How Blockchain Technology is Powering FinTech Revolution in 2020

RASHMI SINGH | April 15, 2020

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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.

Learn more: https://capital.report/blogs/tracking-the-future-of-cross-border-payments-with-ai-ml-and-blockchain/8124

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.

Learn more: https://rubygarage.org/blog/how-blockchain-works#article_title_1

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.

Learn more: https://www.forbes.com/sites/michaeldelcastillo/2019/04/16/blockchain-50-billion-dollar-babies/#3d2cf7be57cc

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 in general.

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.
 

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High Frequency Traders: Masters of Modern Financial Markets

Article | November 16, 2021

High Frequency Traders (HFT) play a ‘need for speed’ game day after day in a quest to capture smaller and smaller profits. To be a successful high frequency trader there are two mountains to summit. The first, is the development of a system which can analyse data in as close to real time as possible. Here, this would involve not only monitoring prices, volatility, clustering; on multiple exchanges simultaneously. There is also the need to monitor slower items such as fundamentals, news streams and annual dividend pay-outs. It is likely that many high frequency traders are using artificial intelligence to do this, as they must process big data sets in as close to real time as possible. Thus, this need for speed has started an ‘arms race’ between traders to possess the fastest system in the market. This links to the second of the two challenges: the minimisation of latency, or in plainer terms; the maximisation of speed. Information must be processed as quickly as possible, a trading strategy devised and a market order submitted. Ideally, quicker than any other trader. To be clear, there is always a first movers’ advantage when trading information into price! To give a sense of this speed, consider that all of the above can be achieved in less than the time required for a human being to blink. This technology originates in the digitisation of exchanges, for example the NASDAQ exchange opened in 1971 as the first electronic exchange. Later in the 1980’s, proprietary information services became available. The most well-known of these became Bloomberg which began in 1981. The faster trading conditions and greater availability of information has opened up the gap between human traders and algorithmic traders, which has become wider to a point where their ability to interact with each other is questionable. Estimates vary; however, one reliable source suggest that 73% of the US equity trading is now undertaken by HFT’s . In my own research in ForEx markets for highly traded pairs, the HFT incidence can be up to 8%, even in an over-the-counter market. To illustrate an issue HFT activity creates, consider that a high frequency trader can observe information, identify which asset is involved and the new ‘correct’ price, and submit an order; all in the time needed for a human trader to blink. This mismatch is especially problematic where liquidity is provided to markets by high frequency traders. Here, it is very difficult for slower human traders to access liquidity as it does not remain in the market long enough as HFT matches against HFT. In their defence, a high frequency trader would tell you that they provide liquidity for rare assets and also work to keep bid ask spreads tight. Also, it is not debateable that HFT does make a significant contribution to keeping prices correct, in terms of reflecting all known information and holding the law of one price across trading venues. So, it can not be as simple as concluding that HFT is all bad and progress should be revered. At this point we need to know that a HFT is typically an inventory neutral trader who will trade to capture spreads. Typically, individual trades earn very little return. Where the spread capture takes place over short time periods; this is known as a ‘scalping’ strategy. A trader who can work at a sufficiently low latency, will be able to run a scalping strategy over six ticks of the market which in some cases, can occur in less than one second. High Frequency Traders in their efforts to capture spreads could also increase price volatility. This may especially be the case where a trader, is placing a large order which incentivises HF traders to try and provide liquidity whilst capturing a spread. As this increases the price impact of the large order, there is an incentive to find a way to avoid the HF trader’s attentions. Such places exist away from the regulated exchanges; these off exchange liquidity sources are known in the trade as ‘dark pools’. These remain legal for trades above a certain size. A more pertinent issue in terms of the fragmentation of markets, is the creation of trading venues which seek to protect slower traders from predatory high frequency traders. Many regulatory tools have been proposed to constrain HFT activity. National regulators have over the last decade developed governance standards for algorithms used in trading, to incentivise developers to have full awareness of the behaviours of their creations under the full range of market conditions. On balance, I am not in favour of solutions involving lags or generally slowing down trading, as the race to the front of the queue still exists. Rather, any intervention needs to alter the desire/incentive for some activity to take place. For this reason, minimum order resting times, perhaps as little as one whole second would remove the incentive for aggressive scalping strategies.

