Smart contracts have a plethora of benefits. Powered by a blockchain, they can be tamper-resistant, self-executing, and self-verifying. At present they are changing the face of the banking industry in instances of error-free realization of insurance claims, smooth peer-to-peer transactions, streamlined KYC processes, transparent auditing, and more. In this article, we will discuss the positive changes that smart contracts have brought into this industry.
Smart contracts may be defined as self-executing programmable contracts that encode an agreement between two or more parties. The conditions of a transaction are encoded as a protocol that exists across a distributed, decentralized blockchain network system.
Types of Smart Contract
1. Legal smart contracts
Legal smart contracts can simplify legal processes and ensure strict conformance to regulatory guidelines. They may be applied to critical financial, international trade, and real estate market contracts. The present legal framework is inadequate in context and support for automated contracts on the Blockchain. However, when the laws are constructed around it, these should be easier to use.
2. Decentralized autonomous organizations (DAOs)
DAOs are contracts designed for blockchain communities. The participants of these communities adhere to the set of rules put into the contract’s code. For example, crowdfunding platforms, implement DAOs. A number of smart contracts define rules and work towards effectively monitoring and managing participants. This guarantees enhanced support amongst all parties.
Also read: DAO: Understanding Their Rise and Popularity
3. Application logic contracts (ALCs)
Whoever has come across the Internet of Things (IoT) layered on the Blockchain, must have come across Application Logic Contracts or ALCs. Application-specific codes that work in conjunction with other programs on the Blockchain constitute ALCs.
ALCs establish and validate communication between IoT devices. ALCs comprise vital pieces of every multi-function smart contract and primarily function under a managing program.
Smart Contracts Transforming Financial Services
Smart contracts are thoroughly into altering the way in and the speed at which businesses happen across sectors; financial service industry included. Smart contracts are useful in carrying out the given processes in banks and financial institutions.
1. Error-free and swift processing of insurance claims
Determining the legitimacy of an insurance claim involves a tedious procedure. Cross-checking the terms laid down in a manual contract and validating the claim is a time-consuming process. Blockchain-driven smart contracts automate the entire insurance claim processing to the banking industry.
Smart contracts simplify the process of filing claims and automated validation through the decentralized ledgers of the blockchain network. It also cuts down on the risk of paying for fraudulent claims by the insurance firm.
2. Reduced transaction costs
The transactions monitored and controlled by smart contracts are self-regulatory. This enables low-cost record maintenance and eliminates human intervention, which considerably lowers transaction costs in the long run.
3. Real-time remittance
The world warming up to digital modes of payment has increased the demand for a glitch-free remittance system. Blockchain-based smart contracts facilitate frictionless payment processing enabling real-time fund transfer, error-free and transparent. They also pace up transaction settlements through their autonomous verification.
4. Transparent auditing
Maintenance of records is essential to facilitate audits. The upkeep of traditional contracts involves loads of paperwork. Also, banks have to invest in resources to manage them. Blockchain-powered smart contracts make for advanced bookkeeping tools.
The smart contracts are driven by incorruptible and distributed codes in the Blockchain network. The solutions allow transparency of records stored while removing all probabilities of infiltration.
5. Streamlined KYC processes
KYC makes for a critical function in the financial services industry. Banks and FIs must determine customer identity before sanctioning a loan or dealing in other business transactions with an individual. A blockchain-powered smart contract system makes the procedures simpler for banks.
With smart contracts, banks and FIs can verify the credit scores of individuals and identities based on Blockchain records.
6. Accurate contracts
Transactions propagated by smart contracts are transparent and self-executing. They minimize the chances of error by removing human intervention. That is why they garner trust amongst the parties engaged in the contract.
7. Smooth peer-to-peer transactions
Banks function in a customer-oriented way. When they look to implement a technology that that enhancestheir performance, they would ensure it workswith the same ease for their customers and clients.
Utilization of Blockchain technology by smart contracts to eliminate intemediaries leads to cost reduction. This also simplifies transactions for the unbanked people. The adoption of cryptocurrencies as an alternative payment system by retailers is enabling peer-to-peer payments.
Smart contracts fuelled by blockchain technology is capable of bolstering retail banking business models. Challenges to a wider adoption of the technology by banks appear in the forms of scalability, volatility of cryptocurrencies, and developing stakeholder trust.
But, by deploying the right regulations and rules, safer banking systems can be established, and customer engagement can be boosted.