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How Blockchain Can Affect Traditional Banking?

how does blockchain affect banking industry

Blockchain has taken the world by storm and is changing everything, from payment transactions to how money is raised to security in online banking. The main question here is, can traditional banking embrace the change or will it be replaced by something new? It is undeniable that blockchain affects banking in a number of ways. 

In the last decade itself, blockchain technology has received a lot of attention, and all for the right reasons. Despite the skepticism about the technology, the question “will blockchain revolutionize the banking industry?” remains.

Blockchain and Banking: What Role It Plays in the Financial Industry?

Blockchain technology offers a way for untrusted parties to verify the state of a database without the need for a middleman. A blockchain offers a ledger where the information is available to everyone and the information is immutable. A blockchain could provide specific financial services such as payments without needing a bank operating as a middleman. It can also enhance data security, and bank account verification and customer ID verification process. 

Blockchain technology/decentralized ledger technology has a huge chance of disrupting banking by reducing the need for middlemen. Here’s a proper breakdown of how blockchain affects the banking industry while providing new business models using technology.

How Blockchain Will Change Traditional Banking Methods?

1. Improves Sending & Receiving Payments

Sending and receiving payments using traditional banking methods is not exactly effective. Let’s say you want to send money from the U.S. to the U.K., you’ll have to pay a fee to the middleman for a wire transfer. To make matters worse, the person you’re sending money to, may not even register the transaction until a week later. 

Completing payments is highly profitable for banks, providing them with little to no incentive to lower their fee on transactions. In 2019, banks generated $224B in payment revenue from cross-border transactions, payments to letters of credit, and more. 

Bear no misconceptions in mind, cryptocurrencies have to go a long way to replace government-issued currencies. In the last couple of years, the transaction rate of cryptocurrencies has grown exceptionally, one such example is Bitcoin. 

Some companies are using Blockchain technology to improve their B2B payments in growing economies. A company named BitPesa facilitates blockchain-based payments to growing economies like Kenya, Nigeria. 

Blockchain technology is also being used worldwide to support micropayments. Online wallet providers offer users with perks to make micropayments using Bitcoin, U.S dollar, or any other payment method allowed by apps. This is the first way on how blockchain affect banking industry.

2. Clearance and Settlements Systems

As mentioned above, an average bank transfer takes up to 3 days to settle, which is because of the lack of proper infrastructure. The antique financial infrastructure makes moving money around a hassle for both consumers and banks. 

Something as simple as a bank transfer has to go through several intermediaries and comply with a series of compliance requirements for payment completion. Blockchain technology works as a decentralized “ledger” of transactions. Instead of banks utilizing SWIFT to keep track of transactions, interbank blockchain technology can track all the transactions securely. 

Blockchain also supports “atomic” transactions (transactions that are settled as soon as payment is completed). The process is opposite to financial systems globally, which clear and settle the transaction after a couple of days. 

Streamlining blockchain technology can eliminate the high costs of maintaining a global network of banks. According to a report made by Accenture, the use of blockchain can reduce transaction settlement costs by $10B annually. 

3. Enhances Raising Funds Process

If you’ve been in the financial industry all your life then you must be aware of how arduous raising money through venture capital is. Entrepreneurs have to sit through long negotiations just to sell a part of the company for the money required. 

Some companies on the other hand are raising funds using ICO (Initial coin offerings) that are backed by digital assets like Bitcoin and Ethereum. The value of a token is tied to the success of a blockchain company directly. Using ICOs, blockchain companies can raise money by selling coins directly to the public. 

There have been some ICOs that have managed to raise millions upon millions before showing any proof of a viable product. 2018 was the high point for ICOs globally, since then there has been a significant fall in ICO transactions. 

While most of the ICOs had the sole purpose of raising money for blockchain products. Now, we’re seeing a trend change where more and more companies are built around decentralization technology. 

