Blockchain For Fintech
Fintech today: Blockchain Tomorrow
There is imprudent bureaucracy and indeterminate incompetencies in most banking setups, and these concerns are majorly pervasive in the clearing and settlement domains of the banks. These gaps which are created by the sheer primal ways of banking and the involvement of hierarchy at multiple levels can be avoided if there is a decentralized system which allows consensus mechanism for faster transactions – hence the need for Blockchain is justified here.
Accenture estimates that the adoption of blockchain technology in the clearing and settlement sectors of banking could save the biggest investment bank close to $10 billion. Not only this, but the Australian Securities Exchange has already executed a project to transfer its post-trade clearing and settlement to a blockchain system.
We’ve all heard that blockchain-powered payments are hyper-secure and private. The principle is that 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. The blockchain spreads such changes across the entire network in real time so that participants stay informed constantly. You can find out more information about this technology in our article on how the blockchain works.
blockchain records and validates each and every transaction and administers transactions in a way that no one can tamper with or delete them post-execution. FinTech companies such as æternity leverage this advantage of the blockchain to protect payments. It uses a blockchain to create scalable smart contracts that secure automated payments.
Another benefit of the blockchain is that it eliminates the need for an intermediary to handle financial services like money transfers. This is a huge relief for businesses that provide peer-to-peer (P2P) transactions as well as for individual payers.
Sending money abroad involves high transaction fees from both individual consumers and small and medium-sized businesses. Based on transaction volumes, fees range from 1.7 to 16.18 percent of the total transaction amount, bringing the remittance industry $40 billion in fees each year.
In addition, cross-border transactions are often delayed. The blockchain can efficiently resolve this problem, streamline remittances, and save costs during cross-border transactions. To put things into perspective, the average transaction fees to transfer $50 using traditional methods can cost anywhere from $5(bank transfer) to $3(Western Union), while blockchain can do it for as little as $0.27.
Trading and trade finance
The trade financing sphere involves lots of tedious 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.
You need to make sure that all counterparty balances are matched and resolved across global trading systems involving thousands of participants. Each trader must maintain their own database for all transaction-related documents and constantly check this database against others for accuracy, as a single error in one document can propagate across all copies of this document.
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.
Blockchain’s help to exclude gray tactics such as naked short selling, which is when a person sells stock they’ve borrowed from an owner and don’t own themselves.
Regulatory compliance and audits
As global demand for regulatory services is expected to be worth $118.7 billion by 2020, FinTech companies are advancing regulatory compliance via modern technologies such as the blockchain. A blockchain, with its immutable nature, can remove risks, uncertainty, and complexity associated with regulation. This is the reason companies use blockchain as irrefutable proof of the transfer of any digital asset.
A blockchain tracks each and every verified transaction and records all actions taken by participants of the transaction so that regulators don’t need to confirm the authenticity of records. On top of that, a blockchain allows regulators to review the original document of the actual transaction rather than manifold copies.
Blockchain immutability also diminishes the possibility of errors and guarantees integrity of records for financial reporting and audits. Since all data is stored in one location, a blockchain can standardize reporting and accounting and revamp the way auditors extract and analyze information. Auditors can access all data in real time with read-only nodes on chains. In this way, the blockchain decreases the time and costs needed for auditing and accounting.
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.
Another issue is that financial institutions don’t have a standardized set of documents that clients must submit to prove their identities. Different institutions can duplicate lengthy verification processes, which require considerable spending from both banks and clients.
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 document, such as claims and transactions.
The conventional banking system ignores a large potential audience of 1.7 billion adults and 160 million small businesses worldwide. These neglected customers include
● people living in rural areas;
● people with no checking or savings account (the unbanked);
● people with an account at an insured institution but who also use alternative financial providers (the underbanked).
Millennials form another group of unbanked who sometimes see no point in having a checking or savings account in a traditional bank. By disregarding these groups of consumers, banks lose around $380 billion annually in potential revenue. Apart from the unbanked and underbanked, two more groups of consumers — credit invisible and unscorable — lack banking services. The Consumer Financial Protection Bureau (CFPB) points out that one in ten adults in the USA doesn’t have any credit history, and 19 million Americans have unscored credit records.
By unscorable consumers, we mean people who have credit records at least in one credit reference agency but the data is either too little or too out-of-date to generate a reliable score. Thus, millions of people are deprived of loans, mortgages, the ability to rent apartments, and more. The blockchain can tackle this problem and provide a new way of credit scoring. A blockchain- powered credit scoring platform can analyze more data sources than existing systems and estimates credit scores based on identification data, historical data, and predictions about borrowers.
Smart loyalty programs
Beyond securing and streamlining financial processes, the blockchain can reform customer rewards systems. With blockchain, companies have access to a wide range of low-cost loyalty programs they can customize to meet the needs of distinct customer groups. Blockchain-based loyalty programs are fully trackable, so firms can analyze at any time how much money was spent, which programs work, and which don’t work.
The blockchain also reduces unnecessary frictions related to loyalty programs, making them more convenient for consumers. Since an inconvenient and time-sapping registration process stops 70 percent of consumers from signing up for a loyalty program, a blockchain can drive higher levels of customer involvement and satisfaction.