What is core banking?
Core banking can be defined as a back-end system that processes banking transactions across the various branches of a bank. The system essentially includes deposit, loan and credit processing. Among the integral core banking services are floating new accounts, servicing loans, calculating interests, processing deposits and withdrawals, and customer relationship management activities.
Core banking systems are aimed at empowering existing and probable customers to have a greater freedom of their account transactions. With technological evolutions, transactions are now safer, faster and less cumbersome. The fact that these transactions can be executed remotely, from any part of the world has made core banking systems a significant aspect of banking these days.
Core banking always brings down operational costs considerably, ensuring lesser manpower requirement for execution. It also enables greater accountability of the customers. Software application based platforms make core banking systems user-friendly and more efficient. The benefits of core banking systems are multi-faceted – keeping pace with fast-evolving market, simplifying banking processes and making it more convenient for the customers, and expanding the outreach of the banks to remote places.
HCL offers unique core banking solutions to its clients, bringing about a comprehensive evolution in legacy banking functions.
Thanks to its advanced web services and mobile apps, online banking had come into the spotlight way before the pandemic. But, more than ever, business owners now rely on this technology to meet their banking needs from the safety and convenience of their homes. If you’re thinking of using an online bank for your business, it’s important to weigh its pros and cons and learn how these innovative banking features are changing the way business owners interact with their money.
In today’s fast-moving world, businesses use online banking to replace in-person visits to a branch. It offers a variety of web-based features to make financial transactions online including:
- Bill payments
- Tax payments
- Cash transfers to vendors and suppliers
- Deposits to retirement accounts (either your personal account or your company’s pension plan)
- Open new accounts
- Loan applications for business loans, credit cards or lines of credit
- The ability to deposit cheques.
Online banking can be accessed via a computer or your bank’s mobile app. All you need is a bank account, a secure password and a good internet connection, and you can access your account from anywhere, which is especially important as we are urged to stay home.
Advantages of online banking
In addition to being able to bank at any time, from anywhere, there are other advantages to banking online. You may also be able to:
Pay bills online
This might be one of the top advantages of online banking because you don’t have to take time out of your day to go to the bank. You can simply log into your account and pay your bill online right away. For increased efficiency, you may also set up automated bill payments, which helps you manage your cash flow when you have monthly payments to and from vendors.
You may need to do a rapid money transfer to a client or vendor, or you may need to transfer money from one account to another. Instead of sending a registered cheque and waiting for it to clear, you may securely transfer the money online.
Deposit cheques online
Rather than driving to a bank branch and waiting in line, you may be able to deposit cheques online in minutes. And because most financial institutions have an app that replicates its services from your phone, you have the ability to always bank on the go. Plus, some banks offer 24/7 customer service, so you can speak explain the services banks provide a customer service representative at any time.
Lower your overhead fees
If your business banks online, your banking fees may be lower, as online banks may not have to pay for the cost and upkeep of branches, and those savings may be transferred to you. Plus, they may have more no-fee options that add to your savings.
Disadvantages of online banking
While online banking is always improving, there are some disadvantages for business owners reliant on immediate and constant access to their banking services.
Online banking relies on a strong internet connection. If your internet is disrupted by a power outage, server issues at your bank, or if you’re in a remote location, your ability to access your accounts might be affected. Scheduled site maintenance also means you can’t access your accounts and may have to seek an alternative.
Lack of a personal relationship
A personal relationship with your bank may be able to offer an advantage over online banking. If you need a business loan, a new line of credit, a waived fee or to make changes to your current banking needs, having that relationship can help.
In-person banking relationships can also help you craft a business account tailored to your specific needs. They can also make notes in your files about cheques, cash deposits and international payments so you can avoid extended holds on your money.
An ideal relationship would be a blend of online banking for your day-to-day transactions and a personal relationship with your banker to assist with bigger needs. That way, you have multiple options to support your business.
Privacy and security concerns
Financial institutions have very good security, but no system is foolproof. Valuable information is always prone to hacks, but you might be able to prevent this if you:
- Always use the mobile app and the website directly. You should see a small lock to the left of the search bar, which indicates the site is secure.
- Make sure you have a strong password based on a combination of numbers, symbols and letters. It’s also important to change your password regularly.
- Do not click on any links in text messages if you haven’t agreed to that method of communication.
- Use two-step authentication, which adds an extra layer of security.
Online banking features a lot of services, but some of them still require business owners to go into banks to “wet sign” documents. This includes loan and credit applications, a large cash withdrawal or large deposits. But as online banking technology continues to evolve, you may eventually be able to electronically sign for these in the future.
These days, banks know business owners want the ease and convenience of online banking, so they’re constantly upgrading and improving their digital assets. You may take advantage of this rapidly changing banking technology and tailor an online banking system that is unique to your business needs. If you think online banking could benefit your business, talk to your bank about the time- and cost-saving advantages of going digital.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.
13 Customer Service Skills for Banks
Good customer service professionals are patient, caring, attentive and positive. In the banking industry, providing excellent customer service is important because it can help you retain customers and provide more value. If you work as a bank teller, manager or customer service representative, then you may benefit from learning which skills can improve your customer service. In this article, we explore what customer service is, share why it is important in the banking industry and list 13 skills that can help you provide excellent customer service.
Related:17 Career Paths in Banking and How To Choose the Best One for You
What is customer service and why is it important?
Customer service is the support you offer your customers while they use your products or services. If you work at a bank, customer service may involve advocating for your customers so they can achieve their financial goals, helping them select the right products and services and assisting them with financial decisions. Bank tellers and customer service representatives also help customers make transactions, deposit and withdraw funds and process loans. Providing quality customer service is important in the banking industry because it makes customers feel valued, helps you meet their needs more effectively and improves your overall customer retention.
