Block Chain in E-Banking System

Challenges and Opportunities

Kavya V & Shwetha T
3rd Semester BCA
BIHE Davangere

Abstract
The 21st century is all about technology. People are open to accepting new technologies as the need for
modernization is increasing every single day. Blockchain is one of those new and revolutionary technologies
that will have a significant impact on the market and industry. In Layman’s terms, Block chain is a data
structure that stores transactional records while also ensuring security, transparency and decentralization. There
is a digital signature on every transaction on a blockchain, which proves the authenticity of the blockchain. In a
Blockchain data is stored which is tamper-proof and cannot be changed as it uses encryption and digital
signature. To change a record on a blockchain, one needs to change several records and one needs to change the
distributed ledger. That’s why it is quite impossible to change the data which has already been entered into
blockchain. The blockchain is a technology allows transactions simply, safely and also effectively. And it is
very promising technology. It is already in lot of places. This technology became famous after introducing the
first cryptocurrency, which is known as “Bitcoin”.

Although E-banking provides its customers a wide range of services at any time and from anywhere most of the
research studies have indicated that security is the major concern to adopt it without any doubt. As digital world
is full of known and unknown cyber threats, there is a real need to protect sensitive records from misuse.
Blockchain is an upcoming technology that just steps in to solve the issues. It is basically a linked list of blocks
(public ledgers) that records data in hash functions with timestamps to store it anonymously with other
participants within the chain. It eliminates third party dependency required for the traditional banking, which in
return reduces the probability of central point vulnerability. Data manipulation is impractical due to use of
one-way has function. There is no requirement of designing distributed trust model as all transactional data are
verified with every relevant stakeholder. It has been studied here how Blockchain technology can be used for E-
banking scenarios using hash algorithm along with nonce and what is its impact on the society to transfer
financial data. However there are still few issues associated with Blockchain that need to be addressed before
implementing it in real life.

This paper concentrate on importance of block chain in electronic banking and other banking technologies. As
we know that there are lot of uncertainties in terms of usage of technologies, security and other day to day
transactional in E-banking systems. Our paper focuses on how to overcome a problem of security and other
challenges using Block chain technology.

Keywords: Block chain, Hashing, Nonce, Distributed ledger, E-banking.

Introduction:

The core ideas behind Block Chain Technology emerged in the late 1980’s. In 1989, Leslie Lamport developed
the Paxos protocol, and in 1990 submitted the paper. The Part Time Parliament to ACM Transactions on
computer systems; the paper was finally published in a 1998 issue. The paper describes a consensus model for
reaching agreement on a result in a network of computers where the computers or network itself may be
unreliable. In 1991, a signed chain of information was used as an electronic ledger for digitally signing
documents in a way that could easily show none of the signed documents in the collection had been changed.
These concepts were combined and applied to electronic cash in 2008 and described in the paper, Bitcoin: A
Peer-to-Peer Electronic Cash system, which was published pseudonymously by Satoshi Nakamoto, and then
later in 2009 with the establishment of the Bitcoin cryptocurrency blockchain network. Nakamoto’s paper
contained the blueprint that most modern cryptocurrency schemes follow.