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How to Tap the Power of Strategic Alliances and Partnerships?

Article | November 2, 2021

Why form strategic alliances and partnerships? Strategic alliances are key to business growth. They bring our strengths together to serve our clients better. I believe that each partner offers unique benefits to tap into and help achieve value at scale that the digital world demands. The North Star that guides our partnerships is our purpose to engineer sustainable businesses to improve everyday life. The partner ecosystem strives to bring end-to-end solutions to our clients and to continually infuse innovation as well as best-of-breed thinking to influence business outcomes. To that end, we constantly explore the potential of emerging technology, growing our relationships and building our partner network so that we bring fresh ideas and custom-made solutions to better serve our customers. How to establish winning alliances? The heart of building and nurturing alliances lies in designing and managing them to foster collaborative behavior. It also requires being aware as well as being able to mitigate the factors that can result in alliance failures. A successful partnership is pivoted on the winning formula of, “1+1 is greater than 2”. We work with our strategic alliances, the recognized leaders as well as the disruptors in the industry to generate Return on Investment (RoI). Best practices to develop and nurture a differentiated alliance: 1. Laser focus on who and how to partner: While it may look good to have a vast number of partners tagged to one’s brand, it is often an ineffective approach. It simply spreads the focus too thin. I believe in working with a fewer number of strategic partners, understand their operating model, craft a solid go to market strategy and implement it with the endorsement from executive sponsors. This means, aligning on a singular vision – agree on the impact we want to co-create and then formalize an execution plan to co-sell. It is equally important to highlight the strength of alliance to all the stakeholders across the business. While the fundamentals of how to run an alliance remain the same, each vendor is unique: they vary by industry, region, size, complexity, and hence require a bespoke approach. Strategic alliances are not a one-off transactional relationship, but a long-term view of how the partners can generate synergies to help address clients’ pain points. An added dimension to achieving partner success is the “three way” or “triple play” partnerships. An alliance of three partners with complimentary strengths and assets can yield competitive advantage. 2. Leverage the power of networks:An alliance success is often determined by the power of networks. Trust is the heart of any network. A well-run partner ecosystem relies heavily on the people driving it. Professional networks in the industry across geographies and executive connect at both business and technology level are pivotal to run a well-oiled partnership engine. I have observed that successful alliance leaders not only cultivate relationships across functional areas internally, but also within the alliance organizations across the regions and with the clients and prospects. Even if one’s purview as an alliance leader is a certain partner (industry and geography), it is important to be able to deal with the cultural differences. This is true especially when engaging with the stakeholders across the organizations and regions. It is getting even more relevant in today’s hybrid mode of work. 3. Partner Up: A consistent communication with our partners helps us uncover potential opportunities early in the sales cycle and iron out any differences. Regular partner governance ensures legal compliance and privacy imperatives are embedded from the beginning. This allows us to not only jointly solve the challenges our clients grapple with but also to co-innovate. Cadence also helps organizations to predict demand, timely invest in training, certifications and overall enablement of associates to be delivery ready. After winning business together, partners should look to leverage these successes with the support of marketing. Partner marketing can elevate and amplify the visibility of alliance across social channels. The impact can be seen in terms of accelerated lead volume, higher deal velocity and expanded deal size. Simply put, it improves the overall health of the pipeline. An ideal alliance leader: Gone are the days when alliance management was a nascent business function and an after-thought. Today, as forward-looking businesses are leveraging their partners to tap into newer revenue streams, the art of managing alliances is now being recognized as a business acumen. Organizations are investing in these roles and are assigning Key Performance Indicators (KPIs) to generate partner-led revenue. Increasingly, alliance leaders directly report to the C-suite. Another clear trend is, often professionals who have spent a certain time in the industry and have taken up a variety of roles across geographies are hand-picked to don the mantle of an alliance leader. This can work well given that these individuals bring with them a well-rounded perspective of the industry and a vast professional network. This comes handy to diligently navigate both internal and partner organizations, align and advance. Better together: Businesses can radically improve their alliance success rates by incorporating the best practices. They need to invest in people, processes and relevant technologies to derive the full potential and future proof their alliances. It is both an art and a science. Therefore, it is important to build an alliance team, which is both diverse and inclusive. Such a team sparks new questions, challenges the status quo and fuels outperformance. The rewards of adopting alliance best practices can be big. The risks of not doing so may be even bigger.