Skills you need to provide customer service for banks
Here are some skills that can help you provide excellent customer service in the banking industry:
Whether you are a bank teller, manager or customer service representative, having an in-depth understanding of the different banking products and services your business provides is a key factor in providing high-quality customer service. Familiarize yourself with all of your bank's offerings so you can answer customer questions accurately and help them make the best financial decisions based on their needs. Here are some products and services your bank may offer that you can familiarize yourself with to improve your industry knowledge:
- Checking and explain the services banks provide options
- College savings plans
- Individual retirement accounts
- Business, personal, home and auto loans
- Safe deposit boxes
- Certificates of deposit
- Tax and estate planning
- Lines of credit
Related:Top Bank Teller Skills: Definition and Examples
Having exceptional people skills can help you build trust with your patrons and provide excellent customer service. While finances can be a sensitive topic for many people, using your interpersonal skills to connect with your customers can help you build trust with them. Your customers may have personal questions about overdraft fees, loan applications or mortgage processing. Offer clear and concise explanations, provide them with options and work with them to find the solution that best fits their needs.
Read more:Interpersonal Skills: Definitions and Examples
Technology in the banking industry is always changing, so it's important to stay up to date on the latest systems, features and digital programs your institution uses to ensure you can provide efficient customer service. As an employee in the banking industry, you may also need to teach customers how to use new tools like online banking, remote deposits, mobile applications and ATMs. Offer to demonstrate how different pieces of technology work to ensure your customers are comfortable with these updates and understand how they may benefit from using them. This can help your customers adapt to change.
As an employee in the banking industry, being able to communicate complex financial information in layman's terms is an important skill because it can help customers understand their options. Take the time to explain banking terminology to your patrons and pause throughout your conversation to ask if they have any questions. You can also familiarize yourself with challenging banking topics to ensure you understand the material and can answer your customers' questions thoroughly. Some key topics your customers may have questions about that you can study include:
- Calculating interest rates
- Comparing loan products
- Recovering from identity theft
- Understanding overdraft protection
- Deciphering credit scores
- Using online and remote banking options
Read more:Communication Skills for Career Success
When a customer comes to you with a financial challenge, showing them you are empathetic and understanding of their situation can help you diffuse tension and communicate more effectively. Listen to your customers' concerns and let them know you are happy to work with them to find a solution. Then present the options they have available and answer any questions they may have. This can help you create a more positive experience for your customers.
Attention to detail
Paying close attention to detail can help you ensure you provide your customers with accurate information and make the correct updates to their accounts. It can also help you identify potential issues before they happen so you can protect your customers' financial assets. Finally, being attentive while listening to your customers can help you ask the right questions to get the information you need to complete their explain the services banks provide in a timely manner.
Read more:Attention to Detail: Definition and Examples
As a customer service representative, patience is an important skill that can help you provide a positive experience. Your customers may have several questions about the products or services your institution offers and they may ask you to repeat instructions multiple times to ensure they understand their financial options. Remember that it is important for your customers to feel like they are making safe and financially sound decisions. Remain personable and answer their questions clearly to keep the conversation on track. This can help you ensure your customers feel valued and like they have all the information they need.
Conflict resolution skills
Good customer service professionals work with their patrons to overcome challenges and develop effective solutions. If a customer approaches you with an issue, take the time to fully understand their situation and what their desired outcome is. This can help you identify what steps you need to take to help them solve their problem. Showing your customers you are happy to work together to develop a solution can make them feel better about their situation.
Read more:Conflict Resolution Skills: Definition and Examples
Being a dependable employee is important because it allows you to build trust with your team members and customers. When you agree to help a customer or complete a task for them, make sure you follow through. For example, if a customer asks you to process a mortgage for them, ensure you submit their request in a timely manner. This can make customers feel like you are reliable, improve their overall experience and help them reach their financial goals.
Making sure your patrons feel welcomed and valued can help you ensure they remain customers for life. Greet your patrons with a smile and a positive attitude to make their banking experience more enjoyable. You may also try to get to know your regular customers by asking them about their interests, hobbies and weekend plans while you process their requests. This help you build rapport with your customers, develop stronger relationships and provide patrons with more personalized service.
Responding to your customers' inquiries and service requests in a prompt and efficient manner can help you show you value their time. If a customer needs help overcoming a challenge, responding to them quickly can help you decrease their level of stress, diffuse any tension and make a positive impression. You may also reach out to customers proactively if you notice a significant change to their account or have important information to share. This can improve your communication with customers and help you build trust with them.
Actively listening to your customers can make them feel heard and understood. Make eye contact with patrons and allow them to fully explain what their needs are before offering suggestions. You can also repeat an important part of their question back to them when you provide an answer to show that you are listening to them. This can help you establish common ground with your customers and ensure you are aligned with them moving forward.
Read more:How To Improve Your Listening Skills
Good customer service representatives help customers evaluate their needs and offer individualized recommendations. By providing your customers with information about the different services and products your bank offers, you can help them make important financial decisions. Familiarize yourself with the benefits and features of different offerings to improve your decision-making skills and provide guidance to your customers.
What Is Business Banking?
Business banking is a company's financial dealings with an institution that provides business loans, credit, savings accounts, and checking accounts, specifically designed for companies rather than for individuals.
Business banking occurs when a bank, or division of a bank, only deals with businesses. A bank that deals mainly with individuals is generally called a retail bank, while a bank that deals with capital markets is known as an investment bank. There are some banks that deal with both types of clients.
- Business banking is a range of services explain the services banks provide by a bank to a business or corporation.
- Services offered under business banking include loans, credit, savings accounts, and checking accounts, all of which are tailored specifically to the business.
- Banks are able to offer business, retail, and investment banking services under one roof.
- The largest bank in the U.S. in terms of assets is JPMorgan Chase.
Understanding Business Banking
Business banking is also called commercial or corporate banking. Banks provide financial and advisory services to small and medium businesses as well as larger corporations. These services are tailored to the specific needs of each business. These services include deposit accounts and non-interest-bearing products, real estate loans, commercial loans, and credit card services. Banks may also offer asset management and securities underwriting to their corporate and business clients.
In the past, investment banks and retail/commercial banks were required to be separate entities under the Glass-Steagall Act—also known as the Banking Act of 1933. That changed in 1999 after parts of the act were repealed. Under the new rules, banks could offer business, retail, and investment banking services under one roof.
