The finance domain, even after being a recipient of multiple technology integrations and advancements, continues to operate as a centralized model – with the center of the being the financial institutions and governments. While an age-old tradition, financial service users have started doubting its value.
This doubt has given birth to a more transparent solution – Blockchain technology. The technology has added another dimension in the Fintech landscape, the one that has evolved as a tech-based revolution in the financial sector. It has offered tremendous potential to the fintech industry by bringing significant changes to business models and operating processes.
This has made both startups and financial application development companies show an interest in exploring the need for blockchain in fintech industry. Something about which we will talk about in this article for the next 8 minutes.
But before we dive deeper into the niche market and look into how blockchain adoption in financial services is changing the complete story, it is quite necessary for everyone to be on the same page in terms of – What is Blockchain & how does it work.
So, I suggest you take a look at our article explaining the basics of Blockchain before you scroll down. 👇
Assuming that you have been familiar with what is Blockchain by now, let’s move ahead to the Fintech challenges that this technology behind cryptocurrencies has resolved.
Challenges In The Fintech Industry That Blockchain Addresses
1. Dependency on a centralized system
Though fintech solutions offered a sense of convenience, the actual power has been still in the hands of third-parties. The transactions are still being held with the acceptance of higher authorities only; with users waiting for getting a confirmation in their favor.
This is the first challenge that has been resolved with the advent of blockchain in fintech.
2. No trustability
When users perform any action on fintech applications, they are not familiar with what’s happening on the other side. This creates lots of confusion and raises fear of identity theft; ultimately resulting in lower trust in the process.
Blockchain application development services solve this fintech challenge with its characteristics of transparency and immutability.
3. Slower processes
Another reason why fintech needs blockchain is that the involvement of various third parties often delays the processes. This ultimately leads to lower satisfaction rates and higher turbulency in the business economy.
4. Higher operational cost
In the Fintech market, time is money. So, by cutting down the dependency on multiple people, making the process public to all, and reducing the time involved, the Blockchain technology has again proved to be one of the fintech trends that can reduce the cost by nearly 50%.
While you might have got a hint of the role of blockchain in finance in the above section, let’s cover the impact of blockchain-driven decentralized finance (Defi) in detail.
Ways Blockchain Is Revamping The Fintech Industry
When talking about the impact of blockchain technology in fintech, the best way to analyze and understand the effect is to focus on the key areas of the economy. So, let’s turn towards the subparts.
1. Banking and P2P payments
There are 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 that follows different consensus algorithms for faster transactions – thus enter blockchain technology in financial services.
Accenture estimates that the role 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.
Today, banks are getting fully aware of the real benefits of digital currencies in financial services (based on blockchain technology) over the traditional ones, such as lower transaction costs, faster transactions, etc. This is persuading all the financial bodies of the world to explore the possibility of making the shift to digital currencies and explore blockchain fintech solutions.
Also, the payment system as we know it today is not absolutely efficient either, which calls for an alternative way of payments in which cryptocurrencies can be fulfilled.
The next way Blockchain use cases in fintech can be seen on the grounds of payment modes. Today, we have three major financial services available – internet payments or credit card payments, international money transfers, and providing banking services to the unbanked.
Firstly, we forget that the credit card was invented before the internet and thus it has been tailored for physical payments, rather than internet payments. Therefore, internet payments through credit cards pose three major issues, consisting of – High Processing fees, fraud, and security concerns. These can all be very well taken down by blockchain adoption in banking and related financial services.
Secondly, the system of international payments is still standing at a very rudimentary stage. It is a closed and compartmentalized system. International payments generally take more than a day to process and can only be achieved during the opening hours of the payment agencies because before reaching its destination, your payments will transit through multiple banking systems having their own different processes. These steps notably increase the work of cross-checking data. And cryptocurrency is the answer to this.
When a blockchain mobile app development company works on the implementation of technology in fintech and banking, the problem of cross-checking data across different organizations involved in international funds transfers gets streamlined and easily authenticated over several levels of checks.
And finally, providing banking services to the unbanked – decentralized ledger technologies will provide the opportunity to the people who are unable to open bank accounts, to have access to banking services through their smartphones. As per a report issued by McKinsey, about 2.5 billion adults have no access to banking services, which is almost equal to half the adult population of the world. But a significant chunk of these groups is now equipped with smartphones. And smartphones can enable them to send or receive payments or give them direct access to microcredit.
2. Trading and trade finance
Trade Finance is still relying on paperwork circulated across the globe for an affirmation of information, i.e., documents are still being posted or faxed. Stock and share purchases still have to pass through a hassle process of brokerage, exchanges, clearing, and settlement. This usually takes 3 days for settlement, but can be extended over the weekends since every trader has to maintain their own databases for all the transactions-based documents and regularly check this database against each other for higher accuracy.
The integration of blockchain technology in financial services in this domain can be used for giving traders an escape from burdensome checks of counterparties and optimize the complete lifecycle. And this way, reduce the risks associated, speed up the settlement process, and enhance trade accuracy.
3. Crypto lending
Crypto lending introduces a new, efficient, and transparent lending process in the financial sector. The borrowers are able to keep their crypto assets as a collateral for obtaining a fiat-based or stablecoin loan, while the lenders give them the assets needed for the loan at a pre-agreed-upon interest rate. This also works in reverse. The borrowers sometimes use their stable coins or fiat currency as collateral to borrow the crypto assets.
