Blockchain is guaranteed to change the way we operate. Since blockchain is a decentralized ledger with strong focus on cryptography, security, and privacy, it’s ideal for banking applications and fintech.
Most banks are now using blockchain technology to create more efficient ways to record data. In 2020, the market share of blockchain in banking was 29.7 percent. Since blockchain allows you to update data in real-time, it’s a more cost-effective method to record transactions without intervention.
Here are a few use cases of blockchain in fintech/banking.
1. Digital identity
One of the most important aspects of banking online is security. Banks have to ensure that the transactions they are carrying out are secure and validated. Most banks have their own security algorithms to confirm user identity. But for customers, they often are a huge hassle as they have to go through multiple security checks for simple tasks like checking their balance, transaction history, etc.
Banks sometimes also perform KYC (Know Your Customers) tools that further annoy customers. If you have accounts in different banks, going through different security protocols can be confusing, time-consuming, and frustrating.
To counter this, you can use blockchain. With it, you can create your digital persona instead of relying on the one made by banks. You can also reuse your persona for identification at different institutes and locations, which will allow you to save time and effort. You can also customize your avatar, allowing you to create a personalized and accurate digital identity.
This technique can accelerate identification and validation at the institutional level. Through their digital avatars, clients can transfer funds, share data, and perform other bank-related activities such as loans, claims, and drafting. Also, since the data stored on blockchain networks is much safer than traditional volumes, fintech organizations prefer it for the software requirements.
Even these days, most trading companies require a lot of paperwork. Not only that, if you’re trading over the weekend, payments and transfers are delayed. Since vendors worldwide use trading systems, there is a need to establish a system where all participants can easily check and verify the trade. The trading system should ensure that all participants have correct entries and that the users can perform changes securely at any time they want.
Blockchain is designed to handle exactly this. It can improve the whole process by using a generalized ledger. And since information is refreshed in real-time, the flow of information is fast, and it is easy to make business decisions and policies based on that. Such a system also improves the whole lifecycle of the trade by reducing shorting risks and improving accountability.
3. Payments across the world
Blockchain supports decentralized currency, which means that you don't have to go through banks for your payments or transfers. It can also help in faster and easier payments since it costs less to transfer money from one account to another. Since transfer through blockchain doesn’t require third party authorization, and banks don’t require resources to transfer funds, the payment processing fees are also less.
Blockchain will help to improve the flow of currency all around the world. Normally banks charge 10-15 percent of the amount transferred as a remittance fee. With blockchain, this comes down to 3 percent.
Blockchain payments are also very secure since all participants in the blockchain transaction have to provide their approval for the transaction to take place, and anyone can check the updated ledger after the transaction.
Also, since you don't require a third party to transfer funds, you can use P2P transfer to do so. Through this, banks can compete with fintech startups and provide their own fintech related services.
4. Investing and lending
Most investment bankers require credit histories and finance details before investing. They need to make sure that their money is in the right hands. Through cryptocurrency, it’s very easy to validate accounts and maintain an investment ledger.
Even without investment firms, there are many ways through which startups can leverage blockchain to generate investments. These days, instead of just huge firms, the general public can also invest in cryptocurrency and blockchain startups. There are many other options like IEO (Initial exchange offerings) and STO (Secure token offerings). They do require their due diligence but are easy investment options.
Of course, banks still need to validate these through securities protocols, and these options need to comply with the government's standards. But through these, startups can generate investments from many investors and get advice from global strategists instead of relying on one hedge fund manager.
Auditing is a process that verifies the accounts and narrows down any inconsistencies. For most banking sites, this is a slow process and requires many man-hours since it checks requirements and compliances set up by the organization and the government. For most organizations, data integrity is the biggest factor for auditing.
Auditing is made simple through blockchain. Through it, you can add records directly into the ledger, which allows for a more efficient way to store and update data. Also, companies have incomparable proof of fund transfer in real-time given that the ledger is absolute and true. This also allows them to have cleaner records. They can also use the general ledger for auditing instead of taking data from different sources.
You can also use blockchain to verify transactions that aren’t recorded by users. Smart contracts and automatic invoicing systems will allow your business to charge clients without manual intervention. Also, since blockchain is immutable, there is no doubt about the transparency and accuracy of records.
There are many interesting applications of blockchain in fintech. There also are so many blockchain companies that are working on cryptocurrencies and blockchain applications that seek to provide quick and transparent fintech services. Even though blockchain has some risks, it can change the way banks do business by allowing faster payments, easier audits, and thorough identification.
Of course, to integrate blockchain into the systems, banks and fintech have to make changes to their existing infrastructure. But rest assured, these changes will have significant returns. There are ample opportunities to grow existing solutions into new use cases, leading to an even better customer experience.
Malcom Ridgers, tech expert, BairesDev