How blockchain is reshaping the fintech industry?
In 2020, financial institutions will try their best to leverage the power of Blockchain technology in their existing systems and prevent them to become obsolete. With its disruption in every industry, whether fintech, healthcare, pharmaceuticals, insurance, digital security, enterprise SaaS, Blockchain has penetrated everywhere today.
As per research, around 77% of the financial services industry plan on adopting Blockchain by 2020.
As per research, around 77% of the financial services industry plan on adopting Blockchain by 2020.
Being decentralized, digitized public ledger of all the transactions of cryptocurrency, Blockchain gains the popularity of being highly advanced technology that has the potential to transform the financial and banking sector. Blockchain offers various opportunities for growth and innovation and is capable of cost reduction and cyber-attack risks.
With this unstoppable legacy of expansion and revolutionizing the financial services around the globe, technological up-gradation has boosted investments into the financial sector. The way FinTech has shown a speedy development with a competitive edge in this digital era has left the stagnant style far behind thus intensifying the revolution.
This article covers the tremendous contribution of Blockchain and how the FinTech industries can leverage its power. This article covers three main sections:
- Why Fintech need Blockchain?
- Blockchain in Financial Services
- Benefits of Blockchain
Let us walk through the details.
Why Fintech need Blockchain?
The financial industry has multiple challenges like trust, reliability, and value. With traditional banking becoming unreliable and outdated, consumers are searching for secure and fast alternatives for their transactions and assets. This has made the Blockchain and cryptocurrency penetrate the financial space.
Trust is one of the most crucial factors that could make and break the financial organizations. Asking people to invest their trust in any financial product is difficult. With huge cash reserves, banks and financial institutions create networks that are secure to carry out transactions safely. Due to a lack of funds, FinTech organizations restrict themselves from developing a high-security system.
Blockchain relieves with its entry into the financial world due to its highly secure and cost-effective nature. With Blockchain technology, the companies track the entire lifecycle of a financial transaction as it is a series of immutable blocks.
Thanks to the Blockchain technology, it has given the opportunity for creating secure and safe financial products, thus, paving the way for innovation in the financial sector.
Blockchain in Financial Services
Nobody could figure out 10 years ago about how Blockchain would open the doors for fintech industry. With the advancement of Blockchain technology, consumers are expecting more from the financial institutions and banks for innovative, faster, and secure solutions.
Some of the possible use cases are given below where financial services are trying to leverage the power of Blockchain technology.
Reduce cost and increase the speed of transactions for your fin-tech payment processes or financial institutions by implementing Blockchain.
There is an absolute yes when it comes to blockchain-powered payments as they are hyper-secure and private in nature. In blockchain-powered payments, each user has personal cryptocurrency keys. This can be used for conducting safer transactions.
The participants of the transaction will be able to see all the details of the transaction. If any changes are to be made in the transaction, it is possible only with the consent of all the members in the transaction. The blockchain makes sure that the participants are constantly informed about the changes, and therefore, the changes are made in real-time across the network.
Every transaction is valid and recorded by the Blockchain. It monitors all the transactions in a way that no one can modify or delete any record post-execution.
A high transaction fee is incurred both by the consumers and the business while transacting the money abroad. Blockchain technology is used to solve the issue of cross-border transaction delays, streamline remittances, and save costs. Many FinTech institutions have started offering crypto-based money transfers like Ripple, OkCoin, BitPesa, Sentbe, and Abra as these have small cuts as lower as 95% than the banks.
Let us consider an example. An American company buys 100 tons of cotton from a company based in Asia. The price of the batch is $250,000. A comprehensive smart contract that is similar to common legal contracts will help you to answer all the possible outcomes after the purchase. Some instances are given below:
If the cargo arrives on time? The smart contract can block the funds for the buyer’s account and transfer it to the seller immediately as soon as the cargo arrives at the harbor.
If there is a delay due to a fault by the seller? Smart contracts will deduct the fine and transfer the amount to the buyer from the seller. Initially, it will block the funds.
Other concerning questions may be on the currency exchange, delay due to customs, and lost cargo.
Smart contracts strive the best to provide the solutions for the possible outcomes of a transaction. Smart contracts have gained popularity because of contract execution as per the pre-specified rules. This eliminates the risk of cheating and fraud.
Peers can’t influence smart contract behavior as it is a computer code that receives input states and executes the command as per the pre-specified rules. Once a smart contract is initiated, it can’t be changed. This clause depends on the parties as some blockchain allows changing of rules with the consent of all the parties involved in the transaction.
Client Identification System
It is a mandate for every credit organization to perform KYC before application processing. Blockchain helps in decentralized user identification by seamless merging with the banking industry and storing the information in a database common for all the banks in the system.
The clients can leverage the following benefits with Blockchain:
- Personal Identity data & reputation management
- Without any safety concerns, data can be shared
- No password required to log in to digital services
- Any type of document, whether claims or transactions, can now be signed digitally
Smart loyalty programs
Reform customer reward systems with Blockchain technology as companies have access to a wide spectrum of customized low-cost loyalty programs that cater to the requirements of a wide range of customers.
Loyalty programs with Blockchain are completely trackable. The firms can easily monitor the money spent and the programs that are working and non-working.
Right from the reduction in friction to a higher level of customer satisfaction and engagement, Blockchain has made loyalty programs convenient for the consumers.
Waves, Loyyal, and Qiibee are some of the examples of Blockchain ecosystems that accords with advanced reward solutions.
Regulatory Compliance and Audit
Fintech companies have been preparing themselves to walk in the rhythm of technological advancements via Blockchain.
