What Are The Revolutionary Impact of Blockchain Technology in the Banking Sector?

Blockchain technology has shown its potential for financial incorporation as well as the formalization of cross-border remittance ever since it was developed and deployed for public use. Currently, various researchers and scholars have explored the abilities of Blockchain technology in streamlining and, possibly, supplant the foundation supporting cross-border remittance and payment. Convectional cross-border remittance and payments consist of an expensive and slow process of continually passing through CBRs as well as other intermediaries who make the process much slower. Nevertheless, Blockchain technologies have shown an ability to support real-time payment and remittance settlements through its shared ledger system.

Moreover, the shared ledger has enabled interoperability, which is associated with seamless interaction of various remittance platforms, and possibly also dissimilar payment products. Hence, competition is enhanced and fixed costs are reduced. In this light, the purpose of this paper is to assess the impact of Blockchain technology on cross-border remittance and payment systems in the banking sector. This will involve an assessment of Ripple Blockchain technology in promoting innovative capacity in the contemporary banking sector. 

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The potential revolutionary impact of Blockchain Technology in various industries still remains a mystery just as the pioneer scientist who introduced it through the Bitcoin cryptocurrency. The scientist published his/her white paper on Bitcoin under the pseudonym: Satoshi Nakamoto (Nakamoto, 2008). Nevertheless, what caught the attention of most tech-savvy individuals at that time was not the Bitcoin cryptocurrency itself, but rather its underlying mechanism, which came to be known as Blockchain. The technology is yet to be widely understood as various computer scientists attempt to gain insight on how it works as well as how it can support organizational practices in various industries.  

Thompson (2016) defines Blockchain Technology as a distributed, or shared, a database that can process and record all peer-to-peer transactions executed in a network. The technology entails advanced automation as well as security features that disregard the need for a third-party entity to verify and record each transaction prior to generating an immutable transaction record (Finextra Research, 2016). Consequently, Blockchain technology creates a chain of historical data made up of a collection of transactions performed in a particular period, known as blocks. The blocks of transaction data are cryptographically appended to a public database, which is made up of existing blocks of data arranged like a chain.

What Is Blockchain Technology, And How Can It Be Used In Organizations And Industries To Create Value?

The blocks are basically made up of two sections, namely: a header and body. The header part includes the block’s metadata, which entails a cryptographic hash code of the latest block to be appended, a timestamp, and its root hash in the Merkle tree. The body, on the other hand, contains a list of transactions for that particular period for which the block comprises of. The hash code is the cryptographic output that represents the input numbers and letters after undergoing conversion through the hash function (Mainelli, 2017).

Its distributed nature offers an efficient way for organizations to transact by enhancing transparency (Seibold & Samman, 2016). This is because the database can be accessed by every device connected to the network as a Read-Only record. This is much more secure than conventional systems, which encompass granting and revoking privileges for viewing particular organizational data. Furthermore, its consensus mechanism allows that network to automatically apply a standard truth condition that determines the validity of a transaction (Seibold & Samman, 2016). Hereby, a set of conditions are established which govern the validity and execution of transactions based on a single version of truth within the network. Additionally, the technology also features a robust cryptographic framework and immutability, which ensure that records cannot be tampered with once they have been shared into the distributed ledger. 

What Are The Revolutionary Impact of Blockchain Technology in the Banking Sector?

            Hence, various organizations have begun utilizing its features to support their business practices. Tapscott & Tapscott (2017) assert that Blockchain has the capacity to improve the efficiency of organizational practices by enabling them to securely manage their information assets. This comes at a time when the cost of computing memory has increased since current information systems depict high redundancy as well as increased security risks. Thus, the purpose of this paper is to assess the impacts of the utilization of Blockchain technology in the banking sector. 

 Literature Review

Blockchain technology was first utilized to present the Bitcoin cryptocurrency. The cryptocurrency was the first secure digital currency that could be transacted securely over a network on a peer-to-peer basis. Furthermore, the technology’s cryptographic identities further made it hard for hackers to intercept a transaction (Iansiti & Lakhani, 2017). The basic mechanism that enabled Bitcoin was later seen as an ideal ledger system. Blockchain technology reflects the business practices carried out in a banking environment, which involves verification of transactions as well as maintaining a historical record of transactions. Nevertheless, its basic mechanism has been integrated into various industries so as to efficiently manage their online transactions in an era when most companies are increasingly integrating information systems to support their business activities.  

