Blockchain is a powerful and secure technology that almost every industry wants to make use of, from banking and medicine to the government sector. The most desired domain of blockchain use is the banking sector because security is of utmost importance for the financial industry. For Fintech, Blockchain technology is set to change the way data is stored, managed and recovered. With its multidimensional uses, even traditional companies are trying to integrate Blockchain to ensure data integrity and engross advanced security measures. Since there is no need for a centralized authority, there is ample transparency and proper traceability. Data tampering, alteration and deletion, some of the major challenges of managing information daily are avoidable due to this technology’s invulnerable nature.
Although Blockchain does not exclusively concentrate on financial services, we’ll focus here on how fintech companies using this technology are enhancing their stack. Fintech is disrupting the financial industry by implying the integration of technological developments that change the way we approach ordinary processes. The speed and scale of this disturbance will depend mostly on users adopting this new economy. Fintech companies that are widely integrating blockchain technology into their work definitely have an advantage among their competitors.
Blockchain is a digital business transaction ledger that cannot be manipulated or altered. Digital currency markets have seen new emerging digital assets and trading platforms built on blockchain since the introduction of Bitcoin almost a decade ago. It is designed to record not only financial but all other activities with a set value. This technology enables the distribution and copying of digital data across different nodes. Any wrong change or modification will alter the hash connections, and it is easy to detect a failure. This is because of the complicated and intricate cryptography behind it. A decentralized peer-to-peer network with virtual currency sounds very appealing, especially now when cryptocurrency is being increasingly recognized as a useful asset.
Blockchain eliminates the inefficiencies that occur in the banking sector, mainly due to its complex network, and better satisfies the needs of modern corporate and private clients. It also improved by reducing fraud and cyber-attack rates in the financial sector, which are the issues that have been crumbling the system for years now. Blockchain assists in restraining data breaking and other comparable deceitful operations to enable fintech businesses to safely store and exchange data through a decentralized network, avoiding any potentially unpleasant situations.
Use Cases of Blockchain Technology in Fintech
The most popular domain of blockchain use is the Fintech sector because security is of utmost importance for the financial domain. Fintech surely relates to creating a seamless and comprehensive journey, which will also result in a reduction in costs and better user experience as opposed to the burden of bureaucracy that is still carried by traditional banks.
Following are the use cases of blockchain in fintech:
1. Payments, Especially Cross-Border Payments
Payments are the primary use case of any banking and financial system. In blockchain finance both central and commercial banks all over the world are now taking advantage of this new technology in terms of payment processing and potential issuing of their own digital currencies.
Blockchain has the capability of completely revolutionizing the current system of payments. The technology can make the payments processing more secure and also lowers down its cost.
The finance industry has perhaps the most number of intermediaries. It makes money transfer within a country inefficient and the problem with international money transfer is more severe. International transactions may take days to complete because of the number of intermediaries involved. Blockchain does not require third-party authorization, thus significantly speeding up the cross-border payment process.
2. Trade Finance
Blockchain also plays an important role in the trade finance sector, financial activities that are related to commerce and international trade (not stock exchange trading).The trade financing domain involves lots of wearisome paperwork and bureaucracy. Stock and share purchases have to pass through brokers, exchanges, clearing, and settlement. Each transaction is typically settled within three days. Yet transactions can be delayed when trading occurs over the weekends.
The blockchain can exempt traders from burdensome checks of counterparties and optimize the whole lifecycle of a trade. Using a blockchain, companies can enhance trade accuracy, speed up the settlement process, and reduce risks.
For example, within a traditional trade finance system, all participants must maintain their own database for all transaction-related documents. Each of these databases must be constantly reconciled against each other, and a single error in one document can be duplicated to copies of the document. Blockchain eliminates such need for several copies of the same document and can integrate all necessary information in one digital document, which is updated in real time and can be accessed by all network members.
3. Digital Identity Verification
The number of fraudulent accounts has increased by 50 percent since the end of 2017, resulting in 900 million malicious transactions in the first quarter of 2018. Banks have to run rigorous KYC (Know Your Client) and AML (Anti-Money Laundering) checks on their new clients. These checks take 30 to 50 days to be completed, and thus can greatly delay a transaction.
The blockchain offers a digital identity system. With blockchain in fintech, users can choose how they identify themselves and with whom they agree to share their identity. 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 document, such as claims and transactions.
4. Limiting the effects of cyber fraud
Financial markets such as stock exchanges, banks, and money transfer services are most vulnerable to fraudulent cases. The reason behind this is the use of a centralized database, which can be exploited to manipulate the whole database and steal important user’s data. Nowadays, Artificial Intelligence has also been added to cyber security threats. And, once there is any access to a system, hackers can further get a key to yet another security breach, which leads to more security failure and loss.
Once again, blockchain comes as a solution to this problem. Blockchain is a distributed ledger that is difficult to penetrate. The decentralized data is stored in blocks, which further contains a cryptographic hash function. Each block holds a link to the previous block’s hash, thus creating a chain of records that is difficult to falsify.
5. Credit Reports for Businesses and Individuals
Blockchain finance can also help individuals and small businesses to quickly get loans based on their credit history. It may take a long time for lenders to review the borrower’s credit history. Traditional business credit reports provided by third-party credit bureaus are not available for small business owners. However, blockchain can provide tools that will allow borrowers to make their credit reports more accurate, transparent, and securely shareable.
Blockchain based credit reports reduce the costs and complexities pertaining to data verification. Besides, the data ownership is returned to individuals because it is no longer held in a central repository.
Here’s how it works with blockchain:
- The data owner places their transaction history into blockchain and secures it with a private key
- The encrypted transaction is stored outside the blockchain
- The hashed encrypted transaction is stored inside the blockchain with timestamps and metadata
- The data buyer submits the criteria for credit history
- The smart contracts identify and verify the potential data based on the data owner control criteria
- The blockchain engine filters the data and returns the results
6. Peer to Peer (P2P) Transfers
Sending money abroad involves high transaction fees from both individual consumers and small and medium-sized businesses. With P2P transfers, customers can transfer funds from their bank account or credit card to another person’s account via the Internet or mobile phone. The market is full of P2P transfer applications, but all of them have certain limitations. Besides, some of the P2P services charge large commissions for their services and are not secure enough to store sensitive data. In addition, cross-border transactions are often delayed.
The blockchain can efficiently resolve this problem, streamline remittances, and save costs during cross-border transactions. Blockchain has no geographical limitations, it exists literally everywhere, making it possible to do P2P transfers across the world. In addition, blockchain based transactions take place in real time, so the recipient will not have to wait for days and weeks until they get money.
Even though there are certain risks associated with the blockchain, this technology can reshape the whole way that FinTech companies function in the global economy.
All the ambiguities that the internet left have been filled by blockchain technology; the main idea is making the industries limitless and lawful at the same time. With the revolution of technology in almost every domain of global business, the financial market is also not far behind. Along with blockchain and cryptocurrencies like Bitcoin, Altcoin etc., FinTech is also attracting a lot of attention from people nowadays. But we also get acquainted with how blockchain can topple the FinTech market.
- How Fintech Will be Revolutionized by Blockchain – https://www.hedgethink.com/blockchain-revolutionizing-fintech-simon-pearson/