Blockchain technology applications on financial services and banking industries

The banks’ legacy systems, some of which are 30-40 years old, complex procedures and, in some cases, slow processes in the financial services industry could surely use a breath of fresh air. Therefore, it’s not surprising that more and more players from these fields are quickly embracing blockchain technology to revamp their outdated systems and procedures, to enhance security of databases and transactions, to increase speed and to save a lot of money while offering customers a streamlined experience.

Using blockchain to improve the KYC process

For financial institutions, Know Your Customer (KYC) is an important process for anti-money laundering, helping to detect and prevent criminal behaviours around the world. Despite its importance, KYC at many financial institutions is inefficient with tedious processes, duplication of effort and risk of error, so it’s clear that a change in KYC is needed. And blockchain could be the right solution to do that!

According to KPMG, the immutability and transparency of blockchain provides a streamlined way for financial institutions to gain swift and secure access to clean and up-to-date customer data. This results in greater operational efficiency, increased trust between institutions and reduction of labour-intensive data gathering, processing time and costs. For regulators, the use of blockchain provides a single source of customer data for better understanding and visibility of customer activity across financial institutions. From a customer standpoint, an institutions use of a blockchain-enabled KYC utility could reduce onboarding wait times and eliminate the need to repeatedly provide the same information to their financial services providers.

While a blockchain-based utility can help banks reduce the burden of time and cost associated with gathering customer information, KPMG believes that it is critical banks still perform due diligence on customer information obtained from the platform. Care and attention must be given to issues such as privacy regulations and customer permissions. When used in combination with other technologies, a blockchain KYC utility demonstrates strong potential to help financial institutions reduce the time and cost associated with KYC processes, while providing greater visibility to regulators and better customer experience.

Benefits of a blockchain KYC utility

Nowadays, banks and large financial institutions around the world are struggling to meet the ever-increasing scale and rate of regulatory change. Processes for KYC compliance, in particular, are costly and time-consuming with the added and significant concern of the extraordinary fines for non-compliance today. For financial institutions, the costs associated with KYC processes are high: $60M – $350M spending/bank and $600+ / KYC on average, which translates into lost revenue opportunities. These processes are also time consuming: 5-100 documents / KYC, approximately 24 days to on-board a new client and a KYC refresh takes almost 20 days. For corporate customers, today’s KYC-related processes might be seen as a poor customer experience due to changing requirements from bank to bank and long on-boarding times. With these factors in mind, it’s obvious that something has to be done to improve and optimize the KYC process. Solution? Blockchain.

Improving KYC with Modex BCDB

How can Modex BCDB (Blockchain Database) improve the KYC process? It can increase speed – from 3-4 weeks to couple of days by compressing data gathering and automating processing. Our solution can also reduce costs by at least 20% by eliminating duplication through shared services, and also reduce risk via a distributed and shared ledger that acts as an immutable, assure audit trail of all corporate KYC process. Last, but not least, Modex BCBD (Blockchain Database) can enhance the user experience via instant visibility across all shared information by a customer, secured through a consent-based mechanism, which controls information access. Read more about this.

Combating cyberthreats to financial services providers

Placed under a constant barrage of attacks from cybersecurity threat actors, the financial sector is in dire need of a new solution that can provide a secure framework for their data, capable of putting them on an equal footing with malicious actors that seek to profit. Among the few that can answer this call for help is blockchain, a relative newcomer to the tech scene that demonstrates that it can leverage its suite of inherent benefits to block a series of attack vectors.

How is blockchain compatible with financial institutions?

In its standard form, blockchain technology presents itself as a new type of distributed and decentralized data infrastructure capable of guaranteeing trust that the information stored on the network has not been tampered with. Building on the foundation of trust provided by the default iteration of blockchain technology, Modex BCDB provides additional functionalities and features like data synchronization policies, access control mechanisms, on-demand encryption at the field level, all while maintaining the familiarity of working with a traditional database engine. As an agnostic technology, Modex BCDB is compatible with an extensive list of database engines and blockchain frameworks which gives financial institutions, regardless of their tech infrastructure the ability to seamlessly integrate a blockchain back-end to their existing systems, making them resistant to cyberattacks that target data confidentiality, availability, and integrity.

