90% of European and North American financial institutions are experimenting with blockchain, underlining the importance of this technology. Blockchain, just like the internet, is revolutionizing the way we do business, socialize, and transact. Many industries are exploring this incredible innovation, but one sector that has taken a particular interest in blockchain is the financial technology industry. Fintech companies have been quick to embrace this innovation, and they are exploring ways to use it to improve their operations.
Understanding Blockchain
Blockchain is a digital public transaction ledger that cannot be manipulated or altered. It includes a list of records called blocks, which are joined together using cryptography. Each block holds transactional data as well as a secured electronic address of each party involved in the transaction. Every monetary transaction is verified by a computer, and any attempt to modify or tamper with the block is easily detected. Below is some useful information about this technology.
What Makes Blockchain So Powerful?
Two properties in blockchain are what makes it a force to be reckoned; decentralized and distributed. For centuries, we have always involved a third party when doing a transaction. This third party is the authority that records the transaction and stores the data. The authority makes the transaction rules and is basically the force behind how modern economies work. However, this is about to change, thanks to the emergence of blockchain.
Blockchain technology eliminates the need for a middle man, as all data is centralized. Here, there is no single authority overseeing transactions. By removing the intermediary, the owners of the assets retain any financial value that could otherwise have gone to the middleman. Blockchain gives users more confidence and security as transactions are registered in many locations and verified to ensure they can’t be altered.
The distributed ledger of blockchain contributes to data integrity. Any transaction information can be securely transferred without the risk of being modified. The ledger takes over most of the roles that are done by the intermediaries. This quality creates trust between the two transacting parties.
Why Fintech Needs Blockchain
One of the biggest problems that fintech companies encounter is the lack of trust from customers. Most people feel that their products or services aren’t secure enough. This forces most people to conduct their transactions through the big financial institutions, as these establishments have the resources to build and maintain a highly secure system.
Now, blockchain is helping fintech companies to have the edge over large financial institutions. Fintech companies no longer need to invest heavily to secure their systems. They are now taking advantage of blockchain technology, which is cheap to develop and highly secure. With this technology, customers can now trust the products of fintech companies.
Applications of Blockchain in Fintech
Blockchain has many applications in financial technology. Here are some of them.
Trusted Payments Solutions
Blockchain technology is dedicated to bringing transparency to the payment process. It strives to facilitate a fast, safe, and affordable transaction. Its distributed ledgers allow quick tracking and verification of the transaction. The identity of the user is hidden through encryption, and only the users involved know the details of the transaction. Other blockchain participants are informed of the transaction in real-time. This allows financial services to work with more integrity, thus allowing the public to trust them. Fintech firms are developing blockchain-based platforms to help people make more secure payments.
Regulatory Compliance and Audits
Financial services are subject to an ever-growing set of rules. Also, organizations that process, store, or transmit customer data have to comply with regulatory programs such as the SOC 2, HIPAA, and PCI DSS frameworks. Fintech companies fall into this category. However, complying with these rules has not always been easy. To meet compliance standards and avoid penalties, companies are now embracing blockchain. The tamper-proof nature of this technology is helping fintechs to eliminate any risks and uncertainties and making it easier to comply.
Blockchains keep all records intact, and the records cannot be deleted, altered, or changed in any way. Traditionally, fintechs had to create paper reports which are prone to errors. Blockchain guarantees the company that the records they submit to the regulator are error-free. With blockchain tech, all records are automatically stored in one place, making it easy for the company to submit them, and allowing regulators to confirm the authenticity of transactions quickly. Through blockchain, compliance has suddenly become less costly.
Cross-Border Micro-Payments
Overall global remittance grew to $ 689 billion in 2018, but it cost over $30 billion to send this money. Now, blockchain technology is having an impact on how people make cross border payments. First, it has simplified the remittance process. It eliminates the paperwork and the middlemen that complicate the process. Second and most importantly, it has removed the processing fee. Fintech companies are helping people to circumvent these tedious and costly processes and allowing people to transfer and receive payouts instantly, effortlessly and affordably.
Eliminate Stock Fraud
It’s well known that some individuals use dirty tactics to make money in the stock market. Blockchain has the ability to eliminate any stock theft and tampering that occurs in this market, therefore increasing transparency. It can also bring significant improvements to the industry by removing processing fees, saving processing time, and putting an end to commission payments that go to intermediaries. There are now blockchain-based platforms that facilitate instant and secure share trading.
Credit Reports
The traditional banking system disregard a large portion of the population. Lack of credit scores and credit history has led millions to be deprived of loans, mortgages, and other essential services. Luckily, blockchain can address this issue using a new method of credit scoring. Some fintech companies are now developing blockchain-powered platforms that will effectively estimate credit scores. To check the credibility of an individual, this system draws data from a wide array of sources that aren’t explored by traditional financial institutions. Some new platforms are also helping to decentralize credit scoring and enabling people to apply for a loan from anywhere in the world.
Resolve Identity Theft
Identity theft is still rampant today, despite the efforts to combat it. To fight this menace, banks are forced to conduct rigorous checks on the client who is transacting. Although it helps to minimize fraudulent and malicious transactions, this process can take over a month, thus disrupting even genuine transactions. This is not only frustrating, but it can lead to financial loss to the user. Blockchain can be used to assign users a universal digital identity where you only have to go through verification once. Afterward, you can use your unique identity to transact from anywhere in the world.
Bottom Line
Blockchain technology has undoubtedly changed how the financial industry operates. Fintech companies have recognized the potential of this technology and are using it to overcome a myriad of challenges. It has reduced the speed and cost of making transactions, improved resource management, and removed intermediaries.
