In this article you will learn blockchain in banking with case study and how can Blockchain revolutionize the banking sector.
With the development of technology and digitization, the banking industry will change dramatically, and blockchain, one of the most disruptive technologies, will have a significant impact on this. It is not surprising that the majority of banks have already begun looking for ways to implement blockchain for their purposes when you consider that the financial sector could save $12 billion yearly by using DLT.
Uses of Blockchain in Banking
The most often uses of blockchain in banking industry are:
- Reducing the cost of anti-money laundering measures
- Automating identification verification for Know Your Customer policy
- Prevention of fraud
Why is it essential? The problem of money laundering, which is estimated to cost between two and five percent of the world’s gross domestic product, must be addressed, and banks and other financial institutions must do their part.
According to research, significant institutions can spend up to $500 million annually on KYC procedures, yet even that amount is still insufficient. The average cost of these procedures is $48 million. Between 2008 and 2016, the fines for failing to follow the rules were $321 billion.
How can a Blockchain help?
Blockchain-based digital identity verification might save a bank €10 million annually and be quicker, more effective, and safer at the same time. The main cause of new client onboarding taking an average of 24 days is KYC regulations, which can result in a high desertion rate costing €150 million over the following five years.
The advantages are obvious. Blockchain enables lowering the possibility of errors or fraud, automating AML processes, and adhering to rules to prevent penalties. Regardless, $552 million has been spent on blockchain-related initiatives, with financial services accounting for more than 60% of the market value.
Blockchain in Banking: Case Study
Following case studies are the examples of blockchain implementation in banking.
The Linux Foundation
Partner Banks: National Bank of Cambodia and other 16 banks
Timeline: July 2019 – present
A fiat-backed digital money was initially developed under Project Bakong. The National Bank of Cambodia funded and Soramitsu co-created the world’s first retail blockchain-based payment system. Using a smartphone app, Bakong enables individual customers to make money transfers and purchases from merchants. With the help of this technology, banks may carry out interbank transfers at a much reduced cost while providing merchants with a quick, safe, and cashless payment option.
16 banks and more than 10,000 users took part in the successful experiment. A retail throughput of up to 2,000 transactions per second was attained using the suggested solution. This aided Bakong in becoming the first payment system resembling a CBDC in the entire world.
Partner Banks: 415 banks across 78 countries.
Timeline: 2017 – present
In the creation of blockchain technology, JPMorgan played a crucial role. In 2012, the bank began a trial program that led to the development of JPMorgan’s Interbank Information Network.
The Network was created to address the gaps in cross-border payment systems and find solutions for developing technology problems. The initial phase entailed using blockchain technology to test the internal cash flow. Following a fruitful test run, the bank abandoned the real money transfer concept and chose to focus on banks’ information sharing instead.
Over 400 banks from more than 70 countries are connected via the Interbank Information Network. This project features a publicly accessible ledger built on Quorum, JPMorgan’s proprietary Ethereum based blockchain. With the help of this solution, permissioned banks can communicate about compliance checks and other matters and prevent payments from being processed in the event of any inconsistencies.
Partner Banks: Commonwealth Bank of Australia, Wells Fargo
Timeline: October 2016
In October 2016, news of the first international trade transaction utilising blockchain technology between two independent banks was released. The transaction involving the financing of a cotton cargo from Texas, in the United States, to Qingdao, in China, was carried out by Commonwealth Bank of Australia and Wells Fargo. They made use of a method for distributed ledgers called Skuchain’s Brackets.
On a private ledger, an open account transaction was carried out between Brighann Cotton US (the seller) and Brighann Cotton Marketing Australia (the buyer). They were able to mirror a letter of credit in their specific use case because to distributed ledger technology.
The tracking function was essential to the procedure. In order to transmit the notification for the payment release and to establish the precise geographic location of the carried items, it was essential.
We.Trade, Batavia and IBM
Partner Banks: 16 banks across 15 countries
Timeline: 2017 – present
We.Trade is the first blockchain-based platform in Europe. Its objectives include streamlining cross-border trades and enhancing the security and traceability of domestic and international trading activities. Many banks, including Deutsche Bank, HSBC, KBC, Natixis, Nordea, Rabobank, Santander, Société Générale, and UniCredit, built the platform in 2017. We.Trade makes it possible for SMEs in Europe to execute trade transactions entirely digital.
