Blockchain technology has left an incredible impact on many different sectors. Governments and businesses are looking towards leveraging blockchain technology in their operational activities to gain efficiency. Blockchain is popular in the global market due to cryptocurrencies, but there are numerous possibilities at the core of blockchain. And one of the possibilities that caught the attention of the banking industry is the Smart Contract.
What is a Smart Contract?
Smart contracts are programs saved on the blockchain that operate when predetermined conditions are met. They are used for the automation of agreement execution. It helps participants to determine the outcomes immediately without any involvement from intermediaries. After sufficing the conditions, it triggers the next event automatically. Moreover, based on the PR Newswire report, the smart contracts market size will reach $345.4 Million by 2026 at a CAGR of 18.1%.
Smart contracts work by following simple “if / when…then…” statements, which are written in code on the blockchain.
When the predetermined conditions are met and verified, the computer network operates. These actions may include issuing funds to appropriate parties, sending notices, or issuing fines. After the task is completed, it automatically updates the blockchain. This means that the transaction cannot be changed. And only the approved parties can see the result that can be highly helpful to avoid attacks from cybercriminals.
To complete the task and satisfy the participant’s need, a smart contract can possess multiple provisions. First, to establish the terms, participants should define the representation of transactions and data on the blockchain. After that, they need to agree to the “if/when… then…” rules governing these transactions, and explore all possibilities and define the resolution of the dispute frame.
So, Exactly What Smart Contracts will Change?
Smart contracts are designed to automate transactions and allow participants to agree on an event’s conclusion without a central authority. The following are some of the most important characteristics of smart contracts: Oracle inputs, programmability, Multisig authentication, and escrow capability:
- A smart contract is a type of contract that runs automatically depending on pre-programmed logic.
- Multisig allows two or more contract parties to independently approve the execution of a transaction. Therefore, it is also essential for multi-party contracts.
- Escrow easily locks the fund with a mediator and only unlocks them after both parties have accepted the conditions. External inputs, such as prices, performance, or other real-world data, may be necessary to conduct a transaction at times. So, using oracle services, banks can assist smart contracts with these inputs.
In the majority of circumstances, distributed ledger smart contract system would make the greatest sense for the financial services industry. This is because the smart contract will assure the connection between all essential stakeholders is on a secured, private, and scalable platform.
- Transacting Parties: Individuals or organizations that want to be a part of the contract.
- Banks, capital market participants, and insurers: Depending on the use case, they can engage and operate as transaction validators and asset custodians.
- Regulators: they can have access to view all transaction records to keep an eye on the systems.
The value of this model of the smart contract will expand among all the crucial financial services segments, i.e., it will become available across value chains. Moreover, it will bring enhanced value in cost savings, risk reduction and efficiencies.
Smart Contracts Opportunities in Banks
Even in today’s digital world, contractual agreements (where the third party imposes the terms) is the basis for banks to perform their activities. However, giving significant attention to each customer can slow down the process while costing a fortune. On the other hand, having these terms on the blockchain network where contracts automatically execute provides numerous opportunities for the banks.
When blockchain contracts automatically execute the provisions of a contract — a contract may actually be carried out.
Transparent Auditing
The traditional contracts are usually based on critical regulations that require the banking sector to spend much time doing paperwork for record-keeping. Record keeping is also the reason behind dull digitization in the banking sector.
Besides, as banks offer several services like providing loans and other financial transactions, it becomes compulsory to record everyday activity. However, cyber-attacks on the records can easily manipulate the data and lead to incorrect information.
With smart contracts solutions, banks can acquire vital tools for bookkeeping in the blockchain network. Furthermore, for the improvement in transparency of the record, we use distributed solutions in the network. This helps banks get rid of infiltration in the account records and eliminates any chances of fund loss from an organization.
Easier Insurance Claims Processing
Settlement of the insurance claims requires the legitimacy assessment of the claim received while counter-checking the contract terms for validation. The traditional process to claim the insurance can drag a lot of time and energy, if one wants to avoid fraud claims.
Although using blockchain technology-based smart contracts, banks can automatically process insurance claims by allowing a consumer to file a claim and validating the claim via provided codes in the blockchain network. To validate the insurance claims, the blockchain network system access the claims, verify their legitimacy and execute the contract’s terms.
Faster & Efficient KYC (Know Your Customer) Formalities
At the time of offering a loan or funding trade to the customer, banks must verify the customer’s identity. And the process of gaining information like credit history from other institutions can be difficult as well as costly for banks.
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Hence, the adoption of smart contracts for those operations can easily provide an individual’s credit score by verifying the customer identity based on blockchain records. In addition, it will also offer compliance requirements for customers by processing the transactional statement of the customer in real-time.
Real-time Remittance
Banks process several transactions of multiple customers. However, the processing of transactions might slow down with piling data. While implementing smart contracts along with remittance in the system can ease the process of fund transfers among stakeholders and customers and payment done to suppliers. Not only that but, smart contracts can also help in speeding up the settlement process of post-trade.
Shaping the future through collaboration
Banks are about to gain significant profit with the adoption of smart contracts for their systems. Smart contracts are so much more than just being an additional intelligent method to handle different contacts. With its adoption, banks will easily create an improved public relations with consumers while offering impressive satisfaction to the customers.
But that’s not all; building a system based on smart contracts will give benefits like standardization of code and execution to minimize the cost of agreements as well as negotiations; security of the transactions through encrypted distributed ledger stored in blockchain; built-in regulatory compliance, new regulatory models for reporting, a well-developed contract that reduces risk in the settlement or counterparty, and lastly, automation of the digital payments and assets flow that might have new business products or models.
Despite all of the positives that come with Smart Contracts in banking services, the need for implementing blockchain technology in the system might not be easy. So, to gain maximum profit from the system without being vulnerable to cyber attacks, it is beneficial to seek help from expert developers in blockchain technology.
It will be exciting to watch what the future of banking with smart contracts will look like and how banks will improve the accuracy and validity of transactions around the world.
