How Smart Contracts are Transforming Banking System

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It is no longer news that smart contracts are transforming our traditional banking system by introducing automation, efficiency, and transparency into the financial system making things easier for people. Smart contracts which a self-executing contracts (program) that are coded on a blockchain network, are capable of automatically enforcing the terms of an agreement between parties when predefined agreements are met.

What we are saying here is that smart contracts can automatically execute an agreement once the condition of the agreement is met without the involvement of a third party. It is when these actions have automatically been executed that the need for third parties (intermediary) will be removed. There are so many ways that smart contacts are transforming our banking system.

How Smart Contacts are transforming our banking system

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Automation of transaction

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• Smart contracts can automate the disbursement of loans and repayment without the physical presence of a third party to confirm the disbursement or repayment. For instance, once a borrower has met the conditions of the loan like providing collateral, to the loan provider, the smart contract can automatically release the money and schedule repayments.

• Smart contracts can also automate the verification of documents before the loan can be executed and trigger payment once documents have been verified which helps to reduce paperwork.

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Reduce of Third Parties and Costs

• Smart contracts help to reduce the need for third parties like brokers, escrow services, and notaries by directly executing transactions on the blockchain. This helps to lower costs and increase transaction speed.

• The elimination of third parties, helps to lower transaction fees, because the money that would have been paid to hire a third party, would be used for something else.

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Improved Speed and Efficiency

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• Local banking systems border transactions usually take time to deliver, so smart contracts can be used to reduce the delay and speed up the transaction within minutes.

• Smart contracts can be used to streamline KYC (know your customer) and AML (anti-money laundering) checks, making the process more efficient and faster than how it would be processed using the traditional banking system way.

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Enhanced Transparency and Security

• Smart contacts are built and stored on a blockchain network which makes them tamperproof as all transactions are audited and transparent, thereby increasing the trust of traditional banking.

• Traditional banking can use smart contacts to monitor the execution of the agreements in real time, minimizing fraud and ensuring compliance with regulatory requirements.

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Decentralized Finance

• Traditional banking systems can use smart contacts to create customizable financial products that are tailored to individual customer needs, such as dynamic interest rates or personalized insurance policies.

• Smart contracts help to facilitate the lending and borrowing of money and with smart contracts, money can be allocated for what it is designed for.

In conclusion, smart contracts are transforming our traditional banking system significantly in many ways which we have discussed in this post.

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