One of the biggest examples is Telegram, a messaging app, raised $1.7B with ICO. The goal behind ICO is to sell tokens to users and set up a payment platform alongside messaging app. Based on regulations, ICO activity should be done with caution. Unregulated ICOs started failing after 2018, thus leading to the fall of ICO transactions. 

4. Ensures Security of Payments and Banking Data

Financial transactions of all kinds come with their fair share of risks. Customers need to know who owns the assets like stocks, and commodities that you’re investing in. The largest financial markets globally achieve this transparency with a complicated chain of brokers, online exchanges, custodian banks, and so on. These relationships are built on a slow paper-based method that can be highly inaccurate. 

If someone wants to buy a share of YouTube, they’ll have to place their order through a stock exchange, the exchange then will match them with a seller. 10 years ago, you’d spend cash and get a certificate for your purchase as proof. 

Now that all these transactions have gone digital, the process has become more complicated. To reduce the hassle of managing the assets every day, companies outsource this process to custodian banks. As buyers and sellers don’t always use the same custodian banks, the banks themselves have to use a third-party service provider to manage the paper certificates. 

To streamline the process, blockchain technology creates a decentralized database of digital assets. With a decentralized ledger, it’s possible to transfer the rights to an asset using cryptographic tokens. Huge cryptocurrency providers like Bitcoin and Ethereum have accomplished this using digital assets. Newer blockchain-based companies are still struggling to find ways to convert real-world assets into crypto tokens. 

5. Secure Loans and Credits Offering

Banks and lenders underwrite loans using an old method known as “Credit Reporting”. The utilization of blockchain technology allows P2P loans, complex programmed loans, and a faster, more secure loan process in general. 

Whenever a person applies for a loan, banks have to assess their risk level. Banks/lenders use credit score, credit history, debt-to-income ratio, and homeownership status. This centralized system can prove hostile to consumers. FTC stated that 1 in every 5 American residents has some kind of error in their credit score that makes it harder for them to acquire loans. As most credit information is distributed between three organizations (Experian, TransUnion, and Equifax), they are usually under attack. The 2017 Equifax data breach led to 150M Americans’ data loss. 

Using blockchain for lending purposes offers a cheaper and efficient solution. This way more people can acquire a personal loan, all the while reducing poor consumer experience and risk of loan fraud. With a cryptographically secure, decentralized ledger of transaction history, banks can decide to approve loans based on a global credit score. 

6. Simplifies the Trade Finance Process

The only reason trade finance exists is to eliminate fraud risk, extend credit, and make sure exporters and importers can take part in international transactions. Trade finance is a vital cog in the global financial process and still, it relies on an outdated method with manual paperwork. 

Blockchain aims to improve and streamline the complex process of trade finance. Which will end up saving billions of dollars for importers, exporters, and their financiers. Trade finance is one of the few areas where blockchain has a firm foot, however, when it comes to streamlining the bills of lending and credit, it’s still taking the initial steps. 

Just like countless other industries, the trade finance market has suffered at the hand of an antique, inefficient manual documentation process. Physical letters from one bank to another bank are still used to ensure that the payment will be received. 

Blockchain technology with its transparency enables firms to securely prove their country of origin, product, and other transaction details. It can provide better visibility into the shipments and a more efficient assurance of delivery. 

7. Customer KYC and Fraud Prevention

Another sector that can be greatly improved with the utilization is customer KYC. Banks/firms/lenders need to verify the identity of their customers using a series of documents before allowing them to use their products or services.

Banks can take up to 3 months to complete their KYC procedures, including photo ID verification, address proof verification, and biometrics verification. A slow KYC process can lead to customers leaving a particular organization and switching to another one. Not just time and effort, banks also have to spend huge amounts for KYC verification. An average of $500 million is spent annually by banks to complete KYC proceedings. 