Demand for business banking is increasing in the United States, as the business sector continues to grow. Commercial banks have been declining since 2002, when there were 7,870 commercial banks, compared to 4,708 in 2018. This has primarily been due to mergers and acquisitions. The companies with the highest market share of corporate or business banking are Wells Fargo, JPMorgan Chase, and Bank of America, with JPMorgan Chase being the largest commercial bank in the U.S., with 2019 revenues of $142 billion. It's important to note these banks also operate as investment banks and retail banks, allowing them to be diversified in both clients and products offered.
Services Offered by Business Banks
Business banks provide a wide range of services to companies of all sizes. Aside from business checking and savings accounts, business banks offer financing options, cash management solutions, payroll services, and fraud protection.
Bank financing is a primary source of capital for business expansion, acquisitions, and equipment purchases, or simply to meet growing operating expenses. Depending on a company's needs, business banks can offer fixed-term loans, short- and long-term loans, lines of credit, and asset-based loans. Banks provide equipment financing, either through fixed-loans or equipment leasing. Some banks cater specifically to certain industries such as agriculture, construction, and commercial real estate.
Also referred to as treasury management, cash management services help businesses achieve greater efficiency in managing their receivables, payables, cash on hand, or liquidity. Business banks set up specific processes for businesses that help streamline their cash management, resulting in lower costs and more cash on hand.
Banks provide businesses with access to Automated Clearing House (ACH) and electronic payment processing systems to accelerate money transfers. They also allow for the automatic movement of money from idle checking accounts into interest-bearing savings accounts, so the cash surplus is put to work while the business checking account has just enough for the day’s payments. Businesses have access to a customized online platform that links their cash management processes to their checking and savings accounts for a real-time view of their cash in action.
Many banks are able to provide payroll services for small businesses. If your business is new or too small to incur the expense of a bookmaker, many banks provide software or specific services specifically geared towards payroll management. Aside from banks, there are many independent payroll service providers. It's worth comparing the costs and benefits of the two.
Fraud insurance is offered by banks to protect businesses from any sort of fraud that has occurred in their checking accounts. These can include problematic checks from vendors or employee fraud that can result from too many people having access to accounts, making transactions difficult to trace.
The Structure and Functions of the Federal Reserve System
The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
Test your knowledge about the Federal Reserve through these quizzes.
The Federal Reserve has three primary functions: Monetary Policy, Banking Supervision, Financial Services
Board of Governors
The Board of Governors, located in Washington, D.C., provides the leadership for the System.
The Board of Governors, also known as the Federal Reserve Board, is the national component of the Federal Reserve System. The board consists of the seven governors, appointed by the president and confirmed by the Senate. Governors serve 14-year, staggered terms to ensure stability and continuity over time. The chairman and vice-chairman are appointed to four-year terms and may be reappointed subject to term limitations.
Among the responsibilities of the Board of Governors are to guide monetary policy action, to analyze domestic and international economic and financial conditions, and to lead committees that study current issues, such as consumer banking laws and electronic commerce.
The Board also exercises broad supervisory control over the financial services industry, administers certain consumer protection regulations, and oversees the nation's payments system. The Board oversees the activities of Reserve Banks, approving the appointments of their presidents and some members of their boards of directors. The Board sets reserve requirements for depository institutions and approves changes in discount rates recommended by Reserve Banks.
The Board's most important responsibility is participating in the Federal Open Market Committee (FOMC), which conducts our nation's monetary policy; the seven governors comprise the voting majority of the FOMC with the other five votes coming from Reserve Bank presidents.
Board members are called to testify before Congress, and they maintain regular contact with other government organizations as well. The chairman reports twice a year to Congress on the Fed's monetary policy objectives, testifies on numerous other issues, and meets periodically with the Secretary of the Treasury.
The Board funds its operations by assessing the Federal Reserve Banks rather than through Congressional appropriation. Its financial accounts are audited annually by a public accounting firm, and these accounts are also subject to audit by the General Accounting Office.
Federal Reserve Banks
A network of 12 Federal Reserve Banks and 24 branches make up the Federal Reserve System under the general oversight of the Board of Governors. Reserve Banks are the operating arms of the central bank.
Each of the 12 Reserve Banks serves its region of the country, and all but three have other offices within their Districts to help provide services to depository institutions and the public. The Banks are named after the locations of their headquarters - Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.
The Reserve Banks serve banks, the U.S. Treasury, and, indirectly, the public. A Reserve Bank is tyra banks life size barbie called a "banker's bank," storing currency and coin, and processing checks and electronic payments. Reserve Banks also supervise commercial banks in explain the services banks provide regions. As the bank for the U.S. government, Reserve Banks handle the Treasury's payments, sell government securities and assist with the Treasury's cash management and investment activities. Reserve Banks conduct research on regional, national and international economic issues. Research plays a critical role in bringing broad economic perspectives to the national policymaking arena and supports Reserve Bank presidents who all attend meetings of the Federal Open Market Committee (FOMC).
Each Reserve Bank's board of directors oversees the management and activities of the District bank. Reflecting the diverse interests of each District, these directors contribute local business experience, community involvement and leadership. The board imparts a private-sector perspective to the Reserve Bank. Each board appoints the president and first vice president of the Reserve Bank, subject to the approval of the Board of Governors.
All member banks hold stock in Reserve Banks and receive dividends. Unlike stockholders in a public company, banks cannot sell or trade their Fed stock. Reserve Banks interact directly with banks in their Districts through examinations and financial services and bring important regional perspectives that help the entire Federal Reserve System do its job more effectively.
Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state-chartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 percent of their capital as stock in their Reserve Banks.
Other Depository Institutions
In addition to the approximately 3,000 member banks, about 17,000 other depository institutions provide the American people checkable deposits and other banking services. These depository institutions include nonmember commercial banks, savings banks, savings and loan associations, and credit unions. Although not formally part of the Federal Reserve System, these institutions are subject to System regulations, including reserve requirements, and have access to System payments services.
Federal Open Market Committee
The Federal Open Market Committee, or FOMC, is the Fed's monetary policymaking body. It is responsible for formulation of a policy designed to promote stable prices and economic growth. Simply put, the FOMC manages the nation's money supply.