Due to the exponential growth of digital technology different sectors have utilized the electronic platforms in a
massive scale. The customers can get the benefit of various online services offered by the banks. The different
transactional activities are fund transfer, bill payment processing of loan application and disbursement through
the online mode, etc. The other non-transactional activities are requesting a cheque book, generating monthly or
quarterly statements, updating the contact information. A large number of customers have opted for the above
facilities, because it is very easy to operate without any hassle. Even privacy, security, authenticity and integrity
of digital transaction are at stake. The banks put up a trustworthy role in ensuring all the financial transactions
performed digitally are sufficiently secured from any future threats. This enables the customers to carry out
their banking operations efficiently as they can thoroughly monitor their account activity. On the other hand,
cost, entity and transaction authentication are the other challenges along with the endorsement of a secured
channel faced by several banks. The banking sector is yet to find a strong, single technical solution to combat
all the security challenges.
Thus to keep the sensitive information from getting misused in the distributed network, the financial and even
non-financial sectors have opted for a different technology, termed as Blockchain, which is basically a chain of
blocks to store digital data. The data inside the block can never be modified as this block is chained to other
blocks. It will be available to public in the same form as it was added to Blockchain. It is very easy for us to
keep track of records without bothering about the risk that these are tampered by someone. If a customer’s valid
bank transaction record is added to Blockchain right now, he can prove it any time in future that he is the owner
of that transaction. As no one can change the piece of information already added to blockchain, it can be said
that the revolutionary concept can save data in immutable way.
Use of Blockchain on e-banking can reduce the duration of any transaction at anytime. This duration is
basically the time span taken to add a block in the blockchain. Banks can exchange funds more quickly and
securely. The tasks involved in blockchain are first to recognize and validate entries. Secondly it has to protect
the entries as a valid one and finally the transactions are preserved and recorded. Major objective of using
Blockchain in e-banking scenario is to transfer money along with relevant data without involving any third
party intermediary like bank. It is very difficult to change the data, once it is recorded inside the blockchain.
The block chain Architecture Consists Four Concepts as Follows Bellow:
1. Decentralization: Instead of a central controlling system, blockchain delegates control all its participants
in the network, thus creating a mutual understanding among the Peer entities.
2. Usage Of Digital Signature: A transactional value is transmitted in the process which uses unique digital
signatures. This method uses public key infrastructure, where primary key is used to verify the identity
of valid sender. It create a proof of ownership.
3. Mining: Miners are entrusted upon the role of verifying and confirming, the transactions by the
distributed consensus system. It then stores the online events in blocks by applying reward miners for
 confirmation and verification of transactions and stores them in blocks using stringent cryptographic
rules.
4. Data integrity: The usage of Intricate algorithms and the unanimous decision among users guarantee that
transaction data, once approved cannot be tampered with Data stored on blockchain thus acts as a single
account of truth for all entities involved, reducing the risk of fraudulent activities by intruders.
Blockchain, the technology that is used in the popular cryptocurrency ‘Bitcoin’, is revolutionary in many
ways. It addresses multiple challenges associated with digital transactions. Blockchain also reduces the cost
of online transactions while concurrently increasing the security features such as authenticity and security.
These benefits are among the prime reasons Why the technology is being extensively developed within the
banking sector.
Involvement of third-party intermediaries in a transaction may solve double spending problem, but it
includes hidden fees charged by large for their operations, they start cutting commissions on each currency
transaction of money. Customers commonly experience this with wire transfers to family and ownership of
one’s funds which eliminates the need for an intermediary which in turn saves time and money of the
customers. Blockchain also provides a Peer-to-Peer(P2P) network that enables anyone to send and receive
money easily. As a result, blockchain is widely adopted in day-to-day business.
Many banks tend to be unreliable and susceptible due to the demanding obligations of being a financial
institutions making them more susceptible to bankruptcy and insolvency. Yet, blockchain will prevent
bankruptcy entirely since the system in decentralized. Thus, money transfer will automatically b sent to and
received by the valid participants within the Blockchain network.
Blockchain supported transactions will be transparent on a public ledger, allowing any individual to see the
amount transferred or received, receiver and sender information, and the timestamp. In addition, the design
of the blockchain enables it so that no one can tamper the data anyway. As we are considering here e-
banking scenario, we assume here that a blockchain can store only transaction data like bitcoin Blockchain.
Sequential transactions are recorded along with timestamp in consecutives blocks are blocked are connected
through links. Each and every block has been assigned a unique digital signature. If content of the block is
changed, even by a single digit, a new signature will be generated for the block due to use efficient hashing
algorithm, which includes complex mathematical formula to accept any string of input and produce a
unique fixed length string of output.
Only digital signature is not sufficient to accept a block within the network. The hashes that meet certain
constraints are accepted. As for example, a block will only be accepted if its digital signature starts with a
consecutive number of zeroes. Nonce is a random number, which is added to every block for being changed
repeatedly in order to find a valid signature. A block contains transaction data, digital signature of the
previous block, and a nonce. Mining is the process of using the nonce repeatedly to generate different
random numbers and hashing the block’s data to find a valid signature. Miners use computational power to
continue this trial and error method. The winner must have more computational power to solve the puzzle
quickly.
Any modification in a single block requires a new signature for all blocks within the chain that need to be
inserted at the end of each node. It is quite impossible suppose in distributed scenario, there are several
participating parties.
Party A(Alice) wants to send money to party B(bob). Then, this transaction is represented digitally as a
block. The block thereafter is announced to each and every party present in the network. Everybody present
in the network approve that the transaction is a valid and useable one. The block can be then be added as a
permanent and transparent record of transactions. The money then moves to the party B, i.e; Bob
 Working methodology of Blockchain in e-banking
Blockchain is emerging as a technology capable of transforming e-banking sector by making transactions