Blockchain can reduce the human effort and the cost involved in following up with KYC compliance. Customer information can be stored on a blockchain and the decentralized nature of the platform allows all institutions to access the information and complete KYC compliance. Different types of frauds and cyberattacks are a huge concern for banks globally. Once a hacker gains access to a bank’s system they can access all customer information that’s stored on a centralized ledger. By using a decentralized ledger that is Blockchain, banks can ensure security of data. This is one of the major ways on how blockchain affect banking. 

Companies like DIRO utilize blockchain technology and enhance the KYC process. DIRO verifies 7000+ customer document types for KYC verification and offers proof of authentication with verifiable credentials. Verified customer information is then placed on the blockchain with a digital hash. The result is a court-admissible customer document with forensic data. Banks, lenders, and other organizations can use DIRO for streamlining the KYC process by eliminating manual verification of customer documents like bank statements, utility bills, insurance documents, tax return documents, and so on. Plus the documents placed on the blockchain are immutable and secure from fraud.

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Why aren’t KBA Questions The Best Practice in Online Banking?

kba questions

Knowledge-based authentication or commonly known as KBA has been used since the dawn of financial services. KBA questions have been used as a key data point by almost all organizations during customer identification programs. Basically, knowledge-based authentication questions are used to verify a customer by asking them to answer a series of complicated questions. These questions are based on customers’ personal information and historical data. These are the kinds of questions that an attacker can’t answer just by stealing personal information like your driver’s license and more.

Questions are usually generated from public and private data sources, credit reports, and government databases.

Here’s an example of the questions:

  • What was the make and model of your first car?
  • What street did you live on in 2005?
  • Which state was your social security number issued?

While these questions may sound extremely secure, the efficiency of the KBA questions has been failing over time. The reason for that is the greater public availability of information and KBA’s susceptibility to fraudulent actors. This is why strong implementation of KYC compliance is crucial.

Why Is KBA Failing Slowly?

At its most basic level, KBA can be easily compromised mainly because of the amount of personal information that is available online. This availability of information can come from two locations such as social media platforms and high-profile data breaches. 

According to studies, with enough research cybercriminals can easily get around the KBA questions as almost all the private information is available online. One simple search engine search with the person’s name can provide fraudsters with a plethora of information. 

More sophisticated fraudsters use technologies that make it easier for them to access information that is usually buried deep. Plus data breaches like the Equifax breach in 2017 make things harder for customers. 

Better Banking Solutions to KBA Questions

A better way to mitigate risks of financial crime is to make use of third-party data solutions instead of knowledge-based authentication questions. A criminal can easily guess, research, or spoof KBA questions, it is much more difficult to create synthetic identities to get around third-party data solutions. 

It is much easier to build an idea of someone’s identity by collecting names, DOB, SSN, address, phone number, and email ID. Fraudsters have the means to gather other information such as browser type, IP address, linked bank account information, etc. By collecting and comparing this information available in public and private sectors, hackers can easily fool KBA questions. 

Unless banks have access to real-time identity and document verification during online account opening, it will be almost impossible for banks to verify all the information during online customer onboarding. By reducing reliance on customers to validate identity through data input, institutions are reducing the weak points that fraudsters can use to exploit. Coupling this strategy with extensive, real-time, third-party cross-referencing is the key to improving compliances and reducing online fraud.

What are the Different Types of Authentication Methods During Onboarding

Verifying customer identity is one of the most crucial parts of the customer onboarding process. KYC and AML regulations are changing the way identity verification methods work. Financial Crimes Enforcement Network (FCEN) is one of many regulatory bodies that are responsible for regulating ID verification in the USA. 

  1. Two-Factor Authentication

Two-factor authentication, also known as multi-factor authentication, is a method where the customer has to provide additional information apart from username and password to access their accounts. The additional information is usually a 6 digit numerical code. This code is sent to users once they click on the login button after entering the username and password. Two-factor authentication is a great option for opening accounts and completing impersonation checks whenever a customer tries to access their accounts. 

