With technology rapidly changing many of the industries we have become familiar with over the years, it is no surprise to see the same happening in banking. But, what can we expect to see change in the coming years?
Although we have seen significant changes in the sector in recent years, most notably the rise in challenger banks, more advances look set to continue in the coming years and beyond.
Working in the finance industry, here at FJP Investment we chose to delve into the changes afoot for the banking sector.
Major changes in the industry
A lot will depend on the implementation and development of peer to peer blockchain financial solutions. This will set the stage for Decentralised Finance (DeFi) to have a major impact on the banking world.
DeFi is the “movement that leverages decentralised networks to transform old financial products into transparent protocols that run without intermediaries”. Essentially, it will turn existing practices into automatic practices without the need for consistent review. Like we have seen in many industries, this will save banks time and money in needing to hire individuals to oversee the process.
It is predicted that DeFi will be widely used within the next five years. The importance it holds globally can be seen in the opportunity that lies in the tools of decentralised finance to lower transaction costs and time in terms of financial value.
This represents a modern way to remove current restraints in the process of moving money through the use of financial services.
The rise of blockchain and crypto
Experts state that the first generation of blockchain users are motivated to learn how to navigate the complex world of cryptocurrencies. The next phase of development will represent the next step.
The adoption of blockchain for banks, whilst on-boarding the millions of users will be a huge but beneficial step. The new users, mostly oblivious to the technology will have better services at their disposal. The ability to send money overseas or protecting their finances against adverse inflation, the benefits are obvious, particularly for business owners. Banks will gain significant competitive advantage if they are quick to adopt these practices.
In terms of actual advantage, the ability for banks to track wealth, spending and receiving money without the need to expose their systems to hacking risks is major. With lower fees and faster methods of payment, banks stand to gain in efficiency and cost.
In fact, the faster society removes barriers to using the next generation of financial services, the faster the wider populace will benefit from the cost and time efficiencies by switching to blockchain practices.
Caution in some areas
In developing areas, the move to blockchain for banks is higher in risk. Taking Africa as an example, a country with low internet connectivity and higher latency, applications that rely on internet connectivity built on a decentralised protocol will struggle to run as intended.
With the cost of internet implementation, a priority, it may take longer to have functioning blockchain implementation worldwide.
With the need for decentralised finance applications to require specific features such as fingerprint verification for security, which is not a standard for all smartphones, there are potentially further hurdles.
There remains a huge gap when it comes to financial literacy in terms of what technology is available compared to actual knowledge. Taking smart phones here, the power in a smart phone in terms of tools to generate financial value is large.
Resistance to change plays a part. Customers continue to operate as they always have, with many taking a risk adverse approach. However, the benefits of banks introducing this technology will be obvious.
Although pre-requisites are similar to most fintech solutions, it is still a challenge today for those with no experience using DeFi tools. The market needs not only more users but liquidity, application is therefore used where there is a concentration of users familiar with cryptocurrencies. As you can expect, in the early stages there will be high trading and investment on the platform.
A need for security is also a big factor here. Although blockchain is designed to be secure, to change a specific entry can be lengthy. As users get to grips with the technology, there may be disruption in the short term.
For extra security, companies should secure firewalls and employ ethical hackers to monitor any potential cyber-attacks. This is best practice currently anyway.
A positive future
We are already seeing a new wave of financial tools being developed that will move the system towards the mainstream needs, much like we expect to see a ‘normalisation’ of cryptocurrencies in the future, something they were originally designed to achieve.
By fulfilling mainstream needs such as financing homes cars and businesses, as well as certain education costs, on top of a new design face we can expect to see users make the shift. With banks adopting the technology and a push from various Government led experiments in association with banks, we expect the gap to reduce when it comes to necessary blockchain technology literacy.
There will have to be a change in the way businesses, banks included, will incorporate the systems in the future. Accountancy roles, for example, will have to be adapted.
Lower skilled roles such as entering transactions in a ledger will give way to new roles in ensuring smart contracts are implemented successfully, implementing the business logic as the company intends. Smart contracts are essentially contracting that programs enforce on a specific logic on a blockchain. A type of ‘if and then’ function that, should certain conditions be met, carry out an automated task to achieve the end result.
These roles will naturally increase understanding of software and blockchain technology, with most companies looking to bring this in over the coming years.
Of course, change is not immediate. Lots of the significant changes will be present in the medium term, but as with many technological revolutions, will be rolled out over months or even years. With accounting and corporate finance institutions relying more and more on software and automation, this move is the next logical step in the banking sector.