It facilitates the beginning of trading agreements, unites all parties in one location, and offers simple access to financing solutions. A similar platform was Batavia. It was created with the assistance of additional partners including Bank of Montreal, CaixaBank, and Commerzbank. It began as a proof of concept project established by UBS and IBM in 2016. Using the Hyperledger Fabric platform, the two aforementioned solutions were combined in 2018.
IBM, Linux Foundation
Partner Banks: China Construction Bank
Timeline: 2017 – present
China Construction Bank has established a blockchain trading platform called BCTrade. The platform combines 60 financial institutions and provides factoring and forfaiting services with cross-chain and inter-bank transactions. The platform has been utilised by 3,000 customers to complete transactions worth more than CN440b (about $70 billion).
After reaching a cumulative transaction volume of 360 billion yuan ($50 billion), CCB announced BCTrade 2.0. Through BCTrade 2.0, trade and financial services between 54 CCB branches and 40 other companies will be digitalized. In China, the China Construction Bank is involved in a number of blockchain trade finance activities. In 2019, their collaboration with CITIC saw the forfaiting blockchain process 20 billion yuan ($2.8 billion) in transactions.
Partner Banks: Barclays
Barclays was one of the early adopters of blockchain technology in the banking industry. To improve security and transparency, the bank wished to incorporate blockchain technology into its processes. The first credit transaction supported by a blockchain was disclosed by Barclays and took place between Ornua and Seychelles Trade Company.
Barclays was able to cut the transaction time from up to ten days to just under four hours. The deal ensured the exchange of goods between Irish agricultural food cooperative Ornua and the Seychelles Trading Company, valued at close to $100,000 USD. The technology used to execute the entire process was created by Wave, an Israeli fintech start-up that participated in the Barclays Accelerator program in 2015.
Partner Banks: IFIC Bank, ING, Natixis, BNP Paribas, HSBC, State Street, CIH Bank, BNY Mellon
Timeline: April 2018 – present
Finastra and R3 collaborated to create the blockchain platform Fusion LenderComm for syndicated loans. On the Corda platform from R3, it was the first app to go live. Seven worldwide banks, including BNP Paribas, BNY Mellon, HSBC, ING, Natixis, and State Street, initially backed the approach.
The stress of managing agents and lenders is lessened by this approach, which also permits cost reduction. It enables syndicated loan portfolio optimization and enables on-demand access to the necessary data. Lenders get direct, real-time access to the platform’s credit agreements, balances, and transaction information.
Partner Banks: Bantotal and 60 Latin American Banks
Timeline: 2019 – present
Bantotal is a technology provider in Latin America. They enabled international payments on the bitcoin blockchain in conjunction with cryptocurrency exchange Bitex. To enable Bitcoin remittances, more than 60 Latin American banks joined this network. Benefits from blockchain including increased record-keeping, security, and transparency are the ideal responses to the region’s problems with inflation, unstable currencies, and mistrust of government economic policy.
A competitive solution to the alternatives is Bitex. In comparison to conventional international wire transfers, it can reduce the cost of cross-border payments by up to five times while also speeding up the process. Because of Bitex, the time it took to complete an international transaction across borders was reduced from even one month to one hour.
Partner Banks: Westpac, Santander, other banks
Timeline: 2016 – present
Fusion LenderComm is a platform for real-time, international payments on ripplenet. The reliability and end-to-end tracking are the major benefits for banks. The platform connects more than 200 financial institutions across 40 nations on six continents.
They now have access to new markets that would be too expensive to operate in without RippleNet.
Ripple has created further blockchain-based banking solutions.
They collaborated with the Australian bank Westpac in 2016 to develop a system for inexpensive international payments. They worked with Santander to create the One Pay FX service, which was introduced in six nations. International payments may be made instantly and cheaply with One Pay FX.
The moneyckchain platform for syndicated loans, created by Finastra and R3, delivers information on how much recipients get and when they will receive it, which makes it unique.
