There are challenges for banks in adopting blockchain, but the benefits of its use outweigh the initial hurdles:
There is a view that adoption of blockchain in the financial services realm remains low in spite of the technology’s proven benefits – maybe in introducing newer products and services or in making back-end processes more efficient. There are obviously challenges that financial services institutions face in integrating this technology in the new digital way of operations.
No doubt, banks and financial services institutions are in the know of how blockchain technology can improve processes and bring in efficiency. They also understand how it has the capability to create additional revenue and take care of customers’ increasing demands. However, they are rather wary of the constraints in adopting this technology on a large scale.
It is still an emerging technology, and the skills needed to develop and use it are in short supply. The skill gap is still quoted as a top challenge and the marketplace for blockchain skills is highly competitive.
RATHER AN ECOSYSTEM
Proponents of blockchain technology for financial services organizations say blockchain is essentially an ecosystem that requires broad adoption in order to work effectively. For example, in a supply chain environment, for track-and-trace capabilities to work efficiently not just the organization has to adopt a blockchain network but its suppliers too need to.
Today. the situation is that banks can either embrace digital transformation with cutting-edge technology or risk becoming obsolete. Blockchain is slowly becoming central to this transformative process, because it itself has transformed from its original status of being the backbone of cryptocurrencies to a technology that is decentralized, transparent and immutable.
Blockchain technology has many advantages that financial services institutions should look into and study and then adopt it:
- Blockchain applications in banking ensure secure and transparent transaction recording as they operate on a semi-decentralized system, permitting only trusted entities to host validating nodes.
- They almost eliminate the intermediaries and therefore inefficiency, facilitating swifter and more economical transactions.
- Blockchain applications can eliminate the cumbersome and protracted settlement procedures inherent in traditional banking.
- Blockchain applications can improve security through cryptographic protection for identity verification and data distribution without the need for intermediaries.
- Cross-border payments can become swifter through direct lender connectivity, eliminating intermediaries like SWIFT.
CONSTRAINTS FOR BANKS
Experts in implementation of distributed ledger technology, however, insist that financial services institutions face several constraints in implementation, chief among them being:
- Budget, which is an uncertain terrain as the technology is new and largely unexplored and therefore unsure of the extent of investments required.
- Compliance and regulation, which is still an unexplored territory and is yet to gain a definite shape, hence institutions hesitate to venture into this territory.
- A new way of operations as any blockchain implementation calls for a major change from the traditional processes. Successful integration into the existing way of operations is indeed a challenge. However, the benefits such implementations bring despite their complexities are of great value in spite of the costs and challenges and the patience that organizations require to have.
- Security and privacy because the technology is new and yet to be accepted as norm and hence concerns, especially since it involves payment methods. There are known security risks like private key attacks, selfish mining and double-spending.
- Organizations taking up blockchain implementation need to publicize about security practices and showcase the efficiency of such practices.
- Still in a doubtful domain because there is a definite lack of understanding about the technology among the prospective users. There is therefore an absolute need to understand make the colleagues understand about the technology.
- Absence of the required technological infrastructure and organizations planning the use of blockchain have to upgrade their internal systems and processes and restructure and enhance the tech infrastructure.
- Lastly, understanding the actual need to have the technology in place, as blockchain is no more just bitcoin or cryptocurrency but is a technology that has vast uses, which can help an organization to improve its revenues and introduce newer products and services.
Nevertheless, blockchain is transforming and is assuming the role of improving the financial infrastructure for both banks and customers. There are some obstacles still, but these are part of the process.
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