For the banking sector, blockchain-based technologies open up a world of possibilities. Blockchain enables fintech businesses to save costs, automate processes, expand their reach, and increase the transparency of their data. Just the top of the iceberg, really.
This article examines how blockchain technology and fintech are altering the financial industry for both corporations and consumers. We’ll also demonstrate how blockchain-based solutions may enhance procedures and address problems unique to a certain sector. We’ll examine the technology’s readiness for wider adoption in the last section.
Let’s first examine how blockchain functions inside fintech.
What Is The Place Of Blockchain In Fintech?
Blockchain is a decentralised peer-to-peer (P2P) ledger that keeps track of transactions on a computer network that is both hacker-proof and open to the public.
The technology has been around for more than ten years, and it has been widely used in finance for at least six of those ten years. Decentralised finance, or DeFi, is a new paradigm for financial operations made possible by the use of blockchain in fintech.
On blockchain networks, DeFi refers to technology that allows distributed financial transactions. DeFi improves the accessibility, transparency, and security of financial services by fusing fintech with blockchain. Additionally, it enables asset exchanges between enterprises and private parties without the use of middlemen.
Additionally, venture capitalists nearly tripled their investment in fintech businesses in 2021, spending over $133 billion on them.
In conclusion, it is evident that financial institutions favour distributed ledger technology. Let’s look at how it can fill in the holes in conventional financial services to better appreciate why.
Use Blockchain To Address The Issues Facing The Financial Sector
The conventional financial system is not flawless. Slow transaction times, hefty fees, and a lack of transparency are common problems for businesses. The majority of these issues are resolved by fintech’s use of blockchain.
High operational costs
The financial sector can lower transaction costs by utilizing blockchain. Even a simple credit card transaction in a conventional system comprises three parties: the retailer, the bank, and the credit card network. Each organisation levies a price for its offerings.
Due to the larger network of financial institutions involved in cross-border payments and foreign exchanges, this issue is made worse. For a single transfer, a client can be charged conversion, intermediary, correspondent, and receiving bank costs.
P2P transactions and decentralized protocols are used by blockchain to do away with intermediaries in financial operations. Fintech firms and their customers benefit from faster processing times and lower transaction costs as a result.
Limited service availability
In some circumstances, access to fintech services may be restricted. For instance, a user’s ability to access an app while traveling may be restricted by governmental limitations or a company’s technological capabilities. A business could also not have any physical locations or remote support personnel.
Fintech businesses may function beyond the constraints of conventional financial systems thanks to blockchain. Clients may carry out activities anywhere they want from any location thanks to decentralized apps, cryptocurrencies, and smart contracts. In other words, financial services may be accessible around the clock, wherever.
Security risks
The protection of consumer privacy while guaranteeing data security across systems is a significant problem for the financial industry. Security concerns can be internal (vulnerabilities related to lax access restrictions, a lack of cybersecurity knowledge among staff, and fast cloud adoption without adequate security safeguards) as well as external (things like fraud and cyberattacks).
In actuality, when compared to other industries, the financial industry continues to be the most susceptible to cybercrime. Securing digital assets and private data is a top worry for fintech developers, with 2,527 recorded occurrences in 2021 alone.
Through three major features, blockchain lowers the risks associated with fraud and cybersecurity:
Decentralization: Blockchain is a decentralized system, thus because there isn’t a single point of failure, it is more resistant to security breaches. A network of nodes encrypts and verifies each transaction.
Encryption: To transfer data between members in blockchain networks, encryption techniques and hashing are used. The encrypted transactions are then combined with other network blocks.
Immutability: A blockchain ledger’s nodes collaborate to validate transactions. The data is more difficult to alter since doing so requires the consensus of other nodes, which is only achievable with several nodes.
Fintech organisations may strengthen their security posture and reduce the risk of cyberattacks by implementing blockchain.