            Budman et al. (2019) show that about forty percent of organizations around the globe have ventured into the adoption of Blockchain technology to support their organizational activities. So far, the financial sector is the leading industry in the adoption of Blockchain technology. Other industries are cautious, yet eager, to develop effective strategies to cost-effectively adopt Blockchain technology. The technology is deemed as an enabler in tackling various forms of fraud as well as reduces the cost incurred in conventional systems including the need for a third party system to verify and record transactions as well as in securing their information systems. Sarah (2016) asserts that Blockchain has the capacity to efficiently secure financial transactions, monitor supply chains, and manage business records. Therefore, Blockchain is practically usable in almost each and every industry across the globe (Fanning, et al. 2016).

Limitations of Blockchain and Emerging Concepts.

            In the banking sector, Blockchain-enabled a distributed ledger system as well as enhanced security of records through its embedded cryptography feature. The technology also improved data integrity through its security features as well as its interlinked nature. Transactions are linked to the same information in case they belong to the same block. This is enabled through its Merkle tree data structure for organizing data (Zhang, Xue & Liu, 2019). Furthermore, despite that records are shared on a distributed ledger, transactions were carried on a peer-to-peer basis. Once carried out, the consequent transaction records were immutable as well as irreversible. This is an important aspect in the future of banking and financial institutions since it assists them to control their financial operations in an effective manner. Bank administrators have acknowledged the significance of Blockchain, whereby they see it as a requisite for offering innovative financial services so as to achieve sustainable growth (Tsai, et al. 2016).

            Albeshr & Nabonee (2020) assert that Blockchain has the capacity to popularize financial institutions and banks similar to the internet popularizing the media industry. Nevertheless, since it is a new technology and its adoption is perceived as a novel venture, it is important that financial institutions and banks identify and come up with strategies to tackle possible risks associated with its adoption. Upon establishment of risk mitigation strategies for addressing the identified risks, the banking sector can optimistically venture into the adoption of Blockchain technology. This is basically a cost-benefit issue whereby the cost of its risks may not surpass the benefits gained from it. First of all, the technology is safe, transparent, and secure. The technology is also distributed, which is a substantial value for banks. The technology is also concomitant with low operational costs, which are promoted by delegation.

            So as to gain insight into the advantages that could be realized through Blockchain technology, it is crucial to explore the features it offers to support fundamental financial institution practices. First, it enhances cost-effective means of carrying out financial services. This is enabled through the utilization of smart contracts to manage tasks that require intermediaries so as to perform tasks such as verification of transactions. Additionally, the technology entails faster transaction rates as compared to conventional financial systems. Monem (2019) demonstrates that a mere task such as verification of bank customers and the transnational transaction may take hours rather than up to five business days. Consequently, banks are able to efficiently improve their customer satisfaction.

IT personnel in the banking sector can integrate Blockchain technology into their organizations so as to realize the aforementioned benefits and advantages. This will involve the information and technology department to undergo training on the technology so as to competently manage the novel technology upon its implementation in the organization. Furthermore, talent management can be enhanced by hiring employees with competent knowledge and skill with regard to technology. Consecutively, the employee will assist those who are not proficient with managing Blockchain systems. Nevertheless, explaining to the shareholder the significance of Blockchain technology can further enhance the success of the organization by securing the required funds to invest in the technology. As a financial institution, the Ripple security strategy is an ideal strategy to adopt for implementation. This is meant to accumulate the security of international financial resources. This security framework allows for exchanges and payments by use of cryptocurrencies.

What are Argumentations about the innovation of Blockchain?

Methods

So as to explore the impacts of Blockchain technology on the banking sector, based on Ripple Blockchain Framework, data was obtained from an analysis of various secondary sources. These sources include policy documents, regulations, and other internet multimedia sources. Qualitative data collection methods were also used to obtain data through online ethnography in a conference Skype calls as well as the Bitcoin.com Ripple forum (Hjorth et al. 2017). Furthermore, this study is based on a mixed research design that incorporates the social construction of reality as well as gaps and holes (GAH) research designs as described by Treiblmaier (2019).      

