Blockchain use cases in fintech have taken the world by storm. By 2018 many European and North American banks were exploring the technology and how to leverage it. Financial companies spent around $552 million on blockchain technology globally. But, what is blockchain technology exactly and which blockchain use cases will change the face of banking and finance?
This article will provide you with the simple answers to both these questions and share different ways it influences global finance.
What is blockchain technology?
Blockchain technology is a data management system using complex cryptography to power many cryptocurrencies and other decentralized applications. At their core, blockchains are accounting systems that facilitate auditing. What makes them different than traditional databases is that they distribute up-to-date versions of ledger data to all the devices on the network. This makes it nearly impossible to change the information once it’s on the blockchain as all the devices in the network would have to accept the changes.
Among the first blockchain product was Bitcoin, which facilitates digital money transfers and has no central authority, such as a central bank. The protocol uses the computing power of all the devices — called mining — in the network to add new data to the chain and rewards miners with bitcoins.
The complexity of the system makes it resistant to hacking as someone would have to take control of the computing power of the network to do it.
Later, Ethereum emerged and introduced smart contracts, which makes this blockchain more useful to more business use cases.
Blockchain use cases in fintech
Blockchain has many applications in real-life financial services. PWC revealed in a 2017 report that 77% of fintech companies expect to involve it as a part of their systems.
Fintech companies are moving towards this new trend for several reasons, including the following:
- Decrease transaction costs
When you talk about an online transaction, there are multiple elements that you have to consider. There are the trading companies or applications, transfer channels, as well as some intermediaries who slow down the process and introduce some extra charges in it. The costs rise even more for international dealing.
A study by McKinsey says that the remittance companies are making $40 billion per year with these fees. Blockchains can decrease all these losses. Blockchains enable direct peer-to-peer transactions over the internet, which eliminates the intermediaries and their costs. The decentralized system also eliminates delays in online payments. Their real-time data updating feature further ensures smooth, error-free operations and prevents extra charges or lost investments.
- Resolve identity theft issues
Digital fraud and identity theft issues are not that common, but they exist. A press release by Javelin shows that 6.64% of the consumer became a victim of identity theft in 2017.
Banks and fintech firms have now started to implement know-your-client and anti-money laundering procedures following increased oversight. Of course, this means they need a lot of paperwork that makes them slow. It can take weeks to verify the identity and complete the online transaction. The lengthy and non-standardized paperwork of these verifications further adds to the problem.
Therefore, financial institutions should implement a blockchain-based system. In this system, the user has to prove the identity only once. After that, they are given a verification document that they can use to conduct transactions from any part of the world. They can also use this document to manage personal data, share data, login without a password, and sign any document digitally.
- Global payment options
Blockchain technology is entirely internet-based and doesn’t need any specific setup for operating. Users can access the data and conduct transactions from any part of the world using their account public and private keys.
Its internet-centric system also makes it flexible for global transactions. In Fact, the 2016 statista study about blockchain usage opportunities amongst financial institutes reveals that about 60% of the total blockchain-based transfer involved cross-border payments.
- Enhanced regulation and auditing
With increased financial connectivity across the world, the demands for regulatory services are also increasing. Companies will need a better and more advanced fintech system to deal with the demand, and that’s where blockchains technology comes to play.
Blockchain technology uses a decentralized system that creates new storage areas for every new action but never tampers with the old blocks. It also maintains a non-deletable report of the transaction related to your blockchain. The system also saves the original document of the trade that the users can view at any time.
Moreover, blockchain provides all the data and analysis report at one single spot, which is beneficial for auditing. Its smart read-only nodes decrease the time and the cost required for verification and accounting.
- Credit reports
Banks and institutes often store the transactional information of their users to analyze their monthly transactions. They use this data to analyze the credibility of the users and prepare their credit reports. However, they mostly use a single server or system for this job, which is a huge security risk. Anyone who can hack into the server can get complete access to the private data of all users.
Blockchain-based systems are different and much more reliable in this case. They decentralize the information and use separate storage spaces to protect the data. It also deploys robust security algorithms and identity verification protocols that further enhance the security level.
The best part is that they even help to audit these credit reports at a much higher speed than the traditional system.
Blockchain use cases in fintech are revolutionizing the finance industry. This revolutionary technology has removed the barrier or speed, cost, and many more factors of financial transfers. It can provide you with real-time database management, financial tracking, resource management, and a lot more.
This future tech can even enhance the security level of your financial institution and work as a defense against identity theft issues. Even large banks like HSBC, Deutsche Bank, and KBC are using this technology to maintain the reliability of their services.
So, clearly, it is the future of fintech, a trend that will drive massive business in the future.