The financial and banking system functioning through a decentralized computer network eliminates the necessity for middlemen like financial institutions or other banking establishments. Smart contracts—self-executing agreements designed to take action automatically when predetermined criteria are satisfied—are a feature of the system. The security, transparency, and immutability of transactions are guaranteed by the deployment of blockchain technology. Users have total control over their assets on an open system, and they do not require a central authority to oversee their transactions. Some reasons behind using this decentralized system include inclusivity and accessibility. The Decentralized financial or DeFi ecosystem is open to everyone having an internet connection along with a compatible wallet. This facilitates access to financial services for those who have been shut out of the conventional financial system. Financial services are accessible to users without the need for middlemen from any location in the globe.
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DeFi offers security and transparency as other important benefits. In conventional finance, user data and assets are managed and secured by financial organizations. Because of this concentration, hackers may more easily target these organizations and get access to private information. Users using this decentralized approach have total control over their assets, and transactions are carried out using safe and transparent smart contracts. There is no single point of failure, which lowers the danger of fraud and hacking. The decentralized financial services network eliminates the need for middlemen, which significantly lowers both the total cost of financial transactions along the middlemen's fees. In the end, this helps the customer by guaranteeing that they have more money available. By allocating the task of database maintenance among the network of users, a decentralized system can provide openness and accountability in the event of a big financial crisis, when confidence in the banking industry is threatened. By doing away with the need for a single, reliable party, this decentralized strategy makes the system impervious to fraud and manipulation.
An organization may become more cost-effective, decentralized, secure, transparent, and compliant with regulations by implementing blockchain technology. By using end-to-end encryption, blockchain technology reduces or eliminates theft and other illegal fraudulent activity by producing an irreversible record of transactions (Kumari & Devi, 2022). The evolution of blockchain technology has had a significant impact on how traditional financial services are provided.
Blockchain adoption, as opposed to storing all data in a single database, would provide better security and lessen the damage caused by database attacks, claim Park & Park (2017). Blockchain is a distributed system that increases the visibility and transparency of stored data, as defined by Wang et al. (2019). Furthermore, the immutable ledger of blockchain ensures that there is just one version of the truth at any given time, fostering faith in the data that is preserved. Transparency in blockchain technology is a powerful indicator of consumers' behavioural desire to adopt blockchain. According to Queiroz & Wamba (2019), transactions and any pertinent information are shared throughout the network, increasing transparency by enabling everyone to be aware of everything at the right time and building trust in the procedure.
The intention to embrace blockchain was linked to benefits including lower costs, improved security, efficiency, and transaction transparency as the main drivers of blockchain adoption by organizations (Clohessy & Acton's, 2019). According to Osmani et al (2021), the application of digital technologies like blockchain will give businesses development long-term competitive benefits in terms of the virtualization of the economy. The capacity to create new services in the future in addition to expanding operational tools is one of blockchain technology's competitive advantages (Vovchenko et al., 2017). Globally, the financial services sector is becoming more and more competitive. Because of this, banks are more inclined to employ innovative new technologies such as blockchain to their advantage and outperform their competitors. It entails allowing digital assets, smart contracts, automated banking ledgers, and transnational money transfer, according to Peters & Panayi (2016). While blockchain has provided companies with possibilities, it is crucial to acknowledge that a variety of challenges and problems in the domains of technology, legislation, and adoption may arise (Attaran and Gunasekaran, 2019). Recent events like cybersecurity breaches and digital currency theft have brought attention to the high degree of risks connected with the use of blockchain technology in banking and finance (Deshpande et al., 2017). The main factor increasing this danger is using the Internet for banking. Legal problems relating to money laundering, client privacy and transparency, and bank responsibility when their websites link to other websites.
Transparency, security, and cost-effectiveness are difficult to ensure in the digital world of today, where the financial services industry handles transactions valued at multi-billion dollars every day. Blockchain's capacity to make digital transactions safe, transparent, and economical has led to its increasing rise in prominence. Digital payments may be made without the use of middlemen like banks, clearinghouses, or financial services providers by utilizing blockchain technology.
Blockchain technology offers solutions to many of the problems that banks are now facing, which has the capacity to disrupt the financial sector in a number of ways. The banking sector might be affected by blockchain technology in the following ways:
Blockchain technology would eliminate the need for middlemen like clearinghouses, auditing firms, and reconciliation agents, increasing transparency and efficiency in banking.
