- January 12, 2022
- Posted by: starlink
- Category: Blockchain
Blockchain is transforming many aspects of your professional life. New payment methods and many robust technologies are due to the evolution of Blockchain. Financial institutions, such as banks are now realizing the potential of the technology and trying to make the most out of it.
It is a major reason why smart contracts are now becoming a common phenomenon in the banking sector. They are replacing conventional contracts as they automate the execution of a particular agreement. Let’s find out more about smart contracts are and how they are changing agreements in the banking sector.
Smart Contracts and Block- An Overview
Before we understand how smart contracts work, let’s know more about them. They are programs on blockchain technology like cryptocurrency. The best part about smart contact is that you don’t need an intermediary to ensure that both parties meet the terms and conditions.
Once each party fulfills each of the sections, the smart contract automatically triggers the action for the next part. It is why they save time and money since you can easily automate the workflow with this robust technology.
How does it Work?
Upon meeting a particular condition in the contract, the blockchain technology automatically executes the next step. Its algorithm uses the if/when condition to determine if the clauses of the agreement are met.
The networks operating smart contracts can verify if the predetermined conditions are met, such as registration of a vehicle, issuance of a ticket, etc. In addition, the technology does not let anyone change the transactions. Only the relevant parties with access can view the results.
Smart Contracts in Finance
Blockchain technology is reshaping every industry in any particular way. Financial institutes are no exception since they have a lot of deals and agreements taking place. It is why they are rapidly choosing smart contracts for several reasons. Here are a few of them:
Brings Costs Down
One of the best things about smart contracts is self-regulations. The technology automates the recording of transactions and movements in smart contracts. As a result, it helps financial institutes to bring down their costs in the long term.
In addition, there is no need for any manual assistance for interventions. Once again this helps in reducing costs and eliminates the possibility of human error.
- Gives you More Transparency
Another crucial point that many financial and governmental institutions use blockchain technology is transparency. The auditing process is clear since you have a complete record of each transaction on the public ledgers.
In addition, there is no option for manual intervention for changing the records. As a result, it is incorruptible and gives you complete reliable information. Also, it requires fewer people to manage compared to handling transactions on paper.
- Processes Claims without any Errors
Insurance companies and banks can take advantage of smart contracts to automate and process claims without are mistakes. Smart contracts make it simple to file claims. They have them automatically validated by the blockchain network’s decentralized ledgers.
Examining the validity of an insurance claim is a time-consuming process if you do it manually. But with the help of this technology, banks can use blockchain-based smart contracts to automate insurance claim processing.
Why are Banks Adopting Smart Contracts?
The features and the functionalities that the smart contract offers are simply unparalleled. Banks use it to streamline their process and resolve any problems with conventional contracts. It is why we see widespread adoption of this technology in the banking sector.
Let’s look at how smart contracts are transforming the banking system.
- Simplifies the Overall Process
Banks are adopting new technologies, such as smart contracts, because of their amazing functionalities. It helps them simplify the overall process to automate their entire workflow.
It is also better to build a trusting relationship as smart contracts offer transparency and reliability. And not just smart contracts, but the entire blockchain technology helps banks to optimize their internal systems.
- Prevents from any Frauds
Using smart contracts, banks can easily verify customer details without spending a lot of money. Since verifying KYC details is necessary for banks to prevent fraud, it is a vital part that organizations can’t skip.
Blockchain technologies enable banks to access the individual’s history and details. Thus they can easily verify any person’s information without going through a lot of hassle.
- Improves Efficiency
Manually recording and processing each thing can take up too much time. It can have an impact on the bank’s speed and efficiency. But with blockchain technology, banks can automate their entire procedure.
This helps reduce the time for banking operations and removes unnecessary steps in the manual process. In addition, it can help the banks to provide exceptional services to their customers with their speedy procedures for loans or other services.
Is there any Opposition from Central Banks and Legislators?
The most notable thing about blockchain technology is decentralization. It makes it impossible for any person to penetrate through this technology and make amendments to the records. While this might be a benefit, decentralization is a concern for central banks and legislators.
That is why the central bank and legislators in the US and some other countering have some issues in regulating smart contracts. In case of a dispute in a conventional contract, the matter is usually settled in court.
However, since smart contracts enable you to make deals without any demographic boundaries, there is a problem regarding jurisdiction. Also, without any regulatory authority, there is no guarantee that either party will abide by the rules of the contract.
Can they completely replace the Conventional Banking System?
You might be wondering if smart contracts are a threat to traditional banking. Blockchain technology comes with many benefits and drawbacks. But if we look at the pros and cons of smart contracts, the pros outweigh the cons.
However, the traditional banking system will not be replaced completely, but many aspects of banking will see a change. It will be all due to incorporating smart contracts and blockchain technology in the systems of financial institutes.
Smart contracts are bringing a revolution in the banking sector. The world is rapidly moving towards digitalization, and we can expect its usage to increase in other sectors. It will play the same role for many industries, just like the financial sector. Here in Starlink, we are also shifting towards the blockchain industry.