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Trends Banks Can’t Ignore in 2022

Article | October 29, 2021

The competitive landscape of banking is changing rapidly. The non-traditional upstarts are threatening to disrupt the existing century-old business model in the financial industry. Banks have never experienced change, as we’ve seen in the last couple of years. Customers prefer Smart innovations like cryptocurrencies, peer-to-peer lending, smart contracts, new types of online security, and more. Some banks are adapting to meet these new challenges, while others are sticking to their old ways. The question is will they be successful, or will they be left out? And that is exactly what we would like to figure out with an in-depth and data-backed analysis. Based on this analysis we have answered the big Q in the industry- What do banks need to do this year to prepare for 2022 and beyond? Here is our take on trends banks can’t ignore in 2022. 1 Social Media Storytelling and Copywriting Contrary to popular belief, the real story of today’s customers is not all about you, your brand essence, or your products. But, it's more about how your customer truly feel about you when all is said and done. The fact is, customers are more sceptical than ever. Hence, banks need to examine their brand's essence to gain customer loyalty and trust in the digital world. Banks that are trusted by its customers will win the survival race in this digital age. Hence you need to create long-term relationship with your customers. For which you should create connections where in you : Provide insight about what your prospects and customers are experiencing and what you are offering. Explain how your offering is in their best interest rather than your own. Position your offer as the ultimate solution to your prospects and customers. Appeal to your prospect’s emotions by explaining how your product or service will improve their life. Present your offer as a complete package — think of it in a way that your prospective customers/clients will expect more from your brand. 2 Gen Z and its chronicles Gen Z is becoming the new consumer group; unlike previous generations, they are poles apart in several ways. Most importantly, Gen Z is tech-savvy and digitally sound. Gen Z grew up in a world that was moving into massive digitalization, immersed in technology and was taught to use computers early. They grew up understanding how technology can benefit their lives; they know how to use their phones and computers to stay in touch with their friends and use social media to stay updated with the latest information and breaking news. But, more than any other generation, Genz Z is concerned about their financial future. They have financially sound knowledge and are concious about their financial assets and investments from a very young age. It is this tech-savvy generation’s attention that banks need to address. Many Gen Z consumers are now coming of age in a time of uncertainty and instability. The financial crisis of 2008 and the ensuing Great Recession caused a financial panic, and many people lost their homes, their jobs, and even their savings. Gen Z, who grew up in this uncertain time, has come to view finance as an essential life skill. Therefore, they are more informed and educated about personal finance and far more willing to become financially savvy than previous generations. This is great news for banks and other financial institutions because it means that Gen Z consumers, more than any other generation, are willing to keep up with financial trends and seek out financial advice. As a result, banks can market their newest services like BNPL, to millennials. 3 Using CDP (Customer data platform) to target the perfect audience A customer data platform (CDP) is a platform that aggregates customer data produced by various channels and devices, and connects it with back-end systems. Companies may use CDPs to centrally store, manage, activate, and analyze consumer data. These platforms also provide connectivity with third-party solutions like Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), or Marketing Automation (MA), allowing marketers to use the CDP's capabilities while creating customer-centric strategies. Modern day marketers need to understand consumer behavior better, detect patterns, and customize customer experiences to connect with customers. A deep understanding on these metrics will help marketers reach their customers diligently, for which marketers need CDP. A CDP may also let marketers gather data from third-party websites or mobile apps. Across financial services and fintech, CDPs have the potential to revolutionize the way that