The Future of FinTech
Is blockchain the future of fintech? This is a big question that has been raising lots of controversies recently.
If you’ve been carefully following the FinTech industry or the news around the industry, you would have heard about the adoption of Bitcoin or cryptocurrency in the industry. But what is more important is the adoption of the technology that backs cryptocurrency – Blockchain.
The word “Blockchain” became public in 2008, when “Satoshi Nakamoto” launched his publication “Bitcoin: A Peer-to-Peer Electronic Cash System.” The publication presented Blockchain as the foundation for Bitcoin’s operation – the underlying technology that makes the cryptocurrency a possibility. In Sally Davies’ voice, “Blockchain is to Bitcoin, what the internet is to email.”
Simply put, Blockchain is a digital file, consisting of “blocks” of data that are linked together (chained), hence, the name “Blockchain.” These blocks serve as proof of evidence for Bitcoin transactions. The blocks store the terms and conditions of a transaction, the exact time and date the transaction took place, and the parties involved in the transaction – this is applicable too to an agreement.
Unlike with the physical documentation of transaction or agreement, Blockchain guides against the issue of foul play by distributing the block possessing the proof of evidence to several other computers (nodes) at multiple different locations not known or accessible by the parties involved in the transaction. This makes the Blockchain more secure, though not necessarily resistant to manipulations.
Blockchain holds several advantages that can be harnessed for great advancements in the FinTech industry. Some of them include:
- The successful elimination of the middlemen from transactions, which subsequently removes inefficiency and the costs associated with future financial services.
- Elimination of time-consuming contract processes, which helps in speeding up transaction processes, leading to the instantaneousness of use.
- Provision of security for financials and transaction information against loss and theft as the information is stored across the decentralized ledger.
- Utmost transparency, which is bolted on the lack of a third party in transactions or contracts.
As much as FinTech is concerned, Blockchain is the latest technology to create an impact in the scenery and it has already brought disruption to the financial industry.
Historically, banking has been one of the most immune industries to technological disruption. However, the banking industry is now focused more on the introduction of technology to reestablish clients’ trust following ill events like the global financial crisis.
But how does this place Blockchain technology as the future of FinTech?
Blockchain in Fintech
Foremost, Blockchain is a distributed ledger system that enables financial transactions to be verified and approved by all nodes in the network before it becomes part of the block. Since the network is decentralized, there is no one central node that can be corrupted or hacked, which makes the Blockchain much more secure.
Secondly, it is well-known that FinTech can tread highly-regulated areas where banks dare to tread in fear of exorbitant fines. As a result, Fintech companies would be able to offer services with much less friction in the future.
Some of these processes, including cross country payments, equity settlements, etc. will be made easier when facilitated by Blockchain. Hence, Blockchain would become so essential for banks to offer their clients with faster settlement through efficient banking systems and processes.
Also, the adoption of Blockchain lowers the cost of Fintech processes. Since low-cost competitors enjoy cost advantage only when high-cost competitors are still operating within the industry, this will more banks to adopt Blockchain to enjoy low cost. Consequently, the increasing market competition will pressurize all banks to pass on the initial profit made through Blockchain adoption back to customers.
Finally, the use of Blockchain goes far beyond backing cryptocurrencies like Bitcoin or for the development of new financial technologies. Blockchain unveiled the smart contract, which can be used for many different purposes. The Blockchain smart contract can be used to stop fraud, for ownership rights, as documents provenance, and physical or digital assets.
For instance, Blockchain was adopted as the digital ledger for transaction verification and diamond identification in the diamond industry, and this has brought more transparency to the diamond market, which was once very opaque.
In a nutshell, adopting Blockchain in the FinTech industry makes banking processes an efficient and seamless experience for both the banks and clients. It promises a substantial reduction in cyber-attacks and frauds in the financial sector and offers a remedy to the inefficiencies that have currently plagued the back-office setups of most financial institutions and banks.
Nevertheless, the big challenge would remain how financial regulators would respond to this new and ever-changing Blockchain environment.
Blockchain Use Cases in Fintech
Goods and Services Tax (GST): we have both input tax services and output tax services to observe. We have to carefully match both services to get full credit – checking whether the tax payments have been made as well as the tax that needs to be paid. This process can be easily automated and facilitated using Blockchain. This will not only help the system to work seamlessly but will also improve the level of trust in the system.
Financial inclusion: with Blockchain, the unbanked population can be financially included by easing the back-office processes, making it accessible widely.
Smart contracts: Blockchain enables both individuals and firms to settle transactions and contracts and reach an agreement very efficiently and quickly, eliminating the need for intermediaries or central counterparties.
Other uses cases include the private Blockchain and Retail cards.
Blockchain and the Future of FinTech
Unlike the popular belief, Blockchain is not a disruptive technology to the current traditional financial model. The low-cost alternatives presented by Blockchain are never to dethrone the incumbent models. Instead, Blockchain is a foundational technology that holds great potential for the financial industry and its reach and impact will be enormous.
Although Blockchain is an important FinTech innovation and offers a potential reduction in transaction costs, it may take several years for Blockchain to have visible impacts on the way the financial industry operates and transacts.
Conclusively, Blockchain is possibly the latest technology in FinTech innovations and Blockchain may be the final leap we all need to make our world a better place.