April 2, 2020
As is the wonder of the 21st century, the technology always ends up trickling down to the other sectors and across multiple industries. In fact, it has led to the rise of hybrid sectors like Fintech and Healthtech. One of the biggest characteristics of these industries is that they are driven by AI and technology to provide unmatched customer service. Keeping with the trend, Blockchain is the next big technology trend that offers a lot of potential to a wide range of industries including Fintech.
A sizeable amount of fintech industries are already considering implementing Blockchain into their organization. In fact, according to a survey by PWC, 77% of companies that offer financial services are planning to adopt Blockchain by the end of 2020. This is essential because the Blockchain technology has the potential to change the operations of the fintech industry. These changes range from upgrading business models to operation services like accounting and payment settlement. Moreover, fintech companies stand to reduce their syndicate loan transaction costs by 70-80% that are facilitated by banks if they choose to adopt Blockchain. This is all the more attractive proposition for startups as Blockchain fits with the ‘startup objectives.’ Interestingly, 65% of startups today plan to implement blockchain by the end of 2020.
In this blog, we will try to decode the attractive proposition that Blockchain technology holds and how it can revolutionize the fintech operations.
Blockchain is defined as the decentralized public ledger that maintains a permanent and irreversible record of transaction data. All of this data is stored in an ever-growing list of records called ‘Blocks’. All of these blocks are linked and secured through cryptography. Each block on the chain can store up to 1 MB of data. Moreover. every block contains 3 elements called the Hash Pointer, timestamp and the transaction data.
Every entity that is a part of the blockchain can access all the records on the database. All the transactions and their associated values are visible to anyone that has access to the system. However, none of these entities have the ability to control the data. Every node in the blockchain stores the information and forwards it to the other nodes. This allows direct communication between peers and not through a central node. Finally, every record in blockchain is immutable because each transaction is linked to a record that was entered before them in the chain. This immutability makes blockchain a great foundation for fintech startups.
Another important concept to understand within Blockchain, is that of Consensus Algorithm. They are a crucial element of every blockchain network. They are in charge of ensuring and maintaining the integrity and security of these distributed systems. The first cryptocurrency consensus algorithm to be created was the Proof of Work (PoW). Now, in a network, digital tokens are sent by users to each other. A decentralized ledger gathers all of these transactions into blocks. So, the responsibility of confirming the transaction and arranging blocks is given to special nodes called ‘miners’.This entire process is called mining. As we mentioned earlier, in Blockchain, an algorithm is used to confirm transactions. Consequently, miners compete with each other to complete network transactions and get rewarded with Proof Of Work. This continues to be one of the major draws of Blockchain.
As mentioned before, blockchain offers a wide range of advantages for the fintech industry ranging from lower operational cost to greater risk management. In this section, we will try to understand all the advantages that come with implementing blockchain in the fintech industry.
Blockchain technology can help the fintech industry with some aspects of operational risk management. This includes measures against money laundering, terrorist financing, and cybersecurity. Moreover, blockchain can help the fintech industry in keeping financial operations risks in check and also take into account geopolitical issues. Furthermore, blockchain can help optimize and secure mobile banking operations. In fact, a study by MRFR showed that mobile payments and banking through blockchain has reached up to $90 billion in 2019.
Blockchain technology simplifies the process of verification, authentication, and storage of all electronic records in the fintech industry. Moreover, it is widely being used to create KYC utility for National Stock Exchange.
Blockchain works on a distributed ledger. All of the information is stored in the form of block and is accessible to each entity that is a part of the blockchain. Now, this can help connect all the parties in the financial trade instantaneously which can lead to faster processing speeds.
For example, if a person uses another bank’s ATM machine, the bank is obligated to contact the user’s bank to ensure if s/he has sufficient funds. If all of this information is already stored in one place (the blockchain ledger), the user can withdraw finds without waiting for this approval. Unlike traditional financial services, blockchain does not depend on slow approval processes which usually go through several mediators before approving transactions. This allows for a more efficient and faster financial transaction. The same logic can be used by applying blockchain for the simplification of remittances.
Bitcoin transactions can take anywhere from 30 minutes to 16 hours. This is, in no, way, perfect. However, it still has the upper hand on bank transactions which takes an average of 3 days to process transactions. In fact, nowadays, developers are working on scaling cheaper solution for cryptocurrencies that allow faster transactions. Bitcoin Cash adn TRON already have low-priced transactions.
Blockchain technology holds a huge potential to simplify and secure international payment processing services. It uses encrypted distributed ledger that provides instant verification. This eliminated the need for intermediaries such as correspondent banks and fastens the process. Recently, YES bank used the R3 Corda enterprise blockchain platform to facilitate the issuance of INR 100 Cr commercial paper (CP) using blockchain technology for Vedanta, a natural resources conglomerate. This goes to show how Blockchain can aid in facilitating efficient and secure operations for big transactions.
Fintech industry is now becoming synonymous with providing financial services to the ‘unbanked’ population of the country. Blockchain can aid fintech players in providing credit to people that lack a CIBIL score or any banking history. In fact, the Telangana government and London based company Cognito Technologies started a project that aims to calculate the credit scores for economically weaker sections of the society using blockchain technology.
The advantages of using Blockchain technology are plenty. More and more financial companies are preparing to use blockchain for their processing and transactional needs. In fact, 77% of financial players are already planning to use Blockchain by the end of 2020. It remains to see how many fintech companies will join the bandwagon.
This blog was authored by Etee Dubey. It was edited by Tony Benoy.