The voting members of the FOMC are the Board of Governors, the president of the Federal Reserve Bank of New York and presidents of four other Reserve Banks, who serve on a rotating basis. All Reserve Bank presidents participate in FOMC policy discussions. The chairman of the Board of Governors chairs the FOMC.
The FOMC typically meets eight times a year in Washington, D.C. At each meeting, the committee discusses the outlook for the U.S. economy and monetary policy options.
The FOMC is an example of the interdependence built into the Fed's structure. It combines the expertise of the Board of Governors and the 12 Reserve Banks. Regional input from Reserve Bank directors and advisory groups brings the private sector perspective to the FOMC and provides grassroots input for monetary policy decisions.
Three statutory advisory councils - the Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council - advise the Board on matters of current interest. These councils, whose members are drawn from each of the 12 Federal Reserve Districts, meet two to four times a year. The individual Reserve Banks have advisory committees as well, including thrift institutions advisory committees, small business and agricultural advisory committees. Moreover, officials from all Reserve Banks meet periodically in various committees.
How Blockchain Could Disrupt Banking
Blockchain is transforming everything from payments transactions to how money is raised in the private market. Will the traditional banking industry embrace this technology or be replaced by it?
Blockchain technology has received a lot of attention over the last decade, propelling beyond the praise of niche Bitcoin fanatics and into the mainstream conversation of banking experts and investors.
In September 2017, JPMorgan Chase CEO Jamie Dimon derided Bitcoin: “It’s worse than tulip bulbs,” he said, referencing the 17th-century Dutch tulip market bubble. “It won’t end well. Someone is going to get killed.” Lloyd Blankfein, senior chairman of Goldman Sachs, echoed that thought, saying, “Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”
Despite the skepticism, the question of whether blockchain and decentralized ledger technology (DLT) will replace or revolutionize elements of the banking system remains.
And this very loud and public backlash against cryptocurrencies from banks begs another question: What do banks have to be afraid of?
The short answer is “a lot.”
Blockchain and banking: The role of DLT in financial services
Blockchain technology provides a way for untrusted parties to come to agreement on the state of a database, without using a middleman. By providing a ledger that nobody administers, a blockchain could provide specific financial services — like payments or securitization — without the need for a bank.
Further, blockchain allows for the use of tools like “smart contracts,” self-executing contracts based on the blockchain, which could potentially automate manual processes from compliance and claims processing to distributing the contents of a will.
For use cases that don’t need a high degree of decentralization — but could benefit from better coordination — blockchain’s cousin, “distributed ledger technology (DLT),” could help corporates establish better governance and standards around data sharing and collaboration.
Blockchain technology and DLT have a massive opportunity to disrupt the $5T+ banking industry by disintermediating the key services that banks provide, including:
- Payments: By establishing a decentralized ledger for payments (e.g. Bitcoin), blockchain technology could facilitate faster payments at lower fees than banks.
- Clearance and Settlement Systems: Distributed ledgers can reduce operational costs and bring us closer to real-time transactions between financial institutions.
- Fundraising: Initial Coin Offerings (ICOs) are experimenting with a new model of financing that unbundles access to capital from traditional capital-raising services and firms.
- Securities:By tokenizing traditional securities such as stocks, bonds, and alternative assets — and placing them on public blockchains — blockchain technology could create more efficient, interoperable capital markets.
- Loans and Credit:By removing the need for gatekeepers in the loan and credit industry, blockchain technology can make it more secure to borrow money and provide lower interest rates.
- Trade Finance:By replacing the cumbersome, paper-heavy bills of lading process in the trade finance industry, blockchain technology can create more transparency, security, and trust among trade parties globally.
- Customer KYC and Fraud Prevention:By storing customer information on decentralized blocks, blockchain technology can make it easier and safer to share information between financial institutions.
Read on for a deep dive into how blockchain technology could turn the traditional banking industry on its head while enabling new business models through technology. To learn about the other industries blockchain is affecting, take a look at our article on 58 industries blockchain could disrupt.
- Blockchain technology offers a secure and cheap way of sending payments that cuts down on the need for verification from third parties and beats processing times for traditional bank transfers.
- 90% of members of the European Payments Council believe blockchain technology will fundamentally change the industry by 2025.
Today, trillions of dollars slosh around the world via an antiquated system of slow payments and added fees.
If you work in San Francisco and want to send part of your paycheck back to your family in London, you might have to pay a $25 flat fee for a wire transfer, and additional fees adding up to 7%. Your bank gets a cut, the receiving bank gets a cut, and you’re charged exchange rate fees. Your family’s bank might not even register the transaction until a week later.
The number of confirmed Bitcoin transactions per day has grown 6x from just over 50,000 in 2014 to over 300,000 as of February 2021. Source: Blockchain
Facilitating payments is highly profitable for banks, providing them with little incentive to lower fees. For instance, cross-border transactions, from payments to letters of credit, generated $224B in payments revenues in 2019.
Cryptocurrencies like bitcoin and ether are built on public blockchains (Bitcoin and Ethereum, respectively) that anyone can use to send and receive money. In this way, public blockchains cut down on the need for trusted third parties to verify transactions and give people around the world access to fast, cheap, and borderless payments.
Bitcoin transactions take 10 minutes on average to settle, although this can lengthen to hours or even days in extreme cases. That’s still not perfect, but it represents a leg up from the average 3-day processing time for bank transfers. And due to their decentralized and complex nature, crypto-based transactions are difficult for governments and regulatory bodies to control, observe, and shut down.
Developers are also working on scaling cheaper solutions to process crypto transactions more quickly. Bitcoin Cash and TRON, for example, have relatively low-priced transactions.
Examples of improved payments through blockchain
While cryptocurrencies are a long way from completely replacing fiat currencies (like the US dollar) when it comes to payments, the last couple of years have seen mostly upward growth in transaction volume for cryptocurrencies like bitcoin and ether. In fact, the Ethereum network became the first to settle $1T in transactions in one calendar year in 2020.
Some companies are using blockchain technology to improve B2B payments in developing economies. One example is BitPesa, which facilitates blockchain-based payments in countries like Kenya, Nigeria, and Uganda. The company has processed millions of dollars in transactions, reportedly growing 20% month-over-month.