4. Regulatory compliance
This is again one of the prime blockchain use cases in the fintech sector.
With global demand for regulatory services predicted to be worth $118.7 Bn by 2020, fintech companies are adopting blockchain for upgrading the regulatory compliances. They are relying upon this technology to track each and every verified transaction and record all the actions taken by the associated people so that regulators do not require to confirm the authenticity of the record. In addition to this, the technology is empowering regulators to review the original documents instead of manifold copies.
What’s more, the blockchain’s potential of immutability is helping with lowering down the possibility of errors and ensuring the integrity of records for financial reporting and audits, along with decreasing the time and cost of auditing and accounting. More about it later.
5. Digital identity
The number of fraudulent accounts remains on a constant rise. Although banks do have a strict KYC and AML checks, it is not foolproof. The fact that there is no standardized documentation process that clients should submit to prove their identity, makes them all the more hack-proof.
Blockchain can help with a digital identity system. The clients can go through validation once and can then use them to perform transactions across the globe. On this front, blockchain can also help financial users:
- Manage identity data
- Share data with other minus safety risks
- Digitally sign documents like claims and transactions.
It is a process that verifies accounts and highlights any inconsistencies. The process is not just complex in nature but is also slow. The process, however, becomes easier with blockchain. Through the technology, you can ask you partnered blockchain application development company to add the record directly in the ledger allowing an efficient way to stare and upgrade data.
7. New crowdfunding models
The crowdfunding process revolves around raising funds by asking a large number of people for a small amount of money, usually online. Blockchain, through ICO, IEO, and other approaches makes the process of fundraising transparent and a lot speedy compared to the traditional funding models. I guess this is the reason why ICOs surpassed the interest in the VC fundraising model.
Now as we know about the applications of blockchain in finance, it is likely that you are curious to know about its future. And eventually, take the right step. However, it is advisable to have a clarity of what all fintech companies are using blockchain technology and how so that you can enjoy better results.
So, let’s have a look at some of the real-life blockchain fintech use cases.
Popular Blockchain Fintech Solutions
We.trade, the platform developed by IBM with 12 major European banks like CaixaBank, HSBC, Nordea, and KBC, is using blockchain as a single database that enables all the counterparties to access the same information regarding trade transactions and add a tint of security to the system.
Circle is another fintech startup that is letting users invest in different cryptocurrencies, such as Bitcoin, Stellar, Ethereum, Zcash, Litecoin, EOS, and Monero.
Another company that is disrupting the fintech ecosystem with the help of Blockchain technology is Robinhood.
The company has developed a mobile application that gives users an easy mode to invest in stocks, stock funds, cryptocurrencies, and more without any additional fee.
Also, the fintech company has launched a crypto platform in 2018 that let users buy and sell digital currencies, including Bitcoin, Ethereum, Litecoin, and Dogecoin.
CryptoPay is also one of the fintech companies offering the best of the blockchain-based payment solutions. The company lets users convert their bitcoins into US dollars, British Pounds, or Euros, send them to friends or get a prepaid debit card to use it for making purchases. This not solely gives users ease of currency exchange, but also safeguard their money against fluctuations in the market.
LAToken is a crypto trading platform that bridges the gap between the real and crypto economy. It lets users trade bitcoins globally, invest in tokenization of assets, making an initial coin offering (ICO) out of their project, and more.
With this covered, let’s wrap up this article while focusing on the future of blockchain in financial services.
Future Of Blockchain-based Fintech Market
Talking about the future of blockchain in fintech, the adoption of technology, and the use of blockchain in fintech is increasing significantly. The blockchain-based fintech market was worth USD 231.63 Mn in 2017 and is anticipated to be valued at USD 6700.63 Mn by the year 2023, with a CAGR of 75.2% during the forecast period.
Also, as per the PWC’s study of financial services and fintech, it has been found that 77% of the financial industry is planning for blockchain adoption in financial services by the end of 2020. Additionally, the funding in blockchain-based fintech startups has also risen exponentially, with the investment value crossed $40 Bn in 2017 itself.
So, in case you are a fintech startup or establishment still wondering if it’s the right time to set the basis of tokenization of the finance industry, act now! Contact the fintech experts to discuss the opportunities and requirements, and make a successful future.
Frequently Asked Questions
Q. How Blockchain Tech is Revolutionising Fintech?
Blockchain technology is revamping the fintech industry in myriad ways, such as by eliminating third parties, reducing operational time and cost, enhancing the identity verification process, etc. These and the other benefits of blockchain in financial services are designed to help the sector transform digitally.
Q. Which Blockchain platform is best for the financial service industry?
Ethereum, Hyperledger Fabric, Quorum, Corda, and Ripple are some of the blockchain platforms that can be considered for revamping financial services. However, it is best to understand the potential of each and choose the platform that boosts your business growth.
Q. How to integrate blockchain in a finance app?
There are various ways to integrate blockchain in your finance app. However, they are quite complex and tricky. So, it is advised to turn towards leading financial applications development companies with sound knowledge of blockchain for the same.