The 21st century doesn’t fail to surprise human society with its innovation. Blockchain is going as a part of mainstream business operations and it's impossible to keep FinTech unaffected.
As the new universality of the twenty-first century, technological advancements have now unquestionably seeped into the workflow structure across multiple industries and are an indispensable element of varied business processes. Assignments that once needed human hands, bulky machines, and physical currencies have now been efficiently digitized. Mobility, cloud services, and consumers who have grown up in the digital age are forcing a CHANGE
Technology has been the core of a number of disruptive trends
in financial services and it is a driver behind three key themes; the first being convergence
of other industries into financial services that is frankly leveraging data and technology, the second is wholesale sort of interruption or disruption
of business models and new entrants entering into the competitive landscape and certainly last is a much more transformative
journey and that is the leveraging of things like Blockchain Technology
, which is completely going to change the financial services ecosystem and marketplace in 2020.
Anyone with an internet connection can now engage in day-to-day banking activities, trading and investment in the stock market, widen e-commerce platforms, make online payments, exchange currency online, undertake equity funding, and more. Similarly, new players are now experimenting in different areas of financial activity such as banking, payments, peer-to-peer lending, wealth management, and more.
FinTech itself is at the cusp of the renovation as if there was a need. That flux of change is coming from the headwinds of Blockchain swinging its wings. Its stagnant style of doing business is apparent to all. What needs to be examined though, in this distinct phenomenon is the contribution of Blockchain which has enhanced this progressive revolution.
Table of Contents
•Why use Blockchain for Fintech?
•How is it currently managed?
•How big is the impact of Blockchain in FinTech?
•Blockchain for Global Payments/Cross-Border Transfers
•Blockchain in Trading and Trade Finance
•Blockchain in e-KYC Utilities
•for Credit Scoring
•Conclusion (All in all)
Why use Blockchain for Fintech?
When we talk about FinTech, or technology for finance, we are going to touch a very delicate aspect. We are in 2020 and banks still demand people to send them a fax with their information, because regulators that are there are not catching up with the technology. So Blockchain for FinTech is a very powerful tool. But until the regulators don’t allow it to be deployed in full, recognizing digital signature, recognizing a contract, a time stamp by blocks in a blockchain is going to be hard.
How is it currently managed?
Let’s understand this with an example - payment with a credit card. Before the payment with a credit card arrives in our bank account, there are 12 companies with 12 databases. They bring the data one to the other before it arrives to the bank account. With the blockchain, it’s up in a single transaction. So in many cases for remittance and for rebalancing accounts, even between branches of a single bank, a blockchain solution allows to remove error in transaction. There are banks that have branches in different time zones. At the end of the month, one time zone branch writes the transaction in the previous month, the headquarters writes the transaction in the next month. And when the month goes to level, it creates a lot of confusion. The accounting system based on blockchain technology will guarantee that all is aligned perfectly.
How big is the impact of Blockchain in FinTech?
Blockchain surely is born for fintech
and is already bringing quite a lot of interest. The reaction of the financial industry is being very positive, one of adoption. When the financial board saw blockchain, rather than getting scared, they started adopting the technology for their own good. In fintech, blockchain is making a big influence to start with.
According to a survey on the financial services sector and fintech conducted by PwC
, around 77% of the financial services industry plan on adopting blockchain by 2020. Banks being 1/3rd of the institutions surveyed have shown an inclination in incorporating blockchain in their operations as was reported by a study published by Accenture and McLagan (January 2017) that made mention of at least eight of the ten biggest global investment banks comprising the blockchain route.
Blockchain for Global Payments/Cross-Border Transfers
Blockchain-powered payments are hyper-secure and private. Each user has personal cryptocurrency keys that they can use to conduct transactions safely. The blockchain ensures that only participants involved in a particular transaction know the details of this transaction. Any changes to the transaction are possible only with the consent of all participants.
As per Deloitte, blockchain-based payments from business-to-business and peer-to-peer results in 40% - 80% reduced transaction costs. They’re also settled within seconds. Yes, it would be a paradigm shift but as per a projection by Mckinsey & Co. blockchain could drive $50 - $60 Billion in transcontinental B2B and $3 - $5 Billion in P2P payments respectively.
A blockchain records and validates every transaction and administers transactions in a way that no one can tamper with or delete them post-execution. FinTech companies such as Aeternity leverage this advantage of the blockchain to protect payments.
Another benefit of blockchain is that it eradicates the need for a mediator to handle financial services like money transfers. This is a huge relief for businesses that provide peer-to-peer (P2P) transactions
Blockchain in Trading and Trade Finance
The trade financing field requires lots of tedious paperwork and bureaucracy. Stock and share purchases have to pass through brokers, exchanges, clearing, and settlement. Shipping, for example, requires client-side etiquettes like lading bills, invoices, and the letter of credit. Each transaction is typically completed within three days. Yet transactions can be delayed when trading transpires over the weekends.