faster, cheaper, more secure and transparent. It is growing list of records which are linked using
cryptography. Each block contains a timestamp, hash of the previous block, and transactions data. Many
leading banks have decided to apply Blockchain technology on their conventional transactions. The
potential of this technology is huge to change the way of transaction are made.
From various research works it has been noted that blockchain methodology provides all the security
parameters to each of the participants involved in the network.
Transaction in Blockchain network become highly secure by the use of one-way secure Hash Algorithm
(SHA) which generates a 160-bit message digit. Sender can use it to get a 160-bit message digest. Sender
can use it to get a 160-bit hash for signing. It enhances with an added level of security during any online
transactions. As a consequence, this has gained tremendous popularity and thus, several banks have adopted
this technology. This has built trust and satisfaction in the customer’s mind as their financial credentials are
safe in open network.
Now we can summarize how Block chain works in e-banking:
→ Anyone who wants to get banking services need to create a transaction request message to the desired
recipient.
→ There are many senders and receivers ready for this type of transaction.
→ All the valid transactions need to be forwarded to all the nodes in the network.
→ The network needs to ensure that every valid transaction recorded within the network must be included
in any block over a reasonable amount of time. The miner node gets incentives for its efforts.
→ The node works on finding the proof-of work (solve the puzzle).
→ It broadcasts the block in the network after finishing proof of work.
→ The new block will only be accepted by others after verifying that all the transactions are valid.
→ It needs to be ensured that the transactions recorded within the block are not duplicated anywhere. The
node tries to find out proof-of-work on its newly created block. During this time, hash of the accepted
block is taken as the previous hash.
→ In this way, the Blockchain network continues to grow day by day.
 Impact of the Block chain Technology in e-banking:
Features Assessment Framework
Intermediary  High fees for intermediary?
 Latency due to processing
through intermediary exist
due to lack of trust?
Transparency  Are multiple participate
involved?
 Does increases in
transparency into the
transaction help the
participants.
Information  Is the same information
storage being stored in multiple
locations?
 Is data consistency an issue?
Manual  Does the process involve
processing manual operations?
 Is the cost of reconciliation
high?
Trust  Is there trust among
participants?
 *Do multiple participants
have the right to modify
transactions?
 Is there a risk of fraudulent
transactions?
Documentation  Is there a large number of
documents/ reports required
to be generated?
Time sensitivity  Will the transactions benefit
from being real-time or
synchronous?
Challenges:
 There is no confidence in the technology
 High costs and complexity of blockchain.
 Lack of understanding.
 A general lack of standards.
 A lack of general regulation is a problem.
 Vague data regulation is countries.
 Lack of block chain talent.
 Energy consumption.
Impact of Blockchain fit
Blockchain’s distributed ledger
technology facilitates
disintermediation, there by reducing
cost and lowering latency.
The hash/pointers of the records
written on the Blockchain are
immutable and irreversible, not
allowing modifications and
eliminating risk of fraud.
Blockchain’s distributed ledger and
consensus mechanism allows data
consistency across multiple
participants.
Block chain maintains automated
audit trail of transactions, thereby
reducing manual processing for data
validations and reconciliations.
Smart contracts allow codification of
business rules, validations and
reconciliations, there by reducing
manual processing.
Smart contracts allow business
validations and automated
reconciliation for straight through
processing.
Blockchain enables the near
real-time settlement of recorded
transactions, reducing risk and
providing an enhanced customer
experience.
Advantage:
 The main advantages of Blockchain technology in banking sector are that it improves efficiency,
enhances security, unchangeable records, quick transaction time and no third party involvement thus
decreasing costs.
 One of the main advantages of blockchain is the history of immutable transactions. Any purchases that
have been made once cannot be removed. This will help to reduce much of the crimes committed
against financial institutions.
 Blockchain uses the Smart Contracts principle. It includes a set of laws by which the parties involved in
the contract and agree to deal with each other.
 It allows any kind of digital information to be stored and allows the party to access or modify data only
in accordance with a set of predefined rules.
 Many financial firms pay millions of dollars a year to retain all their consumer records. But blockchain
allows all the information to be stored in one location. This guarantees the dignity and non-repudiation
of the stored data. It allows organizations to access the verification information of a specific customer
from another organization and thus avoids duplication of data.
 Blockchain increases the processing speed of transactions. The distributed existence eliminates the need
for intermediaries to authorize financial transactions between consumers. This offers a cheaper and
easier way to exchange currency at lower rates than bank charges.
 It is the safest way to avoid fraud, money laundering and promises.
Applications:
 Secure sharing of medical data.
 NFT market places.
 Cross-border payments.
 Real-time IOT operating systems.
 Personal identity security.
 Anti-Money laundering tracking system.
 Supply chain and logistics monitoring.
 Original content creation.
Limitations:
o High initial cost: Block chain save transaction cost and time but it need high initial capital cost.
o Complexity: This technology involves with entirely new vocabulary. Participants should have
specified knowledge about the technology.
o Network size: Blockchain requires a large network of participants. If it is not widely distributed grid
of network, it becomes more difficult to achieve the benefits.
o Transaction cost: transaction cost of first few years is free. But after that it rising transaction cost in
the network.
o Limited scalability and storage issues: Block chain have consensus mechanism to verify the
transactions. This limits the number of transactions that can be made in a given time period. Block
chain has an immutable distributed chain of blocks grows at a very rapid space, then this cause for
storage issues.
o Unavoidable security flaw: If more than half of participant nodes to service the network a lie, it will
become a truth.
o Energy and resource consumption: A blockchain network consume heavy resources. When
blockchain network grows, miners need to validate the blocks also get increased. So it increased
heavy energy consumption.
Future improvements of Block chain Technology in E-banking:
Blockchain and bitcoin are really hard to those who are not worked with technology and
software development. So one of the future improvement is build tools to make the transactions
easier.
Storing data in the blockchain is quite expensive so make a solution for store the data off the
chain and send them to the blockchain periodically.
Make laws for adopt block chain technology for the industry is necessary for revolution of e-
banking system.
Block chain will hope to reduce their prices and improve their quality of services with new
features in near future.

