By Natalie Lord
We’ve explored the concept of blockchain in general and acknowledged that it has the potential to revolutionise the banking industry. This week we start to look at the specifics of how and where this could happen.
Blockchain technology offers an economical yet highly secure method of sending payments that eliminates the need for verification from third parties and beats processing times for traditional bank transfers. Approximately 90% of members of the European Payments Council believe blockchain technology will significantly impact and change the industry by 2025.
As things stand currently, trillions of dollars traverse the world via a dated system of slow payment processing times and added fees. If you want to send a transfer to someone in another continent, you might have to pay a fee for the transfer plus potentially additional charges. Your bank will get some of that money, so will the receiving bank and if you’re exchanging currencies, on top of all that you’ll be charged exchange rate fees. It’ll then take up to a week for the transaction to be completed.
Cross-border transactions including payments and letters of credit generated 40% of global payments transactional revenues during 2016. The current payment system is highly profitable for banks and as there isn’t any incentive for them to lower fees.
Compare this with what’s going on in the world of digital currencies. Cryptocurrencies like Bitcoin and Ethereum are built on public blockchains that anyone can use to send and receive money. Public blockchains reduce the need for trusted third parties to verify transactions and allow people globally access to fast, cheap and borderless payments.
While it can take a traditional bank a week to complete a cross-border payment, a Bitcoin transaction can take as little as 30 minutes or as long as 16 hours (in extreme cases) to settle. The differential is immense. Another advantage is that due to the nature of the technology being decentralised and complex, crypto transactions are challenging for governments and regulatory bodies to control. And whilst traditional banks don’t seem bothered about reviewing their processes or reducing their charges, developers in the crypto sphere are already working on scaling cheaper solutions for cryptocurrencies like Bitcoin and Ethereum to process more transactions at faster speeds.
As a point of reference, the number of confirmed Bitcoin transactions on a daily basis has grown approximately six-fold from just over 50,000 in the summer of 2014 to 290,000 as of December 2018.
While cryptocurrencies are still far from being in a position where they might replace Fiat currencies, there has been significant uptake in transaction volumes because of the benefits offered versus those offered by the current traditional banking system. The reality is that unless the banks do something to address these issues, they will continue to lose increasing ground to cryptocurrencies.