Why Blockchain Could Make Banking Transactions Obsolete

Technology is revolutionising our lives every day. Sometimes, we forget how far we’ve come. Not just in effectiveness, but also in efficiency. It’s been said before; we’re entering a new age, the digital revolution.

And, just like the industrial revolution, the digital revolution will make our lives simpler and safer.

One way we have done this is through robotics and automation. Instead of running a business, entrepreneurs now have the option to fully automate operations.

This can essentially remove the business owner from the day to day minutiae of business life. This kind of start-up is more common with a younger crowd. But there’s no question, we have a growing need for automation in almost every sector.

Banks have made great strides in recent times. These days, automation and ‘going digital’ is a big reason why banks fail or succeed. Just look at how prevalent internet banking has become. The reason I point this out is because, sometimes, we forget what it was like to live 10–15 years ago.

Banking transactions are outdated

Banks are not perfect. In fact they’re far from perfect. There are still many areas in which they could be improved. One area of improvement, industry experts say, is the payment system.

Let’s use the example of a standard transaction. Imagine you and your friend want to exchange money. You owe him/her money from that time when they covered your movie ticket.

Instead of going to the ATM, you decide to use internet banking. In all likelihood, you’ll have seen what this looks like. You log in, and select to transfer money from one of your accounts to a different specified account (your friends account in this case).

Then, you can select the total amount you would like to pay, after which you can confirm the payment. Done! Now you’ve paid back your friend.

But, behind the internet wires of a transaction, something a little more complex is going on. If you and your friend are with the same bank then it’s just a matter of the bank updating a few numbers in the system. Yet if you’re with different banks, then something different altogether has to happen.

Instead of exchanging money between the two banks, there needs to be a corresponding bank present. Therefore, the money passes through a gateway before being received by your friend’s bank.

And this process will only work seamlessly if both banks have a direct relationship with each other. If they don’t, you either can’t make the payment, or you need to reroute it through multiple parties. This clearly drives up costs and complexity.

But this might not even be between you and your friend. You might have two different accounts with two different banks (yes this does happen). This is why revolutionary technology, like the blockchain, is gaining so much traction. It may have the answers that disgruntled customers are looking for.

What is the blockchain?

The blockchain is a public ledger of all Bitcoin transactions that have ever been executed. For example, if your company pays your salary through the transfer of Bitcoins, this will show up on the blockchain.

Each transaction is insured to be valid. The date, time, amount and who participated in the transaction are all recorded within the blockchain. Everyone can view this transaction ledger (blockchain), which is aimed at preventing corruption.

But simply collecting information doesn’t make a system secure.

That’s why each ‘block’ within the chain contains its own full copy of the blockchain. These blocks then have to automatically and continuously agree with each other about the current state of the ledger. This includes every transaction that has taken place. Therefore, if anyone attempts to corrupt a transaction, the blocks will not arrive at a consensus. Thus the whole network will refuse to incorporate the transaction into the blockchain.

Continuously verifying every transaction at once may sound like a recipe for an overloaded system. But that’s why Bitcoin miners, who also maintain the ledger, verify each transaction. Using not just one system, but a whole fleet of computing power, is what keeps the blockchain efficient.

This method of recording transactions is seen as the main technological innovation of Bitcoin. And when you want to receive payment or withdraw capital, your Bitcoins can be converted into the denominated currency of your choice.

The future of transactions

Knowing a little bit more about the blockchain and its advantages, what does this mean for the future of transactions?

I’m not a fortune teller. I cannot predict what technological enhancement may improve the payment system. But, right now, the blockchain is threatening to slash banking profits. Lenders who fail to quickly adopt the online record keeping innovations could be wiped out.

Jose Fernandez, global digital business executive at BBVA, said digital disruption of the blockchain is ‘extremely large’ for financial institutions. ‘Those institutions not up to that are likely to cease to exist,’ he said.

IMF deputy managing director David Lipton said ‘one significant source of risk may be the erosion of bank revenue in payments services.

That why industry experts are touting the blockchain as the answer to our payment system problem. The blockchain would allow customers and suppliers to directly transact over the internet.

It would reduce the need for intermediaries (banks). Why? Because it creates a safe and transparent record keeping system. And while the shared database technology was originally designed for Bitcoin, it’s now being adopted across the whole financial services sector.

Härje Ronngard,
Junior Analyst, Money Morning


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