consumers view and interact with their companies. A CDP, or customer data platform, gives marketers access to a centralized platform, or hub, containing a person’s data (including its identity), interests and preferences, and information about their interactions across the company’s many channels. Marketers can gather, analyze and act on this data, using many tools; to drive personalized experiences and communications. We're seeing technology advance and be commoditized in a way that we've never really seen before with the advancements around artificial intelligence and cloud capability, or even the revolution that we're seeing within the core banking sphere is really changing what financial services actually means.” -David Brear, CEO and Co-founder at 11:FS 4 Self Service We are living in the age of customers. Today, consumers expect greater accessibility and personalization. They want banking tailored to their needs. They want the ability to talk to humans when they need – but also, they want banking and payment tools that are intuitive and simple to use. Consumers also want to speed things up as much as possible. They want everything to be quick and convenient. They want banking to be personalized and contextual. As we look at the future of digital banking, we see consumers interacting in a much different way than they did just a few years ago. It’s no longer about meeting every expectation but about anticipating them. For exampleif you know that your customers usually travel on Tuesdays, you can suggest that them to pay their bills on their return. This way, you won’t miss a payment, and your customers won’t incur late fees. With more and more banks moving their infrastructure to the cloud, self-service banking is getting increasingly sophisticated. When we talk about self service we are not talking about ATMs or Digital wallets. We’re talking machine learning and artificial intelligence, cognitive technologies, and conversational interfaces. We’re talking about banking in 2022 and beyond. Its high time you analyse how your bank is performing in terms of the above-mentioned trends and start investing in them accordingly. 5 FAQs Q. What are the new challenges faced by modern banks? A. Today, customers demand "quick" access to their money, and regulators are concerned that banks aren't providing enough services. So, banks have responded by making greater use of credit cards, debit cards and other financial products. As banks have moved into other areas, they are faced with new challenges like: Increased competition. A cultural shift. Regulatory compliance. Changing business models. Rising expectations. Q. What are some trends in modern banking? A. The goal is to give customers a seamless and convenient digital banking experience. To stay competitive, banks are looking for ways to innovate. Some are turning to technology, including AI, machine learning, and automation. Others are adopting new strategies, like opening innovation labs and inviting outside entrepreneurs to test new products. Q. Can banks use the public cloud? A. Yes, banks can use the public cloud. , banks are taking note of the benefits of cloud computing. The cloud-based software-as-a-service model, for example, allows banks to focus on their core banking operations and outsource the management, maintenance and support of their IT infrastructure. Q. What is the future of banking? A. The Digital Revolution is changing the way people do their banking. Given the right access to the right information at the right time through digital means, customers are increasingly shifting transactions online. This has empowered them to make better financial decisions. { "@context": "https://schema.org", "@type": "FAQPage", "mainEntity": [{ "@type": "Question", "name": "What are the new challenges faced by modern banks?", "acceptedAnswer": { "@type": "Answer", "text": "A. Today, customers demand \"quick\" access to their money, and regulators are concerned that banks aren't providing enough services. So, banks have responded by making greater use of credit cards, debit cards and other financial products. As banks have moved into other areas, they are faced with new challenges like: Increased competition. A cultural shift. Regulatory compliance. Changing business models. Rising expectations." } },{ "@type": "Question", "name": "What are some trends in modern banking?", "acceptedAnswer": { "@type": "Answer", "text": "The goal is to give customers a seamless and convenient digital banking experience. To stay competitive, banks are looking for ways to innovate. 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This has empowered them to make better financial decisions." } }] }

