It's no secret that the retail banking system is in dire need of an upgrade.
There is a strong case to be made for a decentralised banking system based on blockchain.
With high barriers to entry (particularly in the financially vulnerable and unbanked section of the market), and the security concerns around centralised stores of money and data, it is clear that the existing banking system no longer serves the evolving needs of many retail customers.
Imagine a way of providing banking and financial services that does not depend upon a central authority, but instead utilises a decentralised marketplace.
Decentralising operations can safeguard people from the inherent problems of trust and the inefficiencies within the current retail banking industry. No recent innovations have yet been leveraged to provide a comprehensive, alternative banking solution to combat financial exclusion.
But a blockchain-based bank can do this. Financial exclusion is a worldwide issue. In fact, two billion adults in the world have no access to formal banking services.
A 2017 survey from the Financial Conduct Authority found, that among the financially vulnerable, one million UK adults are unbanked.
Over-reliance on banks also poses security and privacy concerns. For example, US credit information firm, Equifax, had a major data breach last year, which compromised data of 143m US consumers and 694,000 UK customers.
It’s clearly time to embrace blockchain technology and cryptocurrencies as part of the everyday.
In doing so, we will also find solutions to develop banking platforms that are secure, trusted, and accessible to everyone.
With the rapid advancement and global adoption of blockchain-based systems, here are four ways in which this technology will transform the retail banking industry.
1. Dealing with trust issues
Trust is the holy grail for retail banking. Blockchain technology is able to empower customers with a new way of establishing trust that is simply not possible in traditional retail banking.
A secure, immutable ledger, shared by all users participating in an established, distributed network, essentially eliminates the need for a central authority or bank.
Blockchain technology is also changing the way people receive and send money – from business loans to remittances. By using a “smart contract” – which is a self-executing agreement that covers any transaction made using blockchain – people can trust each other and transact directly without a middle man. This cuts costs and provides greater security and transparency.
There is still hope to reverse the trend of diminishing consumer trust, if retail banks can keep their money safe. Blockchain technology is the way forward.
2. Breaking down barriers
Peer-to-peer banking services have the ability to break down financial barriers for individuals and SMEs.
Blockchain can be used to “crowdsource” financial services, instead of relying on banks.
This opens up opportunities for people to send money with low transaction fees, lend money to generate a return, and take out small loans with affordable interest rates.
From cash withdrawals to currency exchange, blockchain technology enables financial services to be conducted in a peer-to-peer manner.
For example, blockchain-powered banking can allow users to lend and borrow money from one another via smart contracts. Payment terms and rates can be clearly defined, agreed, executed, and recorded on a completely transparent and accessible transcript of all transactions.
It is fundamentally clear that blockchain technology provides the ideal platform for innovations of peer-to-peer services to thrive, even beyond the retail banking sector to the wider financial services industry.
3. Removing inefficiencies
One of the most innovative (and divisive) aspects of blockchain technology is the use of cryptocurrencies.
While the huge fluctuations in value have dominated news headlines, the benefits of stable crypto transactions deserve more attention.
Crypto gives control of funds back to the customers and enables money to move freely around the world.
There are 180 currencies in the world, but only 17 of them are freely convertible. To solve this issue, blockchain-based banking enables the “tokenisation”of fiat currency, creating a digital currency which is tethered to physical cash.
Central banks can also use tokenised fiat to move to a crypto version of their local currency. This will accelerate local GDP growth as it reduces the cost and time of doing business.
Central banks can take baby steps towards cryptocurrency by starting with local payment, before shifting outside their own territory once they gain experience and confidence with both the technology and new monetary policy.
4. Driving financial inclusion
It is easy to take financial services for granted when you live in a developed economy, but 40 per cent of the global adult population have no bank account or mobile money services, according to a 2014 study from the World Bank. Even in stronger economies, SMEs have always struggled to obtain affordable funding.
Even most of the banked people are, in reality, underbanked due to the lack of connectivity and financial interaction, particularly when it comes to dealing with micro payment and micro-transactions. Traditional banks are unable to support this type of transaction due to the high overheads, but a blockchain-based bank can offer this to everyone.
The decade since the financial crisis has been fraught with systematic failures by the traditional retail banks.
An inclusive, fair, and globally connected retail banking system is now long overdue, and something that is now within our power to provide. A regulated blockchain bank will decentralise the services that banks provide, making them more accessible for everyone, meaning every customer can participate equally in a global marketplace.