A lot has been written about the new touted technology, Blockchain. It is becoming the next big thing and has transformed the way financial services are operated. Blockchain technology sets up a unique, and secure connection between customers and the platform because of which it is expected to be the future of financial services. A chain of blocks secures blockchain in financial services, where a # Hash distinctly identifies each block. The unparalleled benefits of blockchain in financial services have taken the industry to literally ANOTHER level. With a lot of information surfacing in the financial segment on the internet, we would like to highlight the blockchain use cases in finance in this blog.
The Revolution Begins:
The concept of cryptocurrencies is backed by the decentralized blockchain ledger. This duo has the potential and the audacity to change the functioning of financial institutions. If we talk about benefits, lower costs, faster transactions, improved transparency, auditable data, traceability, security… phew… There are endless things we can talk about here.
Talking about numbers, the financial service industry may cross $2.6 trillion by 2022. Imagine the number of P2P transactions that will happen within this defined timeframe, I guess in billions. This high number of transactions will be followed by multiple challenges such as data breaches, manual paperwork, delays in transactions, mishandling of data, which may put the financial segment at risk.
However, a lot of many challenges have been resolved by the introduction of decentralized finance, referred to as DeFi. DeFi mitigates the role of intermediaries by introducing smart contracts. Let us see what are the challenges of the finance industry and how blockchain technology be used to solve these challenges.
Challenges faced by the finance industry:
Blockchain is like a panacea to the major challenges existing in the fintech world. Every stakeholder given rights in the defined blockchain financial network can access the data from anywhere. All the prerequisites are met, no data is compromised, and the consumers have faster access to the transactions. Earlier, it was impossible for the finance industry to operate round the clock, but with the advent of blockchain, this can be done in a super speedy and round the clock without any involvement of professionals.
Let’s look at the other things that blockchain technology helps in resolving.
Security and Transparency:
A significant challenge addressed by the advent of blockchain is centralized and multilayered service operations. The centralized system involved a lot of multiple-hand involvement owing to which there was always a risk of lack of transparency and data safety. In addition, server hacking was another major concern that puts everything at threat.
The introduction of blockchain on the other hand ensured the following.
- Immutability: Blockchain confirms that the data is immutable. It can not be changed and is highly secured & authentic.
- Privacy: Blockchain data is protected by a public key and a private key. The public key is for the users whereas, the private key is for stakeholders. This enhances transparency and maintains data confidentiality.
There was a lot of money involved with the centralized concept of operations in the finance industry. This upfront cost includes bookkeeping, labor costs, security of databases, value transfer systems, purchasing of central databases, etc.
Some of these costs need to be paid monthly, yearly or quarterly. However, blockchain technology has broken down the cost factor. How? Well, the role of intermediaries has been reduced, the bookkeeping practices are no longer followed, and the value transfer costs have been reduced. All of this automation helps in overcoming time-consuming and costly affairs.
One of the important segments operating under the financial industry is the loan lending section. It is a risky operation, to be honest. The counterparty doesn’t pay, there is a lack of trust between the parties and the cross-checking of information is itself a hurdle.
All of this is significantly reduced by the implementation of blockchain. P2P transactions are facilitated, credit risk and fund management risks are reduced, smart contracts are enabled, and the entered data can not be changed at all.
Transparency is the key requirement for auditing the finances. The traditional approach seems to have compromised over this primary thing. This led to irregular compliance, longer auditing time, dishonesty, and more.
Blockchain technology ensures that the above issues are addressed effectively. The data remains immutable and the compliances are met on time.
What are the use cases of blockchain in finance?
Well, if you are looking for an answer to how blockchain revolutionizes the global financial system, you should read about its use cases in the next section.
1. Cross-border payment:
Sending money cross-border is always a question. Banks cut their share over every transfer, be it goods or payments. Additionally, the process goes through a long chain of documentation before the recipient receives the money. Blockchain technology eases out the transfer of money process. There are no manual processes involved, nor do any intermediaries play a role in the transfer.
2. Lending platforms;
As mentioned above, the loan lending process requires the utmost trust between the two parties involved. This often puts the entire loan lending situation in jeopardy, because of the lack of honesty of the other party involved.
With blockchain technology involvement, the borrowers can negotiate directly with the money lenders and initiate a transaction with the smart contract. This smart contract mentions details that both parties have to abide by and if they do not, the money is added as payment fees in the actual amount.
3. Credit score:
An extension of the above use case, loan application processing requires the applicant’s credit score. However, the existing credit management system does not have its validity in the country outside operation.
This situation requires a universal credit score implementation. Blockchain technology on the other hand doesn’t let the party compromise over data security. Smart contracts assess the creditworthiness of the person and make the process easy and smooth.
4. Invoice management and billing solution:
It wouldn’t be wrong to say, blockchain technology will streamline every single operation in the finance industry. Blockchain technology allows organizations to upload invoices using smart contracts.
Every single piece of information about payment due date, client detail, etc are stored in the chain, in an immutable format. Once the transaction is completed, the invoice updates automatically and the client is notified about the same.
5. Fund investments:
Blockchain in finance gives stakeholders an opportunity to invest in desired shares without any limitations. All the legal procedures and personal information are stored within the chain, which eliminates the chances of errors and makes it more accessible. The transparency brought in by blockchain technology is something that we long waited for in the fund investment segment.
6. Financial record-keeping:
Owing to the exclusive immutability of records, companies operating full-fledged are up for using blockchain technology. The smart contracts and the data storing capacity bring a different level of transparency and trust build up between the stakeholders.
Blockchain technology also handles financial transactions history, profits earned, dividend distributions, Money on Money Multiple, etc.
7. Stock exchange:
The most lucrative industry, the stock exchange, also requires the involvement of multiple parties such as regulators, brokers, clients, and more.
But, with the advent of blockchain technology in finance, the roles of these intermediaries can be regulated and monitored directly through smart contracts.
8. Government expenses:
No doubt digitization is everywhere, but government operations may lack flexibility and transparency. But, blockchain technology allows customers to track where their payments are executed in the government sector and corruption can be avoided to a great extent.
The clear advantages and easy resolution of challenges by blockchain technology in the financial sector are the keys to a revolution in the industry. Blockchain technology plays a crucial and profound role in making finance administration effective and efficient. The potential of blockchain in finance is now being explored and it looks like there will soon be more new use cases on the list. If you are interested in blockchain technology implementation in your organization, you can talk to our experts.