The global demand for regulatory services is forecasted to be worth $118.7 billion by 2020. Because of its immutable nature, Blockchain removes risks, uncertainty, and complexity that are associated with regulation. This is because once the data is saved into the chain; there is no chance of modifying or deleting it. Therefore, using blockchain in financial companies ensures the secure transfer of any digital asset.
Blockchain is capable of tracking every verified transaction and records the participant’s actions so that the regulators don’t doubt the authenticity of the records. Moreover, with Blockchain, the regulators can review the original document of the actual transaction and not the manifold copies.
A blockchain-based compliance platform, Coinfirm verifies the ownership and authenticity of various documents in addition to serving for in-depth reports on financial risk.
Blockchain has the capacity to revamp the traditional way of auditors extracting and analyzing information by standardizing reports and accounting.
Loans and Credit
Every bank or financial institution has been unreliable and vulnerable to some extent in the case of loans and credits. A distributed ledger for loans and deposits that will be immune to any kind of financial fraud is the ultimate need in such cases.
Do you know the conventional banking system loses a potential audience including adults and businesses? They often ignore:
- Rural areas
- No savings account
- Accounts in insured institutions yet using alternatives.
- Millennials with no enthusiasm of having an account
As per the research put forth by the Consumer Financial Protection Bureau (CFPB), one in ten adults in the USA lack credit history, and 19 million Americans have unscored credit records.
Unscorable consumers are people with credit records with at least one credit reference agency but generating a reliable score is difficult as the data is too little or out-of-date. People, therefore, are deprived of loans, mortgages, rent, etc.
Blockchain tackles this problem by providing a new way of credit scoring where the platform will be able to analyze the data sources from the existing systems and would be able to calculate the credit scores on the basis of:
- Historical data
- Identification Data
- Predictions about borrowers.
Some of the examples of decentralized credit scoring are Enigma, Bloom, and Colendi that permits the customers to leverage the global credibility identity.
Insurance involves multiple steps like:
- Paying premiums
- Filing a claim
- Final settlement of claims
With Blockchain, managing claims of the customers becomes very simple as Blockchain creates transparency, efficiency, and responsiveness and thus, helps in reducing fake claims.
Moreover, Blockchain can help in settling the unclaimed life insurance files. Connect the dots with the Blockchain registry when the beneficiary is untraceable or unknown. Therefore, Blockchain retains privacy and security by helping the right claimant to access the funds when the policy is matured.
Blockchain has the capacity to streamline the subrogate claims. Validating subrogate claims is difficult due to fear of fraud. These fraudulent claims, with the help of Blockchain Technology, can be reduced to the minimum. Subrogate claims are those where the insurance company fulfills the claim of the insured person in the first place and reclaims the loss to the fault-party.
With blockchain, you can easily find out whether the insurer of the faulty party has a waiver of subrogation. There is a possibility that the insurance company won’t be able to seek reimbursement and they might refuse to compensate the insured. In this case, blockchain enables a better auditability as it has a registry that holds transparency in all aspects.
With Blockchain, improving conventional insurance systems by the automation of payments has become a mandate. Smart Contracts help significantly in eliminating long bureaucratic delays due to a large number of members involved in the process.
Benefits of Blockchain Technology in the Financial Sector
Since blockchain has its usage in cross-border remittances, KYC, trade finances, and digital currency, it has raised the standards by bringing an exponential change in the banking and financial sectors.
Let us walk through some of the benefits of Blockchain technology in the financial sector.
- Eliminating the Intermediaries
With Blockchain technology, third-party intermediaries are eliminated as the trusted-keeper. This decreases the overhead costs by interacting online with each other without a middle-man.
The processing speed of the transactions increases with a reduction in human intervention due to blockchain. Using Blockchain has resulted in a reduction in duplication of records, errors, and frauds, thus, leading to a quick settlement of payments.
- Resolving identity theft issue
Identity theft issues are being resolved with the help of Blockchain as the users get complete control over the transactions. This protects the merchant from getting into frauds as we know, once a transaction is done, it can’t be undone. With Blockchain, receiving and sending money globally has become easy and without the involvement of central authorities as they are verified immediately and are shown to the participants. Moreover, the transaction cost of the flat money conversion is less.
- KYC (Know Your Customer)
The KYC process is individually being performed by each and every financial institution and banks though the rising prices are severely increasing the tension for banks and other financial institutions as they need to bear to comply with the norms of Anti-money laundering and KYC.
- Trade Finance
One of the most important applications of Blockchain, trade finance is all about how a complex transaction is simplified through a network of Blockchain. The information is shared on a private distributed ledger by shippers and manufacturers, importers, exporters, and their respective banks. Once the conditions are fulfilled, the deal of trade is automatically executed through different smart contracts. The parties in this deal can view the data and actions done on their systems.
- Consortium-Accounts Monitoring
While transferring funds from one bank to another from the borrower side, the lender fails to track the fund’s end-use. With Blockchain, you can monitor the end use of the funds of a borrower sponsored by the bank’s consortium, resulting in NPA i.e., non-performing assets as the fund’s end-use are monitored. The information with the movement of the funds is received by all the members of the group thus strengthening the monitoring mechanism.
Wrapping it up!
Blockchain’s ability to adapt to the new changes in financial services is undeniable. The fintech industries around the globe, including some big names in the banking and finance industry, have started utilizing the power of blockchain for trade finance. This indicates the potential of Blockchain for driving businesses.
This revolutionary technology bears the capacity to drive the innovative FinTech ideas and change the financial ecosystem. Many Blockchain development companies are landing into the competition with their experienced and skilled team to change the face of the financial world with Blockchain.
With this opportunity to excel and provide a secure, decentralized solution, organizations that are looking at Blockchain as an advantage will become the game-changer in this financial ecosystem.