Confidentiality attacks

Traditionally, cybersecurity threats such as ransomware focus on encrypting sensitive data, effectively blocking companies from accessing their information without the decryption key. Recent attacks demonstrate that the groups behind these types of attacks changed their approach to put additional pressure on financial institutions by also exfiltrating the data that they manage to encrypt. Also known as data extrusion, data exportation, or data theft, data exfiltration is the unauthorized copying, transfer, or retrieval of data from a computer or server. Data exfiltration is a component of a larger family of security threats commonly referred to as data breaches.

How does Modex BCDB ensure data confidentiality?

As data breaches are becoming more prevalent in the cyberspace, ensuring data security has become a top priority for companies, financial institutions, and enterprises in general. The most common method to ensure data protection is through encryption, a process through which information is transformed into ciphertext, an unintelligible block of text that can be decrypted only with the correct decryption key. For decades, data encryption has become an important line of defense in the flow of cybersecurity architectures because even if data is intercepted by malicious actors, a complex encryption algorithm can block attackers from deciphering the content of the information.

Modex BCDB enables companies to tap into the potential of blockchain technology to store their database entries into a secure tamper-proof blockchain ecosystem. The infrastructure of the BCDB system was designed with security in mind. To enhance the security capabilities of a standard blockchain network, Modex BCDB comes with a default data encryption mechanism that removes the need for programmers to write new code to encrypt data. To enhance user experience and add a layer of flexibility to the BCDB environment, users have the option to enable automatic encryption at the field level. As such, any new data inserts are automatically stored in an encrypted format.

Availability attacks

Availability focused attacks aim to interrupt the ability of a financial institution to access their data records. The most common and widespread type of availability attack is ransomware which is a type of malicious software that prevents users from accessing their system or personal files and demands a ransom payment to regain access. Over the past decades, ransomware has become one of the most prolific criminal business models in the world, because cybercriminals usually target high profile financial institutions, corporations, and even governmental organizations. Ransomware works by locking a victim’s computer through encryption and demanding a substantial sum of money for the decryption key necessary to decrypt the data. Depending on the group behind the ransomware, failure to comply with the demands may initially lead to an increase in the ransom and eventually to a permanent loss of the data, or new attacks based on the user base stolen from the previous attack.

Modex BCDB preserves data availability

A major advantage of the Modex BCDB solution is that it enables centralized legacy systems to make the transition to a decentralized, distributed model without requiring a complete infrastructure overhaul. With a plug and play approach, Modex BCDB can connect to a bank’s IT infrastructure through a set of custom connectors. Once positioned between the application server and database engine of the company, the BCDB software acts as a liaison that connects the existing system to a blockchain backend.

In case of encryption by ransomware, the attacker would find it impossible to hold all the data hostage because the entire network is distributed among thousands of users (even more depending on the size of the blockchain) and even if they manage to encrypt a node, admins address the vulnerability that allowed the attacker to enter the system and restores the node to its previous version by pulling data from other nodes from the network. It is safe to assume that a blockchain-powered database can be an ideal solution to ransomware or other types of data availability attacks.

Integrity attacks

Data integrity attacks, also referred to as data manipulation attacks, are a type of cyberthreat that aims to undermine trust in the data records stored in the systems. Typically, in an integrity attack scenario, an unauthorized party gains access to a data system and manages to successfully alter data records without alerting authorized users and sysadmins. Paired together with the fact that many companies tend to neglect the importance and usefulness of data activity logs, many such attacks go unnoticed until the problem escalates even further, translating to financial damages, disruption of operations as well as the risk of compromising business partners.