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How Banks Should Use Buy Now Pay Later To Increase Their Customer Base

Article | October 7, 2021

The Buy Now Pay Later (BNPL) phenomenon is gaining momentum around the world. BNPL services give consumers who do not have access to credit the ability to purchase goods and services with no deposit and to pay for goods and services over time. However, while banks, consumer credit providers and alternative credit providers will benefit from BNPL services, they also introduce challenges for financial regulators, existing providers in related markets and banks themselves. Banks need to make sure that they are ready for a new type of competition. Larger retail banks seem to have added BNPL business to their portfolio already. Smaller banks will be forced to enter the market, either by acquiring a BNPL provider or rolling up the sleeves internally. In any case, it’s time that banks get rid of their prejudices and get on board with this consumer-friendly innovation that will ultimately benefit them by providing an influx of new customers, at least in the long run. For a complete understanding of buy now pay later, we should first look at the traditional financing models that banks and fintechs use to lend credits. These financing technique is known as point-of-sale or POS. Let’s take a look on POS below. How POS (Point-of-sale) Financing services work: Traditional POS financing is a model that has been around for decades. Most consumers are familiar with its most basic form: pay now, pay later. With POS financing, a customer signs up for credit to buy a product, typically for a portion of its full price. Some POS financing programs require no down payment. Once the customer has made all payments, they become the owner of the goods. POS financing works by financing the full price of the product, not a portion of the price. This means the customer pays the full purchase price of the item, plus interest. While POS financing has been popular for decades, it has faced some challenges. The payment model doesn't cater to customers who can't afford to pay the full purchase price upfront — these shoppers are often low-income or first-time-buyer customers. POS financing also requires shoppers to make large payments right away, which can be difficult for them. “The banking “industry” is changing rapidly – almost on a daily basis. However, those changes are not affecting people as much as we may think, particularly the underserved and unbanked.” -Steven Rosamilia, CEO at IMEX USA How BNPL helps customers: BNPL, or "buy now, pay later," payments enables customers to pay for their purchases over time, interest-free. BNPL payments don't appear on a customer's credit profile, so it doesn't affect their credit score. Here are some of the major points where BNPL helps customers: BNPL payments give customers the ability to buy now and pay later without accruing interest. BNPL payments are typically not fixed and fluctuate based on a customer's ability to pay over time. BNPL payments often appear in the form of layaway, credit extensions or installment loans. BNPL payments may attract customers who want to own products but don't have the money upfront. BNPL payments also work well for customers who want to spread out payments over time. How BNPL is different than other POS lending services: BNPL is an alternative payment technique offered by the payment service provider to businesses. Payment service providers use credit lines provided by banks and credit card companies to offer installment loans to customers. Unlike conventional POS financing, BNPL focuses on consumers' ability to purchase a product rather than their ability to repay their loan. This is achieved by classifying consumers into different groups based on their creditworthiness and offering consumers an installment loan with payment periods that vary based on their creditworthiness. As a result, payment service providers use BNPL as a risk-based financing technique. The payment service provider considers consumers' creditworthiness by classifying them into different consumer groups, such as "prime" consumers, "sub-prime" consumers, and "near-prime" consumers. These consumer groups are similar to credit profiles used by conventional credit card companies. With BNPL, businesses can request a payment profile classification from their business service provider. The payment profile classification determines the installment loan payment schedule that the consumer receives. Businesses can request a payment profile classification from their business service provider. The payment profile classification determines the installment loan payment schedule that the consumer receives. For checking your credit-worthiness before lending you BNPL, service providers may check consumer’s payment history, income, job stability, and other major factors. The financial service provider then use these factors to determine the installment loan payment schedule that the consumer receives. What features BNPL brings to the table for Merchants: Buy Now Pay Later is a new way to process payments. It's for young adults with shaky credit. The option lets merchants accept credit or debit cards but defer the payments. It lets merchants offer customers a low payment schedule, typically 6 to 24 months. But it's different than payment plans. With BNPL, there's no interest, no hidden fees, and no penalties for not paying all at once. BNPL works with all credit cards, not just Visa or MasterCard, and payments are processed securely through Authorized pages. BNPL increases conversion and sales by 20% for merchants while boosting average order value by 60%. For customers, BNPL gives them access to the credit they otherwise wouldn't have. And for merchants, BNPL means more conversions, more sales and more repeat customers. BNPL is offered by a handful of digital storefronts, including Best Buy, Kohl's, and Walmart. But it's a new way of doing business that allows both parties to benefit from the deal (compared to 2.5 percent for a credit card transaction). Why should Financial Institutions accept BNPL: Amazon's Buy Now Pay Later (BNPL) program is both a blessing and a curse for