The blockchain technology can release traders from troublesome checks of counterparties and optimize the complete lifecycle of a trade. Using a blockchain, companies can intensify trade accuracy, speed up the settlement process, and reduce contingencies.
Ornua and Barclays completed the world’s first blockchain trade transactions
in 2016, employing four hours rather than a week on a letter of credit — a document guaranteeing the export of $100,000 worth of agricultural products. IBM & Maersk collaborated
for a global trade platform to attain scalable solutions of Blockchain in Fintech. Furthermore, Forbes released its report of Top 50 Billion-Dollar companies who’re exploring the scope of implementing blockchain solutions.
Blockchain in e-KYC Utilities
Identity can be undoubtedly established by government-issued documents such as driver‘s licenses, social security cards or passports, etc. Establishing identity through KYC verification is a lengthy procedure.
While exploring the bank-driven approach to KYC customer record sharing, there is always a debate around centralized versus decentralized approaches.
According to Niall Twomey, Chief Technical Officer, Fenergo,
The centralized model offered centralized KYC utilities, controlled by a single entity. The main proponents and vendors behind these models at the time were incumbents with huge data resources and reach, which makes sense when it comes to creating a KYC utility. However, each utility had separate financial institution members, meaning that the overlap of customers and the ability to re-use customer information between them was seriously diluted. This was a key showstopper for utilities at the time. This led to a shift towards a decentralized model, where control is shared and participants coordinate with each other without going through a single intermediary.
Blockchain is a form of distributed ledger technology, having a specific technological foundation and cryptographic features that enable the storage of data in an immutable (unchangeable) ledger of ‘blocks’ of records. The blocks of records are linked in groups or a ‘chain’, which are maintained by a decentralized network, where all records are approved by consensus. It can build trust between financial institutions as it is auditable, and can help streamline the attestation process; ensuring clients are in charge of their own personally identifiable data.
The use of blockchain, currently best known as the foundational technology for Bitcoin and other cryptocurrencies, could overcome inefficiencies and duplication of effort in KYC information gathering between legal entities within a more comprehensive financial corporation or even between competing banks.
The blockchain offers a digital identity system
. Using this system, clients need to go through validation just once and can then use this verified identity document to conduct transactions all over the world. A blockchain allows clients to
• Manage their personal identity data and reputation;
• Share their data with others without safety concerns;
• Log in to digital services without passwords;
• Digitally sign any type of documents, such as claims and transactions.
for Credit Scoring
FinTech companies are widely using blockchain to cater to the unbanked population lacking CIBIL score and helping them get credit. Apart from the unbanked and underbanked, two more groups of consumers — credit invisible and unscorable — lack banking services. The Consumer Financial Protection Bureau (CFPB) shows that one in ten adults in the USA don’t have any credit history, and 19 million Americans have unscored credit records.
Unscorable consumers mean people who have credit records at least in one credit reference agency but the data is too out-of-date to generate a reliable score. Consequently, millions of people are deprived of loans, mortgages, the ability to rent apartments, and more.
Traditional banks and lenders approve loans based on a system of credit reporting. Blockchain technology unlocks the possibility of peer-to-peer loans, complex programmed loans that can approximate a mortgage or syndicated loan structure, and a faster and more secure loan process
When you apply for a bank loan, the bank evaluates the risk involved. They do this by looking at factors like your credit score, debt-to-income ratio, and homeownership status. This centralized system is often unfriendly to consumers. The Federal Trade Commission concludes that one in five Americans have a “potentially material error” in their credit score that negatively affects their ability to get a loan
Alternative lending using blockchain technology offers a cheaper, more efficient, and more secure way of making personal loans to a broader pool of consumers. With a cryptographically secure, decentralized registry of historical payments, consumers could apply for loans based on a global credit score.
All in all
In fintech, blockchain finds application in areas like digital ID, customer authentication, insurance, to name a few. Blockchain practitioners are experimenting with this technology to bring out new use cases and applications to solve the repetitive and complicated issues in the fintech industry.
Blockchain in fintech is anticipated to reach $6,700 million by 2023
in the United States. Financial institutions will use blockchain for smart contracts, digital payments, identity management, and trading shares. The blockchain sector in fintech has been intended to provide banking with a more seamless and efficient experience. We will soon see the process of cash to crypto and vice versa to become ubiquitous.
Blockchain technology has tremendous potential to deliver excellence in core areas of banking and financial institutions’ business model. But to succeed in implementing blockchain
, financial institutions should collaborate with the ecosystem before they launch blockchain solutions.