Modex BCDB guarantees data integrity

Data integrity is directly related to the readability and trustworthiness of database records. In legacy systems, ensuring data integrity entails constant maintenance and frequent backups to guarantee the accuracy and consistency of data during its life-cycle. The Modex BCDB solution provides a blockchain-powered alternative to this model. By combining cryptography with hashing algorithms, blockchain ensures data immutability, a feature that brings unprecedented levels of trust to the data owned by financial institutions. In turn, immutability provides data integrity which drastically simplifies audit processes, while providing proof to stakeholders that the information has not been altered.

Through minimal changes, Modex BCDB integrates between a company’s database and application server to grant access to a blockchain backend, an environment resistant to modification and external tampering. Blockchains are highly valued for their ability to guarantee data immutability and integrity, which they achieve by storing a digital signature of the information present in the database in interdependent structures called blocks. Unlike traditional database engines, blockchain is an append-only structure which means that information can only be added to the network but never deleted. At first glance, this may seem troublesome because it may lead to the accumulation of redundant data, but in fact, this feature acts as a timekeeping mechanism for the data, as it creates an exact historical record of each version of the data, providing useful information like when it was modified, how it was modified and who modified it. Additional info.

Instant settlements and increased transparency

Blockchain has a huge potential to reshape financial services and banking, so below we’ll have a look at other areas which can be improved thanks to this revolutionary technology. Currently, settlements can take up to a week. With a blockchain-based solution, transactions could be done in minutes or seconds. Thanks to blockchain, settlements become user-optimised, which will save a significant amount of time and money, for both parties involved. Blockchain removes the need for a lot of middle office and back office staff at banks, as transactions settle instantly. Also, blockchain can bring to the table reduced error handling and reconciliation. Any data that is recorded on a blockchain can be tracked in real-time, leaving a very detailed audit trail.  

Faster transactions and better data quality

If slow procedures and processes have long been associated with banks or other financial institutions still anchored in the past, blockchain can change this, too. In a blockchain network, assets move by ledger entries, which makes transactions almost instant.Verification and processing of bank transfers may take several days, but new technologies can speed up the process from a few hours to several minutes. Thanks to blockchain technology, transactions will become instant and will take place in real-time. Moreover, blockchain can store any type of information and allow accessing it by following particular regulations and procedures. The technology uses smart contracts to automatically verify and complete a transaction, which improves the data quality and makes it resistant to any interference from the outside.

Lower costs and simpler money transfers

By using blockchain, banks can significantly reduce their infrastructure costs. Smart blockchain contracts can lower financial expenditures on intermediaries and minimize maintenance and execution costs. Blockchain facilitates quick and secure payments between two sides without a need for someone else’s interference. In addition, blockchain can significantly simplify the process of sending money internationally. When sending money via the traditional way, businesses and consumers have to face delays, additional expenses, and bureaucracy. However, blockchain offers a simpler, faster, and cheaper way to conduct cross-border transactions, which is why more and more banks are partnering with crypto coins.  

Simplifying the workflow in banking institutions

Blockchain can simplify the current complex workflow in banking institutions. As any operation can be traced, the ability to automate processes significantly reduces costs and the need for manual work. Moreover, it is impossible to make retroactive changes on the blockchain. This guarantees data immutability and excludes the human factor, thus the probability of error, data tampering, or even leakage. Using blockchain in banking can digitize and automate the manual work, greatly boost the productivity of financial institutions and eliminate the probability of mistakes, delays and errors.

Improved contractual performance due to Smart Contracts

If banks and financial institutions are using smart contracts, this improves contractual term performance as smart contracts execute automatically once certain pre-set conditions have been met. It is important that those smart contracts are firmly rooted in law and comply to any regulatory compliances. In particular, complex financial asset transactions can benefit from blockchain, due to automatic settlement using smart contracts under the control of an incorruptible set of business rules.

‍