            Based on GAH research design, traditional paper-based payment and banking infrastructure were categorized as the principal gap in the current literature on innovative financial systems. Therefore, various secondary resources were assessed to obtain data on companies that performed at the infrastructural level, instead of at the point of sale of payments and exchanges. Consequently, building the theory was supported by a social construction of reality research design drawn from the analytical social science literature concerning finance, money, and the market. It is important to note that the study results do not aim to disprove current or new theories on the topic, but rather Ripple is used as a ‘critical case’, which attains the most amount of data about a particular issue as suggested by Flyvberg (2001). Therefore, the study does not aim to present a generalized view based on duplication. Rather, it develops a theory on the topic based on rich descriptions obtained during the evaluation process (Treiblmaier, 2019).   

            Moreover, the research design used in this study considers an interpretive epistemology, as Cavaye (1996) instructs, instead of exploring the failure and success in implementing the Ripple Technology in the banking sector. This research paper excludes the design politics of a certain technology as well as the perceptions, philosophies, and political economies related to the use of Ripple. Contextually, the specific criteria of analysis of failure and success constitute part of Ripple. Consequently, the reader should acknowledge that a conclusion is based on various sources of literature, whereby data converge in a triangulating way (Leszczynski, 2018).   

            This study paper emphasized Blockchain applications to cross-border bank-to-bank remittance infrastructures instead of peer-to-peer retail exchanges. This is because this is what emerged as the paramount gap in the organization. The rationale is that establishing a Blockchain infrastructure that enhances cross-border bank-to-bank remittances would enable the bank to efficiently adopt a Blockchain system that would revolutionize the bank’s correspondent point-of-sale banking services. Analysis of current literature showed that Abra, BitPesa, Stellar, and Ripple were the most commonly used Blockchain technologies in the market (Burniske & Tatar, 2018; World Bank, 2018; DuPont, 2019). Nevertheless, Ripple is the only one among the cited Blockchain technologies that effectively manage cross-border bank-to-bank remittance through its comprehensive record of partnerships with Money Transfer Operators and banks around the world. Furthermore, it also features a complete distributed ledger technology as part of its suite (Elsden et al. 2019).

Results and Discussion

According to Erbenova et al. (2016), banks normally depend indirectly on transnational Correspondent Banking Relationships, also CBRs) for cross-border remittance. Correspondent Banking (CB) establishes a continuous agreement between banks and other financial institutions to enable banks to offer their services in nations they do not directly conduct their banking services. The Wolfsburg Group (2014) asserts that CB consists of cash management, check clearing, global wire transfers, foreign exchange, and payable-through account services. The CBRs incorporate the supposed ‘Vostro’ and ‘Nostro’ accounts. World Bank (2015) asserts that the Vostro refers to the account operated in lieu of the respondent bank by the correspondent bank as well as recorded in the latter’s book, whereas the Nostro account is the respondent bank’s account retained by the correspondent bank. The relationship between the two banks can be downstream or nested when there are many respondent banks to one correspondent, or a one-to-one relationship (BCBS, 2017).        

            Despite that remittance of funds occur through records in books held by the different banks, bank-to-bank transaction messages happen through the Society for Worldwide Interbank Financial Telecommunications, commonly referred to as SWIFT. Nevertheless, SWIFT only enables the transfer of transaction messages, which still requires clearing and settlements of fund transfers. Evidently, this leads to a slow and expensive cross-border remittance than local remittance. Furthermore, the number of CBRs has reduced in the past decade as measures of de-risking with regard to regulatory compliance cost. Besides, CBRs closed down due to shrinking profits in Nostro-Vostro accounts (Bansal et al. 2016).   

            De-risking is also shown to affect money transfer operators and donations extremely, due to their actual or perceived greater risk profile and less profitability as correspondent banks’ clients. Basically, an increase in price and a decrease of channels for cross-border remittance affect underdeveloped and developing countries more than developed countries. As well, local banks are impacted significantly than transnational banks, whilst Money Transfer Operators are affected more than local banks (World Bank, 2018).