Alior’s internal solution
Partner Banks: Alior Bank
Timeline: 2019 – present
Banks are required to provide consumers with updates pertaining to their contracts via a Durable Medium in order to ensure that the information is accurate and up-to-date. The public blockchain network, Ethereum, can be used to verify the validity of papers on the platform that Alior Bank developed in 2019 that exposes the bank’s terms and conditions as well as other publicly important documents.
With the help of this solution, the bank was able to significantly reduce the number of letters it received—more than a million in total—informing recipients of regulatory changes, commission and charge tables, or interest rates on savings and deposit accounts. Customers of Alior who choose electronic communication will no longer receive letters on paper.
This platform is the first example of a bank in Poland employing a public ledger, or one that is open to all users equally. Using a public blockchain makes complete transparency possible. The bank’s assurance that the information posted on the platform is accurate may be verified thanks to the freely accessible source code, which also makes it possible to assess the correctness of its operation.
Partner Banks: PKO Bank
Timeline: 2018 – present
In order to offer customers with documents electronically, PKO Bank Polski worked with KIR, a leader in technical solutions for the banking industry. Along with IBM, Accenture, and other technology partners, the solution was created.
Hyperledger Fabric-based blockchain technology makes guarantee that the prerequisites for a Durable Medium are satisfied.
In compliance with the demands of the Office of Competition and Consumer Protection and GDPR, it enables the dissemination of generic documents (pricing lists, rules, T&Cs), as well as specific papers for private clients.
Blockchain technology and a certified electronic seal are both used by the service. It permits authenticity checking and gives both current and previous bank customers access to papers.
Microsoft, ConsenSys, JPMorgan, Temasek, others
Partner Banks: Singapore Exchange, Bank of America Merrill Lynch, UOB Bank, BCS Information Systems, Credit Suisse, DBS Bank, HSBC, Mitsubishi UFJ Financial Group, OCBC Bank, R3, J.P. Morgan
Timeline: 2016 – present
A blockchain software company called ConsenSys creates decentralised services and apps for the Ethereum ecosystem. They collaborated with Microsoft on a project to commercialise “smart contract function.” After certain criteria are met, their solution automatically completes transactions. The Monetary Authority of Singapore (MAS), financial institutions, and enterprise blockchain technology firms like ConsenSys collaborated to create Project Ubin.
Using blockchain technology for banking applications was the major objective. Real-time gross settlement (RTGS) systems, which offer complete transaction privacy, settlement finality, and failure prevention, were part of these programs. Using the use of distributed ledger technology, Project Ubin successfully demonstrated how a tokenized dollar may be used as a daily inter-bank settlement method, changing the institutional infrastructure in Singapore.
Partner Banks: Delega Banks
Timeline: 2020 – present
The management of signature rights is a well-known problem for banks and corporations worldwide. But until lately, there hasn’t been much success in developing original, comprehensive answers to this problem.
Delega wants to create a solution that benefits each party equally. On a blockchain-based signatory management solution for banks and businesses, DAC.digital and Delega are collaborating.
Large enterprises need signature management for financial documents. This procedure can be made easier and more automated while also being more secure thanks to a DLT-based layer. All banks will experience time and resource savings as a result of fully digitizing the signatory management process.
Why banks need blockchain technology?
Blockchain technology has a wide range of applications. With both a private and public blockchain available, there are potential that not only boost competition but also significantly improve security and transparency. These attributes are becoming more and more significant to bank customers.
Decentralization alters how we think about money and simultaneously makes it difficult for banks to satisfy customers’ rising expectations. Organizations will need to make changes and apply creative solutions if they want to take a strong market position.
This opens up a vast market for both emerging and established technology enterprises. Cooperation between the banking industry and startups and SMEs with knowledge of specific blockchain applications is becoming more and more common. This partnership is advantageous to both parties.
Banks profit from the expertise of businesses with industry experience, and startups can scale up the deployment of their products.
With the development of technology and digitization, the banking industry will change dramatically, and blockchain will have a significant impact on this. If you need a partner to help your business build blockchain-based solutions, get in touch with us.