Some interesting facts:

1. Blockchain technology potentially reduced 30% bank infrastructure cost.
2. Banks using Blockchain Technology reported an annual saving of $8-12 billion.
3. Global Blockchain market is expected to be $20 billion by 2024. The average investment in
Blockchain project in 2017 is $1 million.

Conclusion:
The block chain concept and technology as beyond its use for e-banking and transactions. The
properties of its security, privacy, traceability, inherent data provenance and time-stamping has seen its
adoption beyond its initial application areas. The block chain itself and its various are now used to
secure and type of transactions, whether it be human-to-human communication or machine-to-machine.
Its adoption appears to be secure especially with the global emergence of the Internet-of-things. Its
decentralized application across the already established global Internet is also very appealing in terms of
ensuring data redundancy and hence survivability. The Blockchain has been especially identified to be
suitable in developing nations where ensuring trust is of a major concern. Thus the invention of the
Blockchain can be seen to be a vital and much needed additional component of the internet that was
lacking in security and trust before.
The ever-rising use cases of blockchain are about to bring major transformations in the banking sector.
Blockchain in banking can disrupt conventional systems and make the existing systems more obsolete.
Blockchain-based solutions are expected to minimize the annual fraud losses up to 9 billion dollars. It is
crucial to develop a secured database of client information and share it through numerous banking
institutions. Therefore, it reduces the time, cost, and effort in inter-bank trade and ensures security and
transparency. The blockchain in banking is a driving force to overcome the rising challenges and
transform efficiently into a cashless society.
In the coming years Block Chain Technology in e-banking will spread exponentially to the financial
industry.
Blockchain is just not about Bitcoin but there’s a lot more to it yet to be found.

References:
Chowdhury M, Suchana K, Alam S. and Khan, M. (2021) Blockchain Application in Banking
System. Journal of Software Engineering and Applications, 14, 298-311.
doi: 10.4236/jsea.2021.147018.
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