Technology would make cross-border peer-to-peer payments possible.
Because blockchain technology is decentralized, hackers find it more difficult to take advantage of weaknesses. By implementing this technology inside financial networks, the likelihood of fraudulent transactions may be decreased.
Tokenization, or the creation of digital versions of assets that can be traded on blockchain networks, is made possible by blockchain technology.
When traditional banking services are unavailable, such as in emerging economies, blockchain technology can assist banks in reaching the unbanked population. Peer-to-peer transactions can be made possible via digital wallets and cryptocurrencies, negating the need for conventional banking services.
For financial institutions, KYC is an essential requirement, but the procedure may become more labour-intensive, time-consuming, and error-prone with time. Blockchain reduces task duplication and provides real-time updates to financial organizations, helping them simplify their KYC process.
By enabling data exchange, simple access to client history, and centralized consumer verification, blockchain is transforming the insurance sector. Each of these elements improves and eliminates fraud from the claim settlement process.
Blockchain technology will contribute to lower operating costs for financial organizations. This is because smart contracts will significantly lower the demand for labour and other associated operating expenses. Since big banks already have a huge clientele, reducing these overhead expenses can help them increase their profit margins even further. Blockchain has the potential to save financial institutions a ton of money. Some of the restrictions of traditional banking are likely to be lifted thanks to the transformation being brought about by the emergence of blockchain technology. Underprivileged, struggling economies and non-financially integrated nations can now become financially included thanks to this shift, which will grant universal access to financial services.
Conclusion
Traditional banks will migrate to the digital banking portal due to the need for technological change, teamwork, and cost savings for businesses. Financial services and banking are always searching for cutting edge technology to enhance customer experiences. The financial sector's demands are being driven by the emergence of new technologies and rising customer expectations, and digital transformation is essential to attracting more customers. Decentralized, transparent, anonymous, or pseudo-anonymous, and immutable is what defines blockchain technology. By employing encryption technology, blockchain generates digital currencies, a helpful new form of exchange that is more efficient and secure than real cash. Today's digital transaction ledgers are maintained via blockchain technology.
References
Attaran, M., & Gunasekaran, A. (2019). Applications of blockchain technology in business: challenges and opportunities.
Clohessy, T., & Acton, T. (2019). Investigating the influence of organizational factors on blockchain adoption: An innovation theory perspective. Industrial Management & Data Systems, 119(7), 1457-1491.
Deshpande, A., Stewart, K., Lepetit, L., & Gunashekar, S. (2017). Distributed Ledger Technologies/Blockchain: Challenges, opportunities and the prospects for standards. Overview report The British Standards Institution (BSI), 40, 40.
Kumari, A., & Devi, N. C. (2022). The impact of fintech and blockchain technologies on banking and financial services. Technology Innovation Management Review, 12(1/2).
Osmani, M., El-Haddadeh, R., Hindi, N., Janssen, M., & Weerakkody, V. (2021). Blockchain for next generation services in banking and finance: cost, benefit, risk and opportunity analysis. Journal of Enterprise Information Management, 34(3), 884-899.
Park, J. H., & Park, J. H. (2017). Blockchain security in cloud computing: Use cases, challenges, and solutions. Symmetry, 9(8), 164.
Peters, G. W., & Panayi, E. (2016). Understanding modern banking ledgers through blockchain technologies: Future of transaction processing and smart contracts on the internet of money (pp. 239-278). Springer International Publishing.
Queiroz, M. M., & Wamba, S. F. (2019). Blockchain adoption challenges in supply chain: An empirical investigation of the main drivers in India and the USA. International Journal of Information Management, 46, 70-82.
Vovchenko, N. G., Andreeva, A. V., Orobinskiy, A. S., & Filippov, Y. M. (2017). Competitive advantages of financial transactions on the basis of blockchain technology in digital economy. European Research Studies, 20(3B), 193.
Wang, S., Ouyang, L., Yuan, Y., Ni, X., Han, X., & Wang, F. Y. (2019). Blockchain-enabled smart contracts: architecture, applications, and future trends. IEEE Transactions on Systems, Man, and Cybernetics: Systems, 49(11), 2266-2277.