retailers — a blessing as it offers them a way to boost sales by attracting shoppers who are price sensitive, and a curse because it threatens to erode bank's main business. Amazon's BNPL program has only been around for two years, but it has already become a crucial part of the site's business model. The program gives people the option to buy products on Amazon with deferred payment terms. Customers purchase the product, but they aren't charged to agree to a 90-day payment plan until later. While that's far less than the average credit card payment period — 25% of Americans carry credit card debt — BNPL has become popular enough with Amazon shoppers that it has shrunk Amazon's average purchase amount by $7.77, according to one report. That's a significant hit. Amazon's BNPL program may be taking Amazon's main business, online sales, down a notch, but the banks that have issued BNPL cards aren't worried. That's because BNPL cards, like credit cards, are financing. And financing today looks different than financing did even five years ago. Many consumers, especially Gen Z, prefer to buy with credit and postpone payments. This shift in consumer preferences has major implications for banks. Banks issued financing to safe, creditworthy customers who wanted to buy now and pay later when credit cards were first introduced. But bank lending practices have changed over the years, and today many consumers use credit cards to finance products they might otherwise buy with cash. How can Banks integrate BNPL in their lending services BNPL is a fast-growing segment of the lending market. In 2015, BNPL made up 15.2% of all consumer credit originations and grew to $12.1 billion, according to the Federal Reserve Bank of New York. BNPL's share grew from 8.4% in 2014 to 14.7% in 2015, according to Experian. A BNPL strategy allows banks to ride the wave of increased consumer debt by managing their balance sheet more aggressively. This helps stabilize revenues and boosts the profitability of loans as banks can charge higher interest rates. While BNPL loans often come with hefty price tags, lenders can minimize their losses by structuring BNPL loans as an asset purchase rather than a loan sale. First, banks have to make sure they can fund the loans, either with their balance sheet or with funding from a non-bank lender. Second, banks have to decide whether the loan will be purchased directly or indirectly. Cross River Bank is currently riding the BNPL trend with this model by providing Affirm with funding capacity. The model is safe as BNPL firms often purchase those loans after origination, but it also caps the potential gains banks can earn as the fee is often a small percentage of the total origination. How can banks initiate marketing their buy now pay later services? First, banks need to be agile and go after merchants that already have relationships with customers. Fintechs, on the other hand, must convince merchants that their service, regardless of its costs, is worth paying. There are obviously some similarities. Both must win over merchants. But they also have different advantages. Fintechs don't have existing relationships or established customer bases, so they must build both from scratch. Fintechs, however, have an advantage over banks in that they have the technology. In addition, fintechs can integrate their solutions into existing e-commerce systems, giving merchants an out-of-the-box, easy-to-deploy solution. This, in turn, makes fintech more attractive to merchants. Fintechs can also target specific markets. For example, some banks sell online merchant accounts, but their service is often limited to larger merchants with more established distribution networks. Fintechs, on the other hand, can target smaller merchants, giving them an approach that's better suited to the needs of smaller businesses. Fintechs can also target specific niches. A fintech that targets small businesses, for example, could focus on those that sell high-priced goods online. Fintechs don't have to build their distribution networks, either. Instead, they can use existing online channels like Amazon, eBay and Alibaba. Of course, fintechs can also sell directly to merchants, but this approach requires additional sales and marketing efforts. Fintechs can also build their distribution networks. They can use a direct-to-consumer model, selling directly to their customers. This approach is best suited for fintech that is sells online merchant accounts and works for fintech that targets specific markets. The Takeaway BNPL programs have a critical role in financing trade and industry and financing small and medium-sized enterprises (SMEs). For this reason, BNPL programs should be an integral part of banks’ lending portfolios. Banks should optimize the utilization of BNPL programs. At the same time, the regulatory framework for BNPL programs needs to be revised. The business models of BNPL programs should be standardized and standardized products should be available. At the same time, the regulatory framework for BNPL programs needs to be revised. FAQs What is buy now pay later? Buy now pay later, as the name suggest, is an option Fintechs give you to purchase a product and pay for it after a certain amount of time. It works like a credit card payment, but it doesn’t charge you interest. Does buy now pay later affect credit score? No. Buy now pay later does not affect your credit score as long as you pay your dues timely. It is constructed in a way that you won’t have to worry about your credit score. However, banks may see your credit score before giving you BNPL service. Why was I not eligible for buy now pay later? Financial services or banks check your credit-worthiness before lending you the services of buy now pay later. They may check your payment history, income, job stability, etc. So before applying for BNPL, make sure you have a strong credit-worthiness. What are the alternatives to buy now pay later? You can use your credit card the same way as buy now pay later, but your interest-free days would only last till they bill you. You can also opt for interest free deals on purchases from e-commerce store.

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