The emergence of digital transactions has brought in enhanced speed, convenience, and cost benefits across various phases of human lives. But these digital innovations have also taught us that a user’s online identity and data are highly vulnerable to digital scams like phishing schemes, laundering, and identity theft.
Since data is the most influential asset of the banking sector, banking institutions worldwide have begun implementing measures to protect confidential user information and perform secure transactions with the help of Blockchain-based Smart Contracts. By leveraging Smart Contract development, the banking industry can overcome the above-mentioned challenges and gain more transparency, accountability, and superior security.
Introduction to Smart Contracts
Smart Contracts are automated contracts that function based on basic when/if statements that are encrypted within a Blockchain program. When encoded conditions are met and validated, a Blockchain-based network can perform the action immediately so parties can be certain of the result within seconds. Smart Contract key features like Multisig verification and Escrow encryption eliminate the involvement of intermediaries and reduce time on passing physical contracts.
Why Smart Contracts are Beneficial for Banking Industry
Banking is a particularly rich hotbed for the implementation of Smart Contracts. It has been estimated that in 2021, around 65% of the Smart Contract market value is sponsored by the banking & finance sector alone. Existing banking companies can deploy Smart Contracts to make their transactions and processes more time and cost-efficient. Besides, Smart Contracts offer greater scope for neobanks and financial enterprises to access potential consumers and scale their services in a way that would not be possible through traditional approaches. The utilization of self-executing Smart Contracts by banks helps reduce risks associated with third-parties involvement that a borrower or investor is reluctant to face.
Some benefits of Smart Contracts implementation by banks include:
- Reduced Execution Risk - The distributed functioning of Smart Contracts largely eliminates the risk of errors, manipulation, or non-performance, since transactions are accomplished automatically by the network instead of individual personnel or parties.
- Greater Precision - Smart Contracts increase the accuracy and speed of a wide variety of banking processes, and transactions, and reduce the possibilities of manual errors.
- Eliminate Intermediaries Involvement - Smart Contract development by banks helps eliminate relying on third-party intermediaries and inconsistencies that lead to expensive resolutions and reimbursement delays.
- Immutability - One of the most significant benefits that Smart Contracts offer the banking sector is integrated immutability. When conditions are encoded into a Smart Contract, it becomes irreversible. It cannot be forged, altered, or deleted. Therefore, the practices of fraudulent transactions or fake financial record creation can be reduced.
Real-Time Applications of Smart Contracts in the Banking Industry
Transparent Bookkeeping
Traditional bookkeeping is also the reason behind slow modernization in the banking industry. As banks provide various services like financing options, loan and mortgage services, and wealth management, it becomes essential to record each & every activity by creating a digital backup to fulfill compliance regulations. However, the risks like data manipulation and cyber-attacks on digital backups could impact customer confidence, causing banks, organizations, and clients to be obstructed, confused, or panicked.
To overcome these challenges, banking institutions can develop Smart Contract applications, which in turn could ensure a major positive impact on economic activity. With Smart Contract solutions, banking enterprises can obtain vital tools for accounting in the Blockchain network. Smart Contract solutions provide an environment of trust as the information and logic in the contract or accounts are immutable and offer security that can’t be hacked. This helps banks eliminate infiltration and reduces any possibilities of fund loss from a user or organization.
Loan Mortgaging
Loan mortgaging is another important use case of Smart Contracts in the banking industry that can be especially profitable. Many banking enterprises are overwhelmed with skyrocketing operational costs and massive time consumption that arises due to traditional loan mortgaging practices. Due to the large number of verification documents that accompany traditional loan mortgaging and transactions, the banking enterprises encounter major productivity losses.
Therefore, banking institutions can hire Blockchain Smart Contract developers to create Smart Contract applications that streamline mortgaging practices through the automation of certain processes. For instance, Smart Contract solutions allow customers to create and manage identities, lenders to organize KYC processes exclusively, credit agencies to validate the data, and make the management of loan transactions more efficient. The Smart Contract applications provide greater visibility and transparency into the whole loan mortgaging process for both users and institutional participants.
Insurance Claims Processing
Clearance of the insurance claims involves the legality valuation of the claim received while counter-testing the agreement terms for validation. This traditional evaluation process for insurance claims consumes a lot of time and energy.
However, using Blockchain-based Smart Contracts, banking institutions can modernize insurance claims processes by permitting a participant to file a claim and authenticating the claim through provided conditions in the Blockchain network. To authorize the insurance claims, the Blockchain network verifies the participant’s legality, executes the contract’s terms, and transfers the claim to the participant’s wallet address mentioned in the contract. This approach reduces the possibility of manipulation by third-party intermediaries and organizes claims processing more securely and conveniently.
Wrapping Up
Banks are about to witness greater benefits with the implementation of Smart Contracts for their systems. By developing Smart Contract applications, banking enterprises can enhance the security of the transactions, minimize operation costs, and automate the flow of digital assets and payments. With Smart Contract adoption, banks can easily build improved public relations with customers while providing better satisfaction to customers.
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