State Bank of India (SBI) is set to test blockchain-based smart contracts in a move that validates the huge potential of blockchain in banking. Story by Resham Karira.

Banks across the world are exploring the potential of blockchain to provide simple and secure solutions for processes such as peer-to-peer payments, loans syndication, KYC compliance, cross-border payments and virtual currencies.

The State Bank of India (SBI) plans to beta test a blockchain-based smart contracts system developed by the BankChain consortium in December 2017. The consortium, which was launched in February 2017, is composed of 27 banks that aim to develop blockchain solutions for the Indian banking industry.

Smart contracts use blockchain to maintain traceable and irreversible contracts between parties. They are self-executing contracts, with the terms of the agreement between buyer and seller written directly into lines of code. The code and terms are available publicly, eliminating the need for a regulatory agency to keep track of the financial history of any party. With smart contracts, consumers can sign contracts electronically without the need for a trusted third party (such as a bank, government or lawyer) to verify the contract or transaction as valid and legal.

This could help provide additional peace of mind for consumers by protecting their money when buying and trading shares, making a credit or debit card purchase, transferring funds between accounts and buying property.

SBI will initially test smart contracts for simpler processes, including KYC. KYC is an expensive element of onboarding a new client. Each financial institution creates their own KYC, which means the cost of customer acquisition is high. And for customers, it means going through a painful process every time a new account is opened with a new bank. Implementation of smart contracts will reduce infrastructure costs for the bank and make the process much quicker, which consumers will appreciate.

Integrating blockchain into banking through smart contracts is a low-risk way to test the capabilities of this technology. Indeed, this approach is perhaps the most sensible next step for others looking to adopt blockchain. Yet, SBI’s move can also be seen as validation of the reliability, security and performance of this technology, providing a hint as to the future of banking.

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– This article is reproduced with kind permission from GlobalData Financials. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by megavic93, Shutterstock.com

About the author

Resham Karira

Resham Karira is a retail banking analyst at GlobalData. She looks at current trends and how different factors such as innovative products and services, technological development, and forecasting and meeting consumer demands, interplay with each other to create a winning proposition for a bank.

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