BitPesa is also widely used for remittances sent throughout sub-Saharan Africa, the most expensive region in the world for sending money. Crypto payments platforms such as BitPesa have led to a reduction of over 90% in transfer fees in the region.
Blockchain companies are also focusing on enabling businesses to be able to accept cryptocurrencies as payment. For example, BitPay, a payment service provider that helps merchants accept and store bitcoin payments, has a number of integrations with e-commerce platforms like Shopify and WooCommerce.
Ethereum-based payments platform Airfox, which was acquired by Brazil-based retailer Via Varejo in May 2020, has partnered with MasterCard to allow customers to pay using its banQi app at global points of sale, as well as at every Via Varejo location.
HUPAYX, a South Korea-based crypto payments startup, partnered with several South Korean businesses in 2019 to create a payments network. Consumers in the country can now pay using the HUPAYX mobile app and point-of-sale infrastructure at over 400,000 stores, including duty-free stores and shopping complexes.
Blockchain technology is also being used to facilitate micropayments, which represent amounts usually less than a dollar. For instance, SatoshiPay, an online cryptocurrency wallet, allows users to pay tiny amounts to access paid online content on a pay-per-view basis. Users can load their wallet with bitcoin, US dollars, or any other payment token supported by the app.
One big reason behind the coming disruption of the payments industry is the fact that the infrastructure supporting it is just as liable to disruption — the world of clearance and settlements.
2. Clearance and Settlements Systems
- Distributed ledger technology could allow transactions to be settled directly and keep track of transactions better than existing protocols like SWIFT.
- Ripple and R3, among others, are working with traditional banks to bring greater efficiency to the sector.
The fact that an average bank transfer — as described above — takes 3 days to settle has a lot to do with the way our financial infrastructure was built.
It’s not just a pain for the consumer. Moving money around the world is a logistical nightmare for the banks themselves. Today, a simple bank transfer — from one account to another — has to bypass a complicated system of intermediaries, from correspondent banks to custodial services, before it ever reaches any kind of destination. The two bank balances have to be reconciled across a global financial system, comprised of a wide network of traders, funds, asset managers, and more.
If you want to send money from a UniCredit Banca account in Italy to a Wells Fargo bank account in the US, the money transfer will be executed through the Society for Worldwide Interbank Financial Communication (SWIFT), which sends 37.7M messages a day for more than 11,000 financial institutions.
Source: Aite Group
Because UniCredit Banca and Wells Fargo don’t have an established financial relationship, they have to search the SWIFT network for a correspondent bank that has a relationship with both banks and can settle the transaction — for a fee. Each correspondent bank maintains different ledgers, at the originating bank and the receiving bank, which means that these different ledgers have to be reconciled at the end of the day.
The centralized SWIFT protocol doesn’t actually send the funds, it simply sends the payment orders. The actual money is then processed through a system of intermediaries. Each intermediary adds additional cost to the transaction and creates a potential point of failure. Further, 60% of B2B payments require manual intervention, each taking between 15-20 minutes.
Blockchain technology, which serves as a decentralized “ledger” of transactions, could disrupt this state of play. Rather than using SWIFT to reconcile each financial institution’s ledger, an interbank blockchain could keep track of all transactions publicly and transparently. That means that instead of having to rely on a network of explain the services banks provide services and correspondent banks, transactions could be settled directly on a public blockchain.
Further, blockchain technology allows for “atomic” transactions, or transactions that clear and settle as soon as a payment is made. This stands in contrast to current banking systems, which clear and settle a transaction days after a payment.
That might help alleviate the high costs of maintaining a global network of correspondent banks. An Accenture survey among 8 global banks found that blockchain technology could bring down the average cost of clearing and settling transactions by $10B annually.
Examples of improved transactions through blockchain
Ripple, an enterprise blockchain services provider, is the most prominent player working on clearance and settlement. While the company is best known for its associated cryptocurrency XRP, the venture-backed company itself is building out blockchain-based solutions for banks to use for clearance and settlement.
SWIFT messages are one-way, much like emails, which mean that transactions can’t be settled until each party has screened the transaction. By integrating directly with a bank’s existing databases and ledgers, Ripple’s xCurrent product provides banks with a faster, two-way communication protocol that permits real-time messaging and settlement. Ripple currently has over 300 customers in over 40 countries signed up to experiment with its blockchain network.
Another of Ripple’s products, xRapid, is helping settle cross-border transactions in a shorter period. If a trader in Mexico wants to send money to their counterpart in the US, a traditional bank transaction would require that both traders have local currency accounts in the countries they wish to receive their money in. xRapid removes this requirement. The trader in Mexico can simply use Mexican pesos to buy XRP tokens through the exchange to pay their American counterpart. The US trader can change these XRP tokens for dollars. And this entire transaction can happen in a fraction of a second, Ripple claims.
R3 is another major player working on distributed ledger technology for banks. It aims to be the “new operating system for financial markets.” It raised $107M in May 2017 from a consortium of banks like Bank of America Merrill Lynch and HSBC, although it has also lost some key members, such as Goldman Sachs, which departed because it wanted more operational control over the system.
R3’s technology was used by Switzerland’s central bank for a pilot to settle large transactions between financial institutions using digital currencies. The Swiss National Bank (SNB) said in December 2020 that the project, called Project Helvetia, was a success. While SNB plans to expand the trial to cross-border payments in 2021, it has not yet decided whether to issue its own central bank digital currency.
Projects like Ripple and R3 are working with traditional banks to bring greater efficiency to the sector. They’re looking to decentralize systems on a smaller scale than public blockchains by connecting financial institutions to the same ledger in order to increase efficiency of transactions.
Blockchain projects are doing more than just making existing processes more efficient, however. While still in their early days — and while we continue to see mostly experiments, pilots, and proofs-of-concepts (PoCs) take form — they’re creating entirely new types of financial activity. The fundraising space is a explain the services banks provide example of this.
- In initial coin offerings (ICOs), entrepreneurs raise money by selling tokens or coins, allowing them to fundraise without a traditional investor or VC firm (and the due diligence that accompanies an investment from one).
- Blockchain company EOS raised over $4B in its year-long ICO ending in 2018.
