When the first time we heard of cryptocurrencies it sounded more fiction than reality. After all, how would you have reacted a decade ago if someone said you can use monopoly money for buying real goods or availing real services?
The blockchain technology (one behind cryptocurrencies) however has crossed several transformative stages and doubts to today become one of the technologies that can be applied to bridge all the gaps in the current financial system.
While, over the years, we have been programmed to believe that a centralized framework is the only feasible mode of handling money, the fintech industry has been running A/B tests to find alternatives for years. However, even amidst the achievements emerging from fintech trends that are designed to challenge the status quo of how money is handled, the process has proved itself to be a barrier in need to be overcome – that is, till now.
With blockchain, the fintech sector has finally found a technology needed to make a dent in the outdated financial sectors.
In this article, we are going to look into how the combination of Fintech and Blockchain can make the Financial world more efficient and transparent.
But in order to truly call for a revolution, it is important to know the root cause of a problem, which in the case of the fintech sector is centered around the fact that it is centralized.
Issues in the Fintech domain that needs an immediate solution
- High inclusion of intermediaries
Although the fintech solutions have grown to offer a lot more convenience to the users, the power even now lies in the hand of the intermediaries. The approval of loans is also still dependent on the approval of higher authorities, while the users keep waiting for confirmation in their favor.
- Lack of transparency
When the users perform an action on their fintech applications, they have less to zero familiarity with what is happening on the inside and how or to what extent will their information be used by the app. This leads to a lot of fear and confusion around identity theft and results in lesser trustability in the system.
- Slower processes
Every traditional banking process – sending money to a friend or opening a bank account is a multi-process operation. The fact that these processes slow down even the smallest of the activities, has been a concern for the users and the stakeholders for a very long time.
- Greater operational cost
In the Fintech industry, time is money. So, by lowering down the dependency on different people, making the process transparent, and by reducing the time involved, Blockchain technology proves to be one of the fintech trends that can reduce the operational cost by more than 50%.
If you sit down to look at the industry-crippling issues, you will find that the solution lies in the advent of a system that is decentralized and trustless.
The Features That Make Blockchain a Great Fit for the Fintech Industry
Blockchain functions on a decentralized network that acts on a peer-to-peer basis.
All the information is stored on its network through blocks. The blocks are time-stamped and linked with past and present transactions, are recorded permanently, and consistently updated in a cryptographically secure manner. By storing the data around its network, it eradicates the risks of holding data centrally.
It enables the sharing of an activity ledger between different parties. What makes the technology so necessary is the capability to automate transparency among the parties using it. Because the ledger is distributed among different transaction participants, it can exist in different places simultaneously. This distributed nature of Blockchain makes it difficult to manipulate the entries without others noticing.
By their design itself, blockchain is resistant to data modification. All the blockchain networks follow a protocol for the validation of new blocks. Once the system has been set with initial standards, no changes can be made. Once it is recorded, the data can’t be altered without the alteration in subsequent blocks – which would need consensus from all parties.
How Does Blockchain Make Fintech Better?
- Cross border payments
Blockchain offers a secure and easy solution to time taking cross border payments through its non-inclusion of third party authorization. By eliminating middlemen from the picture and the costly process of cross border payments, everything gets simplified. This, in turn, increases the cross-border payment process speed at a much lesser cost.
- Share trading
Using blockchain technology for purchasing and selling stocks brings in a number of benefits. But the one that is most advantageous of it is the elimination of third party people like CCPs, brokers, exchanges, and CSD, which makes the whole process very time-consuming.
Blockchain enables trading to happen on computers, removing middlemen from the process. It speeds settlement and enables more trade accuracy. Trading the transactions through blockchain also lowers the instances of information redundancy, thus improving the overall performance. This is the reason why a number of companies have started using blockchain for share trading.
- Digital identity verification
Financial transactions call for a number of steps, which includes –
- Face-to-face checking
- Authorization etc.
All these steps are taken with every service provider.
Blockchain technology enables the re-use of identity verifications for other services. With the help of technology, users can even choose how and with whom they wish to identify themselves. They would also not have to repeat the registration for every service provider if they are powered by blockchain.
- Accounting data reconciliation
A number of financial institutions are using outdated, inefficient databases. The distributed ledger technology is all set to revolutionize how financial data are gathered and exchanged. The concept of a part-manual data reconciliation would soon get obsolete when blockchain gets interwoven in banks’ everyday operations. All of this because technology is a database that is immutable and secure and comes with the benefit of multi-chain reconciliation.
Modern fintech consumers want to have complete control over their money matters. They need expedited and transparent financial services. As a result, meeting this demand has become the primary goal of every fintech company – a goal that is turning them towards blockchain adoption.
Although still at an experimentative stage, Blockchain is packed with every feature set that is needed to make the sector open and transparent. We are positive that in the time to come every Fintech brand would have found a use case for the technology in their process and deliverables.