Application of Blockchain Technology to Enhance Cross-Border Remittance

The integration of Blockchain technologies to support cross-border remittance in the bank focuses on interoperability. This involves shared visibility of transaction records, payment infrastructures, standards, and customers. CPMI (2016) asserts that interoperable payment systems enable the unified interaction of various remittance platforms, and possibly also dissimilar payment products. Hence, competition is enhanced and fixed costs are reduced.   

Blockchain technology and its effect on the society

            Blockchain has the ability to promote the realization of interoperability through distributed ledgers that can be accessed by all banks carrying out cross-border remittances. IMF (2017) asserted that potential uses of Blockchain technologies in the banking sector involved real-time settlement, risk management, and cost reduction. Furthermore, despite that the Blockchain technology materialized at the extreme formalization of capitalism and thus faced opposition, companies have gone to adopt it. This has led to disruption and re-structuring of various market sectors and organizational structures to adapt to a structure that supports Blockchain technology (Libra, 2019). Furthermore, cryptocurrencies are increasingly taking a new form of digital assets (Burniske & Tatar, 2018).  

Advancement of Cross-Border Remittance through Ripple Blockchain Technology

Ripple started as a local exchange trading system in 2004. Fugger (2004) asserts that it was launched to offer a financial infrastructure for expanding the local exchange trading system as well as other alternative currencies. Ripple later transformed into a shared ledger, known as XRP Ledger, between 2012 and 2013. The shared ledger encompassed a combination of exchange credit networks with the XRP crypto assets and shared currency exchange. The XRP Ledger stays an open shared ledger that is not under the immediate control of the parent organization Ripple.

            The XRP Ledger materializes money in two different ways: XRP and trust lines. Trust lines are I Owe you (IOUs) that represent contracts to pay designated in any unit of account they need. The framework permits clients to make completely new currencies as well as set their own conditions. In the case that a peer connects to the created trust line, individuals can perform remittance transactions by exchanging balances contained in that trust line. As well, they can transfer funds across common associates. Remittance can be performed through the trust lines as long as there is a continuous chain of trust lines. Then again, they can send each other XRP, which can be sent from any client to some other without the requirement for trust lines. In the event that the payment requires a cash trade, the sum moves through ideas on the appropriated trade, which works like a computerized FX commercial center. Individuals post offers on the Ledger, and the framework matches friendly balances with open ideas to trade one money with another and find the most appropriate choice.

            Nevertheless, Ripple aims to open up new streams of profit that were held up in Nostro and Vostro accounts by eliminating intermediaries. Ripple (2018) promises to enhance its aim of unlocking pools of liquidity trapped in conventional correspondent systems by use of its interoperable protocols. Furthermore, the liquidity pressures greatly impact Money Transfer Operators than banks under low payment values. This is attributed to the tiered nature of payment systems. The XRP Ledger, on the other hand, offers equal rights to everyone through its contract-based service where an individual sets up their own individual conditions.  

Since Ripple is not aimed at eliminating banks and MTOs, since they aimed at using them as gateways, they developed the InterLedger Protocol (ILP). Thomas & Schwartz (2015) assert that the ILP is not meant to send money over the blockchain network, but rather simultaneously updates the shared ledger in financial institutions that have adopted the Ripple Network. ILP includes atomicity in which transactions either occur or fail completely. Furthermore, IBM (2019) carried out an ACID test, i.e. Atomicity, isolation, integrity, and durability of the protocol, whereby the results were perfect for managing transactional data.

Conclusion

Generally, Blockchain technology is seen as an innovative tool in the banking sector to reduce the cost of cross-border remittance. Ripple is depicted to aim at eliminating intermediation in cross-border remittance, which is associated with causing liquidity pressures that make cross-border remittance expensive and slow. Ripple also plays a major role in further innovating the Blockchain financial infrastructure by developing friendly systems that will allow banks to gradually integrate Blockchain technology to support their financial services. Moreover, Ripple aims at flattening the financial environment so as to alleviate the negative effects of de-risking on Money Transfer Operators and banks.        

Evidently, the impact of Blockchain technologies, particularly Ripple, is yet to be comprehensively understood. Nevertheless, Based on the data collected during the research, it is clear that most supporters in the forum portrayed a high appreciation for the enhancements brought by Ripple in the banking sector. On the contrary, it would have been better if the study collected data on real-life experiences on using the Blockchain network. This involves bank administrators, rather than developers.

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