Raising money through venture capital is an arduous process. Entrepreneurs put together decks, sit through countless meetings with partners, and endure long negotiations over equity and valuation in the hopes of exchanging some chunk of their company for a check.
In contrast, some companies are raising funds via initial coin offerings (ICOs), powered by public blockchains like Ethereum and Bitcoin.
In an ICO, projects sell tokens, or coins, in exchange for funding (often denominated in bitcoin or ether). The value of the token is — at least in theory — tied to the success of the blockchain company. Investing in tokens is a way for investors to bet directly on usage and value. Through ICOs, blockchain companies can short-circuit the conventional fundraising process by selling tokens directly to the public.
Some high-profile ICOs have raised hundreds of millions — even billions — of dollars before proof of a viable product. Filecoin, a blockchain data storage startup, raised $257M, while EOS, which is building a “world computer,” raised over $4B in its year-long ICO.
Still, regulators are putting a serious damper on ICOs.
After soaring in early 2018, ICO funding has since fallen significantly. In fact, ICOs raised only $371M in 2019, down 95% from a year earlier.
At the same time, initial coin offerings represent a paradigm shift in how companies finance development.
First, ICOs occur globally and online, giving companies access to an exponentially larger pool of investors. You’re no longer limited to high-net-worth individuals, institutions, and others who are able to show the government that they’re credible investors.
Second, ICOs give companies immediate access to liquidity. The moment you sell a token, it’s priced on a 24-hour global market. Compare that to 10 years for venture-backed startups. As Earn CEO Balaji Srinivasan says, “the ratio between 10 years and 10 minutes to get the option of liquidity is up to a 500,000x speedup in time.” We’re already seeing the impact of ICOs on the fundraising market.
Venture capital firms have taken notice, with Sequoia, Andreessen Horowitz, and Union Square Ventures, among others, all directly investing in ICOs, as well as gaining exposure by investing in cryptocurrency hedge funds.
Venrock partner David Pakman has said, “There’s no question that crypto will disrupt the business of venture capital. And I hope it does. The democratization of everything is what has excited me about technology from the beginning.”
Examples of improved fundraising through blockchain
While the majority of ICOs thus far have been for pre-revenue blockchain projects, we’re seeing more and more technology companies build around a paradigm of decentralization.
Messaging app Telegram, for example, raised $1.7B via ICO. The idea behind the ICO is to sell tokens to users and bootstrap a payment platform on top of the messaging network. If, as blockchain advocates predict, the next Facebook, Google, and Amazon are built around decentralized protocols and launched via ICO, it will eat directly into investment banking margins.
Several promising blockchain companies have emerged around this space. Companies like CoinList, which began as a collaboration between Protocol Labs and AngelList, are bringing digital assets to the mainstream by helping blockchain companies structure legal and compliant ICOs. CoinList has facilitated nearly $1B in transactions since 2017.
Demand for Filecoin’s ICO on CoinList was so high that it caused server overload within an hour of launch. Filecoin ultimately raised over $257M via ICO.
CoinList has developed a bank-grade compliance process that blockchain companies can access through a streamlined API, helping projects ensure everything from due diligence to investor accreditation. While CoinList’s platform is designed for blockchain projects, its focus on reducing the logistical and regulatory load around fundraising is being mirrored in the public markets. Investment banks today are experimenting with automation to help eliminate the thousands of work hours that go into an IPO.
And CoinList is just the start. A number of companies are emerging around the new ICO ecosystem, from Waves, a platform for storing, managing, and issuing digital assets, to Republic.co‘s crypto initiative, which is aimed at helping people invest in ICOs for as little as $10.
Of course — given regulatory pronouncements — ICO activity should be taken with a grain of salt, and the bubble of unregulated ICOs largely burst after 2018. Even aside from regulatory pressure, there’s no doubt that many of these projects will fail altogether.
What’s interesting is that they’re testing out blockchain technology that could replace functions of traditional banks. This is not just limited to company fundraising, but also to the underlying fabric of securities.
- Blockchain tech removes the middleman in asset rights transfers, lowering asset exchange fees, giving access to wider global markets, and reducing the instability of the traditional securities market.
- Moving securities on blockchains could save $17B to $24B explain the services banks provide year in global trade processing costs.
To buy or sell assets like stocks, debt, and commodities, you need a way to keep track of who owns what. Financial markets today accomplish this through a complex chain of brokers, exchanges, central security depositories, clearinghouses, and custodian banks. These different parties have been built around an outdated system of paper ownership that is not only slow, but can be inaccurate and prone to deception.
Say you want to buy a share of Apple stock. You might place an order through a stock exchange, which matches you with a seller. In the old days, that meant you’d spend cash in exchange for a certificate of ownership for the share.
This grows a lot more complicated when we’re trying to execute this transaction electronically. We don’t want to deal with the day-to-day management of the assets — like exchanging certificates, bookkeeping, or managing dividends. So we outsource the shares to custodian banks for safekeeping. Because buyers and sellers don’t always rely on the same custodian banks, the custodians themselves need to rely on a trusted third party to hold onto all the paper certificates.
To settle and clear an order on an exchange involves multiple intermediaries and points of failure.
In practice, that means that when you buy or sell an asset, explain the services banks provide order is relayed through a whole bunch of third parties. Transferring ownership is complicated because each party maintains their own version of the truth in a separate ledger.
Not only is this system inefficient, but it’s also imprecise. Securities transactions take between 1 to 3 days to settle because everyone’s books have to be updated and reconciled at the end of the day. Because there are so many different parties involved, transactions often have to be manually validated. Each party charges a fee.
Blockchain technology promises to revolutionize financial markets by creating a decentralized database of unique, digital assets. With a distributed ledger, it’s possible to transfer the rights to an asset through cryptographic tokens, representing assets “off-chain.” While Bitcoin and Ethereum have accomplished this with purely digital assets, new blockchain companies are working on ways to tokenize real-world assets, from stocks to real estate to gold.
