
Estimates explain that blockchain-based customer onboarding can save $1 billion in operating costs and can reduce annual losses from fraud by $7 billion to $9 billion.
Risk Assessment Based on Credit Score
Banks that process loan applications evaluate the risk by looking at factors such as credit score, which reflects the creditworthiness of customers. To get these pieces of information, banks have to rely on specialized credit agencies. This scenario isn’t ideal as these centralized databases are very vulnerable to data leaks and contamination of erroneous information.
DLT technologies offer the potential for storing large volumes of data that can be anonymized and protected by the ledger’s encryption protocols. All the banks on a network can view customer data that have been uploaded by any bank in the network.
Furthermore, blockchain technology can also offer multiple cybersecurity to retail banks as it can easily spot any data manipulation.
Blockchain promises a lot more than we discussed for the retail banking sector. But it has to fulfill several conditions before becoming a mainstream technology in banking.
The banks also need to develop an infrastructure required to operate a global network as only a widespread adoption of this technology can bring revolutionary reforms to this sector
This is a lengthy and costly process but the investment will come with significant returns.