How Smart Contracts are Altering the Banking Industry Operations?
The impact of blockchain technology across various industries is quite significant. Various business and government operations are seeking to leverage technology in their activities to provide more efficient processes. Blockchain’s most popular application is cryptocurrencies. Several of these digital currencies exist in the market each promising a new experience on how users interact with money; from faster transaction speeds, lower costs of processing and security of the digital currency. Volatile prices of cryptocurrencies have made financial institutions shy away from investing in them. However, at the core of blockchain are several other possible applications of the technology. One that is gaining the attention of the banking industry is smart contracts.
What is a Smart Contract?
A traditional contract involves paperwork outlining terms of the agreement upon which the contract is executed. The contract involves a third-party sometimes responsible for validating the fulfillment of these terms by both parties before the contract terms are executed. A smart contract, on the other hand, is a self-executing contract whose terms are written as a protocol within the blockchain network system. Upon the meeting of the coded terms, the contract autonomously validates and completes the contract according to the terms initially agreed. Smart contracts have terms decentralized within the network, and no third-party is required to validate the contract.
Opportunities for Smart Contracts in the Banking Industry
The banking industry has most of its activities based on contractual agreements. The terms of these contracts are enforceable by third-parties in case of breach of the terms. Providing each customer with individual attention is a slow and costly process for players in the banking industry. Having these terms on a network that executes contracts automatically opens many opportunities for the banking industry.
Some of the opportunities include:
- Insurance Claims Processing
Settling insurance claims often needs assessment of the legitimacy of a claim, and counter-checking the terms of the contract to validate the claim. This process often drags a long time, as insurers seek to strictly eliminate fraudulent claims. In some cases, the claims often lead to court cases, which may result in dissatisfaction by either party of the contract. Through blockchain technology, smart contracts offer automated insurance claim processing to the banking industry. Smart contracts allow the customer to file a claim, which is then validated automatically by the codes written into the blockchain network. The validation involves assessing claims to verify their legitimacy then automatically executing the terms of the contract, for instance, compensation of the casualty. Banks and insurers eliminate the risk of compensating fraudulent claims since the records of the claim are unbiased reviewed based on decentralization of the ledgers.
- Real-time Remittance
Banks process several transactions for their numerous customers. The processing of these transactions may slow down as a result of piling up. Moreover, banks engage in business activities with other businesses, including suppliers and major partners. Funds transfer to these businesses is often recurrent and delayed remittance may cause sour business relations. Implementing a remittance system based on smart contracts ease the processing of payments to suppliers, and funds transfer to customers and other stakeholders. Some banks have sought smart contract development services to speed up their remittance while maintaining accuracy and transparency since smart contract codes are immutable and distributed within the network. In addition, smart contracts speed up post-trade settlements as, upon completion of the trade, details of transactions are autonomously verified between the bank and customer and settlements processed.
- Transparent Auditing
Traditional contracts are often based on strict regulations, requiring banks to invest much in paperwork for record-keeping. This phenomenon is the reason behind sluggish digitization of the banking industry. Since banks provide various services like financing trade and providing loans, they are mandated to keep a record of each activity. These records are often susceptible to manipulation and may result in incorrect information. Smart contract development solutions for banks incorporate essential tools for bookkeeping, based on incorruptible codes in the blockchain network. The solutions are distributed within the network to enhance the transparency of records stored. In this way, banks eliminate possibilities of infiltration of their accounting records, and hence rid of loss of funds from the business. Smart contracts may also be deployed in banks for general meetings to enhance participation of stakeholders through proxy voting. The technology allows all stakeholders to transparently participate in decision making.
- Know Your Customer (KYC)
While funding trade activities or offering a loan to a customer, a bank needs to verify the identity of the customer. In addition, while offering syndicated loans, banks need to verify the identity of the customer. The process for obtaining data such as credit histories from other institutions may be difficult and probably costly to the banks. Banks adopting a smart contract system for their operations can easily share credit scores on individuals, and verify their identity based on records on the blockchain. In addition, the smart contracts will facilitate related compliance requirements, like tax returns, for customers by ensuring customers’ transaction statements are processed in real time.
The Value Addition
Banks are on course to gain significantly by adopting smart contracts for their systems. All the opportunities discussed are a channel for minimizing costs for running operations, especially administrative costs. Banks also limit chances for erroneous records and enhance transparency. By this, banks will create a better public relation with customers and consequently impressive customer satisfaction. Smart contracts also help minimize risks that may be faced during operations, for instance, compensation of fraudulent claims.
Implementing the Technology
Despite the attractive face value of this technology, implementing it to your system may be no easy task. Blockchain technology applications are hailed for security, but hacks are often reported on such systems, including smart contract manipulation. In order to achieve the maximum efficiency of a smart contract system for your business, you ought to seek expert services in smart contract development. Professionals will help you customize the smart contracts to perfectly fit your targeted operations, and ensure that employees are well equipped with skills to manage the systems with no risks of manipulation by adversaries.
Errna is a leading blockchain solutions provider, offering a comprehensive service including smart contract development and blockchain consulting services. We engage proactively with the client to ensure that the solution provided is working effectively for your system and is right for you. Contact us for more information on how you can leverage smart contract to your business.