The potential for disruption is massive. The four largest custody banks in the US — State Street, BNY Mellon, Citi, and JP Morgan — each oversee over $13T of assets under custody. While fees are typically lower than .02%, profits come from the sheer volume of assets. Using blockchain technology, tokenized securities have the potential to cut out middlemen such as custodian banks altogether, lowering asset exchange fees.
The four largest custodian banks in the US each manage $13T+ in assets under custody. Source: Trefis
Further, through smart contracts, tokenized securities can work as programmable equity — paying out dividends or performing stock buybacks through a couple lines of code. Finally, putting real-world assets on blockchain technology has the potential to usher in broader, global access to markets.
Examples of improved securities processes through blockchain
Polymath is one of the blockchain technology companies that wants to help migrate trillions of dollars of financial securities to the blockchain. Polymath is building a marketplace and platform that helps people issue security tokens and implement governance mechanisms to help these new tokens meet regulations. So far, Polymath has announced partnerships with Blocktrade, Corl, and Ethereum Capital to launch security tokens on the platform.
Meanwhile, financial institutions aren’t sitting still. The Australian Stock Exchange plans to replace its system for bookkeeping, clearance, and settlements with a blockchain solution, developed by Digital Asset Holdings, by mid-2022.
Similarly, in 2019, HSBC said it plans to digitize the records of $20B worth of assets in custody. The bank’s platform, called Digital Vault, “will digitize paper-based records of private placements.” This will give investors real-time information about their placements.
In 2017, enterprise-focused blockchain company Chain — since acquired by Stellar — successfully orchestrated live transactions between the Nasdaq and Citi’s banking infrastructure via integration. Meanwhile, Overstock’s CEO launched a trading platform called tZero, which aims to create a blockchain-backed dark pool, or private exchange, for securities that might be listed on the Nasdaq.
While tokenized assets are a hugely promising use case for blockchain technology, the biggest hurdle is regulation. It’s still unclear if ownership via blockchain technology is legally binding, while tokens remain an ambiguous term that don’t currently have legal standing. Regulatory and legislative guidance will be key to the success of these nascent projects.
The worlds of the consumer, the financial institution, and blockchain are slowly converging. Another space where that convergence has the potential to completely upend the way finance operates today is lending and credit — a domain that’s no stranger to disruption.
5. Loans and Credit
- Blockchain-enabled lending offers a more secure way of offering personal loans to a larger pool of consumers and would make the loan process cheaper, more efficient, and more secure.
- The first live securities lending took place in 2018 with a $30.5M transaction between Credit Suisse and ING.
Traditional banks and lenders underwrite loans based on a system of credit reporting. Blockchain technology opens up the possibility of peer-to-peer (P2P) loans, complex programmed loans that can approximate a mortgage or syndicated loan structure, and a faster and more secure loan process in general.
When you fill out an application for a bank loan, the bank has to evaluate the risk that you won’t pay them back. They do this by looking at factors like your credit score, debt-to-income ratio, and home ownership status. To get this information, they have to access your credit report provided by one of three major credit agencies: Experian, TransUnion, and Equifax.
Based on that information, banks price the risk of a default into the fees and interest collected on loans.
The 5 biggest US banks control $3.7T worth of commercial lending.
This centralized system can be hostile to consumers. The Federal Trade Commission (FTC) estimates that one in five Americans have a “potentially material error” in their credit score that negatively impacts their ability to get a loan. Further, concentrating this sensitive information within three institutions creates a lot of vulnerability. The September 2017 Equifax hack exposed the credit information of nearly 150M Americans.
Alternative lending using blockchain technology offers a cheaper, more efficient, and more secure way of making personal loans to a broader pool of consumers. With a cryptographically secure, decentralized registry of historical payments, consumers could apply for loans based on a global credit score.
While blockchain projects in the lending space are still in their infancy, there are a couple of interesting projects out there around P2P loans, credit, and infrastructure.
The Bloom protocol seeks to issue credit based on a track record of successful identity attestation on the network, without trusted third parties. Source: Bloom
Examples of improved lending through blockchain
One company, SALT Lending, lends cash using a blockchain. Users of SALT Lending’s platform can borrow money against any bitcoin, ether, or blockchain asset as collateral. Loans are approved based not on a borrower’s credit score but on the value of the collateral. To use this platform, a user must buy the platform’s cryptocurrency, SALT. This grants a user membership to be able to take out loans.
Another example of improved lending using blockchain comes from Dharma Labs, a protocol for tokenized debt. It aims to provide developers with the tools and standards necessary for building online debt marketplaces.
Meanwhile, Bloom wants to bring credit scoring to the blockchain, and is building a protocol for managing identity, risk, and credit scoring using blockchain technology.
While most of these projects focus on creating liquidity through loans around people’s existing crypto assets, they’re also jumpstarting the infrastructure that will enable bigger disruption in loans via blockchain.
6. Trade Finance
- The use of blockchain and distributed ledger technology can support cross-border trade transactions that would otherwise be uneconomical because of costs related to trade and documentation processes. It would also shorten delivery times and reduce paper use.
- With approximately 80-90% of world trade relying on trade finance, the influence of blockchain on the market would be felt globally throughout all industries that use cross-border trading.
Trade finance exists to mitigate risks, extend credit, and ensure that exporters and importers can engage in international trade.
It is a pivotal part of the global financial system, and yet it frequently operates on antiquated, manual, and written documentation. Blockchain represents an opportunity to streamline and simplify the complex world of trade finance, saving importers, exporters, and their financiers billions of dollars every year.
Blockchain technology has had an increasingly regular presence in trade programs for a few years explain the services banks provide, but its mainstream role in bills of lading and credit has only recently begun to firm.
Like many industries, the trade finance market has suffered from logistical setbacks due to old, outdated, and uneconomical manual documentation processes for years. Physical letters of credit, given by one party’s bank to the other party’s bank, are still often used to ensure that payment will be received.
Blockchain technology, by enabling companies to securely and digitally prove country of origin, product, and transaction details (and any other documentation), could help exporters and importers provide each other with more visibility into the shipments moving through their pipelines and more assurance of delivery.
One of the greatest risks to trade parties is the threat of fraud, which is greater because of a lack of confidentiality and little oversight on the flow of goods and documentation. This opens up the possibility of the same shipment being repeatedly mortgaged, an unfortunate occurrence that happens so often that commodity trade finance banks write it off as a cost of business.
