“The reason we are all here is that the current financial system is outdated.”
Blockchain has disrupted every possible field – including Fintech. The technology has added an innovative dimension in the Fintech landscape, the one that has evolved as a tech-based revolution in the financial sector. Blockchain technology is reconstructing the fintech industry in numerous ways, such as by eliminating third parties, improving the identity verification process, cutting down operational time and cost, etc. This has made startups and financial application development companies show an interest in exploring the requirement of blockchain in fintech. Blockchain technology is all based on the idea of decentralized ledgers so the applications in fintech are noticeable, but is it the end solution? Definitely not. Here is what blockchain means for fintech, and what to keep an eye on.
According to industry data, large investment banks and financial institutions have spent over $1 billion to build and apply blockchain technology for everything from trade finance to credit default swaps.
Challenges in the fintech industry that blockchain addresses:
“Blockchain is as significant now as the internet was 25 years ago.”
Ways blockchain is revamping the fintech industry:
By now, you might have got a clue of the role of blockchain in fintech in the above paragraphs. Let us see how blockchain is revamping the fintech industry. When we talk about the impact of blockchain in fintech, the best way to understand and analyze the effect is to focus on the key areas of the economy. Hence, let us turn towards the ways blockchain is revamping the finance world.
There are indeterminate incompetency and imprudent bureaucracy in most of the banks, and this concern is persistent in the clearing and settlement domains of the banks. The gap which is created by the conventional ways of banking and the involvement of hierarchy at a different level can be avoided if there is a decentralized system that follows special algorithms for faster transactions- hence the need for blockchain technology is justified in banking and P2P payments.
Besides, all the banks along with central banks across the globe are contemplating the power of introducing their Digital Currencies based on blockchain. Since cryptocurrencies cannot be regulated by any kind of monetary policy, the aim behind introducing their own Digital Currency is to make sure that any digital currency provided by the central banks will reduce the popularity of all the cryptocurrencies. This will give absolute control over financial regulations and monetary policies to central banks. Also, banks are aware of the key benefits of digital currencies in financial service based on blockchain technology over the traditional ones, such as faster transactions and lower transaction cost. This urges all the financial bodies in the world to explore the possibilities of making the shift to digital currencies and to bring the blockchain technology-based payment into practice.
The payment system we have today is not efficient either, which calls for an alternative way of payments which can be done with cryptocurrency using blockchain technology. As credit card was invented before the internet and thus it has been tailored for physical payments, rather than internet payments. Hence, internet payments through credit cards pose many issues, consisting of – Fraud, high processing fees security concerns. This can be taken down by blockchain adoption in financial service in the banking sector.
The international payments system is still standing at a very basic and undeveloped stage. It is a compartmentalized and closed system. It takes usually more than a day to process transactions and can only be done during the opening hours of the payment agencies. It is because payment transit through multiple banking systems having their own different processes before reaching its destination. This increases the work of cross-checking data. In these current circumstance, use of blockchain technology and Digital Currencies is the solution to this. Implementation of blockchain in banking surely simplifies the process of cross-checking data across different organizations involved in the international payment transfer and can be easily authenticated over several levels of checks.
Providing banking services to the #unbanked shall provide the opportunity to the people who are unable to open bank accounts using decentralized ledger technologies, to use 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 equal to half the adult population of the world. But the majority of these groups have access to smartphones. Using smartphones, people can send and receive payments or banks can give them direct access to #microcredit.
Trade finance still uses paper for the documents, which are circulated through postal service or fax across the globe for confirmation of information. Stock and share purchase still have to pass through a process of brokerage, exchange, clearing, and settlement. This normally takes 3-4 days for settlement and may get extended over the weekends since every trader has to maintain his own database for all the documents based on transactions. The use of blockchain technology in trade finance helps traders in escaping from troublesome checks of counterparties and optimize the complete cycle. It also speeds up the settlement process, reduces risks associated, and enhance trade accuracy.
In loans and credits, blockchain provides banks and other organizations with a faster, easier, and secure method for verifying the identity of a person and background information of customers. This way, it prevents identity theft, money laundering and other such fraud.
Companies are relying upon blockchain technology to track each verified transaction and record all the actions taken by the people associated with the company so that regulators do not have to confirm the authenticity of the record. Moreover, technology is allowing regulators to review the original documents instead of copies. Blockchain’s potential of immutability helps in reducing the possibility of errors and ensuring the integrity of records for financial reporting and audits, along with reducing the time and cost of auditing and accounting.
Future of blockchain-based Fintech market
The blockchain-based FinTech market was worth USD 231.63 Million in 2017 and is expected to be valued USD 6700.63 Million by the year 2023, at an impressive Compound Annual Growth Rate (CAGR) of 75.2% during the forecast period. As per PWC’s study of financial services and fintech, it has been found that 77% of the financial industry is planning for blockchain adoption in the financial services by the end of 2020. Moreover, the funding in blockchain-based fintech startups has also increased exponentially; with the investment, value crossed $40 Billion in 2017.
Blockchain technology might not feature high on the list of priorities of banks, but if any bank believes that their operation will not be partly underlined by blockchain technology in the next 10 years, they are mistaken. Banks may not hastily begin implementing blockchain technology but in the worst-case scenario, they could see banks losing their core business of facilitation of monetary transactions. Dreams of those people who oppose the domination of the banks may come true in the future.
The key to avoiding this is in challenging companies that are already combining innovation with the blockchain technology early. Developing own alternative systems that allow them to get ahead in the game, may save huge cost of failure.
“People will continue to be interested in fully decentralized digital currency.”
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