  1. Credit Bureau-Based Authentication

Another method of customer identity verification is using credit bureau information about a potential customer. This method of verification relies on gathering information about the onboarding customer from any of the major credit bureaus. This information includes data like name, address, and social security number. It also uses a score-based system to create a perfect match without having to put customers’ personal information harm.

  1. Database Methods

Database ID methods collect data from a wide range of sources to verify any identity. These sources of information are made up of online databases such as social media and offline databases such as government data. 

This method of verifying customers is for assessing the level of risk a user poses. Although this method of verification isn’t exactly secure as it doesn’t ensure that the person providing the information isn’t the one making the transactions, thus this method is susceptible to identity theft.

DIRO’s Document Verification Technology For Secure Verification

One of the best ways to verify a customer during the onboarding process and reduce the risk of future financial crime is by verifying all sorts of documents. Using the latest technological features, document verification can be conducted online on all kinds of documents. 

DIRO’s award-winning document verification service is the industry standard for verifying documents and reducing the risk of financial crime for banks, financial institutions, and other industries. It even helps in diminishing the risk of human error. Institutions just have to log in to DIRO’s secure browser and verify if a document is original or not.

DIRO’s innovative technology does instant document verification and offers 100% proof of authentication. The proof of authentication itself can be used as an original document by users. By utilizing all the technology has to offer, banks, financial institutions, and FinTechs can improve their chances of fighting financial fraud.

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How to Avoid Bank Frauds Using Technology?

Want to know how to avoid bank fraud? Well, the first step is to follow the basic old-school step with a blend of technology. Fraud is a worldwide phenomenon that affects all multiple industries and can even have a severe impact on the economy of a country. Banks need to understand how to prevent bank frauds, which they can’t do without employing the right kind of technology. One of the most challenging aspects of the banking sector is to make sure that all online transactions are free from any kind of electronic fraud. Technological advancement and adoption is the only answer to the question of “how to control fraud in banks”.

By utilizing the power of data analytics, banks can detect fraud in their initial step and reduce the negative impacts of significant losses regarding fraud. This is one of the primary methods how to prevent bank fraud.

The present-day studies indicate that false documentation and inadequate training of employees are the reason for 60% of all banking fraud cases. Most of the frauds in banking institutions are detected through customer complaints or some external tip, which is the case with global banking frauds. To mitigate risks, banks need to learn how to prevent online banking fraud. 

Large and small businesses alike are targets of online bank frauds, it is also called ACH fraud or wire fraud. Once cybercriminals can find a weak point in the banking system, they can create a lot of nuisance before being detected finally. 

Banks, financial institutions, and FinTechs need to understand the need for technology so they can reduce the number of frauds they have to suffer through. If you wish to understand how to prevent online banking fraud, then you need to employ technologies such as DIRO’s document verification technology.

Technologies For Online Banking Fraud Prevention

1. Multi-Factor Authentication

The best step is to start with a multi-factor authentication structure to improve the first layer of security. Financial institutions can’t solve all their problems just by using multi-layer authentication, they need to start from somewhere. One of the major mistakes made by financial institutions is to leave everything on a single solution which makes them more open to being compromised.

If financial institutions can set up a solution like combining old-fashioned phone calls for bank authentication with online two-factor authentication, they can reduce the risk of fraud by a lot. In the old days of banking, calendars were put in place for all transactions across multiple accounts. If someone has the same banking and transaction routine, then any sudden changes would be marked as red flags. 

2. Banks Need to Monitor Transactions

In the earlier days of banking, banks used to have daily limits imposed on their users. The banks used to impose the limit on their mainframe processor, along with file limits and batch limits, this limit would help to spot if there was something out of the ordinary. Usually, banks don’t watch out for any activity under $9,000 which makes it easier for criminals to fraud the banks by conducting activities under $9,000. One of the best ways how to prevent bank fraud is to monitor transactions more carefully.

