Technological innovation has been deployed in various facets of our lives, and the banking sector is not left behind with the adoption of digitization-driven models to facilitate banking transactions. Attempts to explore digitization in the banking sector is what led to blockchain technology, mobile banking, etc., to facilitate seamless banking transactions as well as address the technological revolution in the banking sector.
A survey conducted by Statista in 2020 showed that 32% of Nigerians have admitted to using or owning cryptocurrencies. This number and the fact that global cryptocurrency users are pegged at 300 million worldwide by 2021 alone shows the level of acceptance that blockchain technology’s continued use will have on the banking sector.
This piece aims to examine blockchain technology, its reception, challenges and benefits in the banking industry.
- WHAT IS BLOCKCHAIN TECHNOLOGY (BT)
Blockchain is a distributed digital ledger that stores data of all kinds. Blockchain technology, on the other hand, refers to a structure that stores transaction records, also known as the block, of the public in multiple databases, known as the “chain”, in a network connected through peer-to-peer nodes. Commonly, this storage is referred to as a “digital ledger”.1
Blockchain technology has been used in various aspects of banking. A recent example in Nigeria is the Central Bank of Nigeria’s eNaira.
- BLOCKCHAIN ADOPTION IN THE BANKING SECTOR: THE NIGERIAN EXPERIENCE
Blockchain technology was met with mixed reactions at its inception. This is due to the fact that it is the same technology that supports cryptocurrencies. Therefore, many financial institutions were cautious about its use at first. However, a large majority of them found themselves leveraging their innovative approaches and models to digitize banking services to facilitate a seamless experience for customers. Nevertheless, the blockchain’s contribution to the sector cannot be overemphasized. For example, a recent study shows that Nigeria has the highest rate of crypto adoption in Africa, with over USD 3 billion of transactions recorded in June 2021 alone.2
Highlighted below are some of the mouth-watering contributions and impacts it has had in the banking industry:
- Payment transfer: Before BT was adopted, regular payment transfers required extra fees and payments between sending banks and receiving banks, especially for cross-border transactions. However, with the advent of BT, cryptocurrencies such as bitcoin and others were developed on a public blockchain, making it free for anyone to send and receive money freely with little or no transaction fees. The fact that BT is being launched on a decentralized network also makes it faster and cheaper to make payment transfers seamlessly unlike what was achieved before it was introduced. Settlement and Settlement System: In the past, wire transfers took days to complete due to the complex system of intermediaries from banks to custodian services. The settlement and clearance system also requires a lot of paperwork which BT has removed since it is hosted on a decentralized ledger, settling transactions on a public blockchain without custodian services. Loans and credit: BT’s influence on this aspect is colossal. Before it was adopted, getting loans and credit from banks is very stressful as it requires a lot of paperwork and back and forth since the banks rely on a credit reporting system and had to consult several other financial institutions to get credit reports. Today, the use of BT has made access to loans and credit easier for customers as the data stored on the decentralized network can be easily explored to obtain the customer’s credit reports from credit bureaus
- as well as their previous credit records to facilitate faster and easier lending services.
- Customer Know Your Customer (KYC): For KYC, banks usually take months to find out a customer’s photo verification, address proof, biometric verification, etc. However, the introduction of BT in banking services has helped ease the KYC process as customers’ information can be stored on the blockchain for easy access by banks.
- CHALLENGES IN BLOCKCHAIN ADOPTION IN BANK
Despite the commendable innovations and improvements, adopting BT in the banking sector is not without its shortcomings. Highlighted below are some of them:
- Potential for illegal activity: The fact that BT is run on a public or private network makes it vulnerable to illegal money laundering and terrorist financing as it is difficult to keep track of transactions fostered on the blockchain. This informs the bank’s early reluctance and reluctance towards acceptance, as regulators such as the CBN believed it to be an oil well for illicit financial activities in light of its non-transparent nature. To mitigate this, African countries are now taking advantage of central bank digital currencies (CBDC), with Nigeria being the first with the launch of eNaira last year. Technical, regulatory and institutional challenges: BT in the banking sector is not properly regulated. This apparent lack/lack of regulation stands in its revolutionary mission to uplift the banking industry. In Nigeria, for example, the CBN and SEC’s refusal to approve cryptocurrency operations by banks is evidence of the absence of clarity in technical, regulatory and institutional frameworks for
- successful operation of the sector.
- Lack of infrastructure: Despite the level of technological advancement in Africa, the lack of infrastructure has taken its toll on BT’s successful implementation in the region. In Nigeria, for example, over 60 million of the population do not have access to the banking system. In fact, this is further compounded by the fact that approximately 79% of economically excluded adults live in rural areas.
The adoption of BT in the African banking sector has been slow. Nevertheless, the increase in technological inclusion in the sector is worth noting. In fact, the South African government has recently encouraged banks in the country to embrace close collaboration and engagement on BT. While BT adoption and usage tends to be higher on the side of the youth population due to their exposure to technology, relatively low usage has been recorded among the older generations.
It is believed that BT is a milestone with great prospects and the African banking sector has yet to fully explore its frontiers.
Footnotes
1. accessed 16 May 2022.
2. accessed 18 May 2022
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