Lack of traceability
For fintech businesses, traditional banking systems present traceability issues. As we’ve already mentioned, even straightforward procedures require a number of intermediates, which makes tracking and verification more difficult. Traditional methods are also extremely centralized, which raises concerns about transparency and increases the danger of manipulation.
Unmatched traceability is made possible by blockchain technology, which employs a distributed, decentralized, and publicly accessible ledger. Consensus methods and sophisticated algorithms track and validate each transaction. Users are able to examine each transaction on the network, and auditors may quickly validate fintech operations as a consequence.
Slow processes
In conventional fintech systems, settlement timeframes might vary from several hours to many days. This is a result of the requirement for manual processing as well as the participation of several middlemen and clearinghouses.
Blockchain is made to move quickly. It allows businesses to streamline verification and authorisation processes, which cuts down on settlement time. It also minimizes the amount of time required to process transactions and confirm payments.
Customers benefit from speedier and less expensive banking transactions. Banks can process payments practically immediately and cut costs associated with expensive infrastructure and various departments.
In conclusion, because blockchain enables quick and secure financial transaction processing, it is perfect for addressing the major issues facing the financial sector.
How Can Financial Companies Benefit From Blockchain?
Here are some of the main advantages of fusing fintech with blockchain, from enhancing immutability to enhancing transaction transparency.
Restorability:
A DeFi network is made up of nodes, or processing units, each of which may keep a copy of the complete ledger. In the case of disasters like database corruption, server wipes, or ransomware attacks, this enables businesses to recover their blockchain network.
Less fees:
Blockchain technology allows financial businesses to cut out pointless middlemen, lowering the cost of their services. Additionally, even if there are still transaction fees (such as for petrol), they are still less expensive than fees in conventional banking systems. Blockchain can cut unnecessary expenses for remittance by 80% on its own.
Automated operations:
Through the use of a self-executing smart contract layer, fintech businesses automate services. This enables them to expand processes like loan approvals and yield payments that involve several personnel. Blockchain significantly streamlines transactions by minimising the involvement of third parties.
Shortened settlement period:
In the 2022 DeFi deciphered study from Deloitte, it is said that blockchain technology and DeFi applications significantly reduce settlement waiting times. Transfers that often take more than three business days to clear can now be done so instantly.
Increased reach:
A fintech firm may become more competitive by offering services at lower rates and providing inexpensive cross-border payments. As a result, they may access clients in international marketplaces. Fintech blockchain businesses can also lessen the entrance hurdles to traditional financial institutions (such as bank account requirements and laws).
Data uniformity:
Smart contracts and consensus methods make sure that all nodes and transactions follow the same set of guidelines. In other words, transaction data continues to be consistent and unchanging.
Top Blockchain Use Cases In Fintech
Many businesses have been looking at using blockchain to provide new financial services or enhance current ones in recent years. Blockchain has several financial uses, including:
- Digital payments
- Trading
- Asset management
- Lending
- Digital identity management
Let’s explore some typical blockchain fintech applications in these service sectors in more detail.
Digital payments
This indicates that blockchain will be utilized by fintech businesses to create services like:
- settlements for domestic wholesale and securities
- Trading of stablecoins, cryptocurrencies, and tokenized fiat
- reduced-fee cross-border transfers and remittances
Real-world examples
Users may freely purchase, collect, and trade digital assets on many different sites. A well-known blockchain-based platform called Coinbase enables companies to accept cryptocurrency payments.
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Trading
Trading is no longer limited to centralized exchanges thanks to DeFi. Decentralized exchanges (DEXs), which utilize smart contracts to enable peer-to-peer trading without middlemen, are the consequence, and they are spreading as an ecosystem. With the use of sophisticated algorithms, pricing is made to correctly represent the supply and demand of traded assets.
Among the uses of DeFi in trading are:
Decentralized marketplaces: Users may transact directly with one another thanks to these exchanges, which do away with middlemen. The trading procedure is secure, open, and without restrictions.
Difficulty derivatives: Users of DeFi platforms may trade with others using smart contracts and access a variety of financial products, including options and futures.
