The world of finance is undergoing a rapid transformation. Startups & global giants alike are implementing technology to open up new avenues. One of the technologies that I find most suitable for our discussion is Blockchain. Here I look at how blockchain can help FinTech in critical areas.
Blockchain technology received a lot of attention in 2018. With increased attention came greater funds, and a boom in technology startups. A lot of reputable blockchain companies established themselves in the financial sector.
The fact that cross-border remittances today extensively use this technology helps us understand how blockchain can help FinTech. From the scale of transactions to reducing costs & improving speed, blockchain ticks all boxes. Of course, the technology is still in its early days and a work in rapid progress.
Before looking at its applications, we must take a look at some key features of blockchain technology.
- It is a decentralized network that operates on a Peer-to-Peer (P2P) basis. With data spread across peers, no central party has control over the network.
- It is a distributed ledger, with a copy stored on each device across the network. This prevents data loss from single points of failure and maintains transparency.
- It is an immutable record. Design protocols make blockchain highly resistant to data tampering. Once it is recorded, data modification on a block is impossible without the approval of a network majority.
With an interesting mix of existing & potential technology, here’s how blockchain can help FinTech.
KYC & Digital identity maintenance
The rising costs associated with Know Your Customer (KYC) compliance are a concern globally. Especially since this pertains to Anti Money Laundering (AML) norms.
Costs arise from not only the gathering of data but also the process of maintaining clean and precise records. Blockchain’s ledger based platform is perfectly matched to maintaining unique records and large amounts of data.
There are also discussions over central KYC data repositories. Financial institutions currently perform their data collection separately. Pooling resources would help reduce costs, and each institution receives secure & instant access to data.
Currently, digital payments are usually processed through central parties like banks. This not only increases the time taken for the process to be completed but also costs associated with it.
How blockchain can help FinTech here is through decentralised payment processes which are completed in a matter of minutes, globally. Without the need for validation from a centralized authority, transactions are also completed at a fraction of the cost.
What’s more, any transaction across the entire network can be monitored in real time. With the right access information, the entire transaction can be transparently tracked from start to finish.
The average stock market transaction involves multiple sets of middlemen. This makes transactions longer & adds layers of fees. There are also some unscrupulous practices which are prevalent in the market.
By decentralising access to stocks, blockchain puts power in the hands of people. The accuracy of transactions has shown recorded improvements as well. There is also the potential to open up global financial markets to individual investors.
The appeal is reflected in the fact that the Nasdaq stock exchange is experimenting with a blockchain trading platform. I am certain we will see this implemented in the near future.
An interesting aspect of blockchain technology is the ability to make smart contracts. This is essentially a protocol that allows private parties to have transactions on the blockchain as per a set of rules agreed between them.
Since the process is automated, the rules are enforced automatically without scope for tampering. Not only does this allow secure private transactions it also opens up a layer for services based on requirement.
This has led to the growth of many startups working on the development of these platforms. These are a part of how blockchain can help FinTech services grow & cater to an ever growing market.
Credit scores & financial history
Nearly 75% of the world’s population has no detailed financial records. This is the global challenge of financial inclusion, to open up financial access to those most in need.
As an immutable ledger of every single record, blockchain technology fills the role perfectly. Credit scores are a product of multiple sources which need to be maintained up to speed. With transactions on the blockchain being completed in minutes, financial institutions can rely on this data.
Financial history is extremely important to a financial institution. Determining the credit-worthiness of applicants accurately can have a significant impact on the bottom line. Implementing blockchain technology is a cost-effective solution that simply cannot be ignored.
The rising popularity of blockchain technology brought with it a number of crypto ‘currencies’. These are digital currencies offered by different blockchain technology platforms.
Depending on the nature of the blockchain platform, the currencies differ in their use. Some are used as tokens to obtain services from the platform, some are used to make payments, and more.
Bitcoin is the most famous example of such a currency. Using Bitcoin technology, financial transactions are being made possible at 10% of the current costs.
In addition to the above, it is important to remember each blockchain has its own unique features. Some prioritise transaction speed, some focus on reducing costs. There are also plenty of blockchain companies simply decentralising existing processes, such as media buying.
All in all, it is an exciting time for FinTech in the GCC region and globally. With a supportive ecosystem and rapidly advancing technology, one can only be excited for the times ahead.
A cross-border monetary transaction that took 3 days not very long ago can now be completed in minutes. I think that sums up very well my view on how blockchain can help FinTech.