3. Employ Dual & Triple Controls

Dual controls on the corporate side are the minimum they can do to reduce the risk of online fraud. The ideal suggestion is to use triple controls, where one person initiates the transaction, a second person approves the transaction and the third person finishes it.

If organizations don’t have the right kind of resources or people to follow up with the triple controls, then they need to set up ACH transactions. Businesses can confirm using a phone call if the transaction was initiated by a specific person, once that is confirmed, the transaction can be completed. This can be done using a person or by setting up an IVR. Usually, only one person will have the ID and password to call the bank and complete the transaction which adds an extra layer of security.

4. Raise Awareness Towards Fraud

One of the best ways how to control fraud in banks is to keep educating the customers about the ways they can reduce fraud. The rise of online banking has given rise to a lot of online fraud. Banks and other financial institutions can employ all the technology they want but the real solution won’t happen till customers are aware of the threats.

5. DIRO Document Verification Technology

This is one hardcore technological solution to make sure banks, financial institutions, and FinTechs can mitigate the risk of online fraud. Using the technology, organizations can streamline the customer onboarding process and verify documents to reduce online fraud and money laundering. 

DIRO’s document verification technology can verify documents like bank statements, bank account verification, utility bills, address proof, and student records. During the customer onboarding process, banks can verify customer documents to make sure the customers are who they say they are. Money laundering and terrorist funding can be stopped by verifying customers before they can cause any real problems.

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Types of Bank Account Verification Methods & How DIRO Facilitates Account Verification?

types of bank account verification

Verifying a bank account is one of the most crucial parts of minimizing the risks of fraud and scams for banks, financial organization, or FinTechs. With the technology growing at an incredible pace, ACH transactions are at an all-time high. Bank account verification is crucial during online funds transfers, commonly known as ACH transactions, as it ensures where the funds are coming from and if they are associated with any malicious activities. 

Many businesses are offering online payments as an alternative to payment methods such as credit cards and paper checks. Finding an ideal method of bank verification can be suitable for users as it improves the user experience. 

Using the right methods of bank verification will allow you to mitigate the risks of fraud and scams.

Reliable Bank Account Verification Methods

Banks, financial organizations, and other FinTechs need to employ the methods for bank account verification if they intend to keep their brand reputation intact. Here are the best bank account verification methods to keep an eye out for.

1. Use Micro Deposits Verification

Micro-deposits are deposits of less than ten cents transferred from one financial institution to another that can help in verifying if a specific account type is valid or not. If a bank does not offer the feature of online banking or if the users can’t remember their credentials even then they can make micro-deposits for account verification as it is a self-contained process. 

When using micro-deposit verifications, the user will fill in their bank account and routing information. Two small credits are sent to the customer’s account that will be reflected in 1-5 business days. These amounts will confirm that the user can access their own account. 

2. Instant Account Verification Service (IAV)

The fastest method of bank account verification is by using the instant account verification service from the bank itself. Using instant account verification can even improve your overall user experience. With IAV, a user is asked to choose their bank and submit their online banking credentials to verify the account. In just mere seconds, the bank account is verified and the users can start with their banking features.

3. Third-Party Bank Verification Methods

A check verification service or a third-party bank verification service provides businesses, individuals, or other financial institutions with the ability to check the validity of the account. 

Third-party bank account verification can be done using multiple methods such as checking different databases with negative account history, checking to route and account number is valid or not, orax contacting the bank directly to confirm the information.

How does DIRO improve the Account Verification Process?

DIRO’s technology captures original documents from any web source online. Using DIRO’s technology, users can verify bank account documents (any kind of documents) that can assist banks & FinTechs in verifying bank accounts and reduce the risk of fraud and scams.

All types of bank account verification can be done in seconds using DIRO bank account verification technology. Even the best bank account verification methods can often fail to verify cleverly fabricated bank documents. DIRO verifies the documents against the original web source to reduce the risk of financial crime.