Decentralized trading on margin: Margin trading has become more widely available thanks to DeFi, enabling users to trade assets and earn interest by supplying liquidity to the pool.
Additionally, TechMagic offers full-cycle bespoke trading software development services.
Real-world examples
A nice illustration of a decentralized exchange is Uniswap. Users can freely link their Ethereum wallets and trade securities thanks to the technology mentioned above.
Pax Gold, a blockchain business that backs cryptocurrency tokens with actual gold, is another intriguing initiative. Users may purchase fractions (ounces) of gold in this fashion, making gold investing more widely available.
Digital identity management
The Know Your Customer (KYC) principles must be followed by fintech firms. These aid with user identity verification and transaction authentication, greatly lowering the likelihood of fraud, money laundering, and other illegal acts.
Traditional fintech gathers verified data using identification from the government, a proof of address, and other personal data. This laborious process, which calls for several documentation and verification stages, takes time. Blockchain, on the other hand, takes a distinctive approach to this with a focus on privacy.
Real-world examples
To assist fintech firms in adhering to KYC and anti-money laundering regulations, Tradle assists in creating a digital identity. Users have control over their identifying information and may decide how much to reveal. Civic is another option that enables individuals to exchange just the data needed for a certain transaction.
DeFi is ushering in a new era of financial services with its wealth of advantages and useful use cases. Although blockchain is already having an impact on the financial industry, it’s critical to recognise the obstacles we still need to overcome before the technology can fundamentally alter how companies and individuals manage their finances.
Lending
Blockchain-based fintech solutions increase both lenders’ and borrowers’ access to credit. A business can create a cryptocurrency pool and raise money from other investors. Then they can provide loans to borrowers who put up digital assets as security. The terms (loan funds, yield, and conditions) are governed by smart contracts, which also carry out collateral selloffs as needed.
To put this benefit into perspective, obtaining a company loan or mortgage typically takes 30 to 90 days. With DeFi, the majority of procedures are streamlined, allowing businesses to approve credit in less than 48 hours.
Asset management
There is growing pressure on the capital markets, private equity firms, and real estate funds to control liability risks, make quicker decisions, and comply with ever-changing rules. Additionally, TechMagic specializes in offering services for asset management product development. Asset and stakeholder management procedures may be efficiently streamlined with the use of blockchain fintech solutions, for instance, by:
- setting up automatic funds
- involving stakeholders with digital resources and services
- Digitalizing assets and portfolios to increase market access and liquidity
- Transacting with adjustable built-in privacy settings
- Voting and other shareholder rights and duties can be programmed into digital assets to avoid human mistake.
Wrapping-Up: Is Blockchain Revamping The Fintech Industry?
Although it’s true that blockchain technology in the finance sector has the potential to completely change the way we manage money, the field is still in its infancy. Blockchain’s improved security and transparency are already helping fintech businesses, but there are still certain obstacles to be addressed.
One of them is scalability. The inability of current blockchain technology to handle big data quantities is a significant barrier to its adoption in the financial industry. Development is also hampered by regulatory problems and interoperability problems (between blockchain networks and current financial systems).
It is still too early to state that blockchain is revolutionizing the financial sector due to these and other obstacles. The technology has potential in the banking industry, but it has to develop more before it can be widely used. We’ll probably see more astounding application cases as technology advances and solves issues like scalability and regulation.
Author Bio
Glad you reading this. I’m Yokesh Shankar, the COO at Sparkout Tech, one of the primary founders of a highly creative space. I’m more associated with digital transformation solutions for global issues. Nurturing in Fintech, Supply chain, AR VR solutions, Real estate, and other sectors vitalizing new-age technology, I see this space as a forum to share and seek information. Writing and reading give me more clarity about what I need.
Trading cryptocurrency can be dangerous, even with the existence of a blockchain. If you believe your money is at risk, you should make sure to contact wealth recovery attorneys, so they can help you retain your investment.
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