Through blockchain technology, payments between importers and exporters could take place in tokenized form contingent upon delivery or receipt of goods. Through smart contracts, importers and exporters could set up rules that would ensure automatic payments and cut out the possibility of missed, lapsed, or repeatedly mortgaged shipments.
The adoption of blockchain technology in trade finance could mean greater trust between trade parties, increasing global business, while also hiding confidential information such as pricing and trade secrets when necessary.
It would also give buyers better insight into where their goods originate from and when they’ve been shipped. Under traditional systems, this information is often incomplete. But a blockchain could enable consumers to be updated at each step of the trade, further increasing trust and transparency.
Examples of improved trade financing through blockchain
Arguably, the time has come for blockchain in trade finance, with multiple companies and banks weighing in to chase bank phone number orlando a solution that will stick.
Standard Chartered and HSBC are 2 banks that have joined consortia dedicated to using blockchain technology to fix trade finance.
One of those consortia is Voltron, run by R3 and CryptoBLK, which operates a blockchain platform for digitizing paper letters of credit.
In October 2020, DBS and Standard Chartered said that they were working on a blockchain-based trade finance platform called Trade Finance Registry. The platform is intended to help detect fraud and duplicate financing for a single transaction in real time. The 2 banks have launched this project in partnership with 12 other banks, including ABN Amro, Deutsche Bank, ICICI Bank, and Lloyds.
Fintech companies such as Israel-based Wave have developed platforms that enable finance groups to provide letter credit transactions as a blockchain solution.
With Wave’s platform, EuroFinance in Barcelona was able to provide a blockchain solution to Ornua and Seychelles Trading Company to streamline their supply chain, reduce transaction costs and documentation errors, and quickly transfer documents to customers around the world.
In this instance, the trade process for almost $100,000 of cheese and butter, from the issuing of the letter of credit to the approval of it, took less than 4 hours, drastically down from the traditional time of 7-10 days.
Blockchain and DLT have also enabled trade between Australia and Japan by facilitating trade-related processes from letter of credit issuance to the delivery of trade documents. Here, the trade process was carried out by Hyperledger Fabric — built by the Linux Foundation — and secured by IBM.
While all of these projects focus on creating simpler processes to secure trade financing, one other important part of the process for a financial institution is completing their due diligence for each customer and transaction. And blockchain technology has a solution to improve this important step.
7. Customer KYC and Fraud Prevention
- Blockchains can store customer information on different blocks, which could help prevent attacks on customer information.
- Blockchain technology for KYC purposes can bring down costs for the banking sector by up to $160M annually.
Apart from the day-to-day activities of clearing transactions, processing payments, and trading, a bank also needs to onboard customers, verify their identity, and ensure their information is in order. This process is called “know your customer” (KYC).
Banks can spend up to 3 months executing all KYC proceedings, which include verification of photo IDs, documents such as address proofs, and biometrics. A delayed KYC process may cause some customers to terminate their relationship. According to a Thomson Reuters survey, 12% of companies said that they had changed their bank because of delays in the KYC process.
Apart from time and effort, complying with KYC rules also costs banks money. Banks end up spending up to $500M annually on KYC compliance and customer due diligence.
Blockchain tech can help reduce the human effort and cost involved in KYC compliance. With KYC customer information stored on a blockchain, the decentralized nature of the platform would allow all institutions that require KYC to access that information. Using blockchain for KYC purposes could reduce personnel requirements for banks by 10%, equating to cost savings of up to $160M annually.
Another security process where blockchain can help banks is detecting fraud and cyberattacks.
A rise in fraud and cyberattacks is one of the leading causes of concern for the banking industry, according to BNY Mellon Treasury Services. Since most banks have centralized ledger systems that store all customer information, it becomes easier for hackers to attack and access that information.
By decentralizing the storage of information, blockchain technology helps prevent a hacker from gaining easy access to all information at once.
Another way of ensuring safe transactions online is by using blockchain-based smart contracts. These contracts operate on an “if/then” basis, which means that the next step of the process won’t happen if the prior one hasn’t been completed, allowing for more failsafes in the process of transacting.
Examples of improved KYC through blockchain
Blockchain-based credit scoring platform Bloom allows customers to create blockchain-based profiles using its mobile application. Bloom’s identity monitoring tool, meanwhile, continually scans the internet and the dark web to identify any potential leaks of a customer’s information.
Ripple’s xCurrent also stores customer details on blocks and passes on important information to different banks. This allows for real-time exchange of messages to authenticate customers and transactions, resulting in a quicker settlement of trades.
Similarly, HSBC, Deutsche Bank, and Mitsubishi UFJ Financial Group, in partnership with IBM, have tested a service to share KYC information via blockchain. The project was able to eliminate duplication of effort in collecting the same information by different financial institutions and digitize and store all customer information securely, among other things.
Beyond the hype of blockchain technology
Disruption doesn’t happen overnight, and much of blockchain technology has yet to be perfected or widely tested.
Die-hard believers expect blockchain and cryptocurrencies to replace banks altogether. Others think that blockchain technology will supplement traditional financial infrastructure, making it more efficient.
It remains to be seen to what degree banks embrace the technology. One thing is clear, however: blockchain will indeed transform the industry.
This report was created with data from CB Insights’ emerging technology insights platform, which offers clarity into emerging tech and new business strategies through tools like: If you aren’t already a client, sign up for a free trial to learn more about our platform.
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Definition of 'Payments Banks'
Description: In September 2013, the Reserve Bank of India constituted a committee headed by Dr Nachiket Mor to study 'Comprehensive financial services for small businesses and low income households'. The objective of the committee was to propose measures for achieving financial inclusion and increased access to financial services.
The committee submitted its report to RBI in January 2014. One of the key suggestions of the committee was to introduce specialised banks or ‘payments bank’ to cater to the lower income groups and small businesses so that by January 1, 2016 each Indian resident can have a global bank account.
Why payments banks? The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.
With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country.
Existing prepaid payment instruments (PPI model) like Airtel Money does not give pay any interest on deposits.