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Blockchain is guaranteed to change the way we operate. Since blockchain is a decentralized ledger with a strong focus on cryptography, security and privacy, it is ideal for banking and fintech applications.
Most banks now use blockchain technology to create more efficient ways to record data. In 2020, the blockchain market share in the banking sector was 29.7%. Since the blockchain allows you to update data in real time, it is a more convenient method of recording transactions without intervention.
Here are some use cases of the blockchain in fintech / banking.
1. Digital identity
One of the most important aspects of online banking is security. Banks need to ensure that the transactions they are making are secure and validated. Most banks have their own security algorithms to confirm the user’s identity. But for customers, they are often a big hassle as they have to go through multiple security checks for simple tasks like checking their balance, transaction history, etc.
Sometimes banks also run Know Your Customers (KYC) tools which 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 own digital character instead of relying on the one created by banks. You can also reuse your person for identification in different institutions and locations, which will save you 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, customers can transfer funds, share data, and perform other banking activities such as loans, claims, and drafting. Additionally, since data stored on blockchain networks is much more secure than traditional volumes, fintech organizations prefer it for software requirements.
2. Trading
Even these days, most trading companies require a lot of paperwork. Not only that, if you trade on weekends, payments and transfers are delayed. As vendors around the world use trading systems, it is necessary 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 users can safely make changes at any time they wish.
Blockchain is designed to handle exactly that. It can improve the whole process by using a generalized ledger. And since information is updated in real time, the flow of information is fast and it is easy to make business decisions and policies based on it. Such a system also improves the entire life cycle of the business by reducing the risk of short circuits and improving liability.
3. Payments around the world
Blockchain supports decentralized currency, which means you don’t have to go through banks for your payments or transfers. It can also help in faster and easier payments as it costs less to transfer money from one account to another. Since transfer via blockchain does not require third party authorization and banks require no resources to transfer funds, payment processing fees are also lower.
Blockchain will help improve the flow of currency around the world. Banks normally charge 10-15% of the transferred amount as a remittance fee. With the blockchain, this comes down to 3 percent.
Blockchain payments are also very secure as all participants in the blockchain transaction must provide their approval for the transaction to take place and anyone can check the updated ledger after the transaction.
Also, as there is no need for a third party to transfer funds, P2P transfer can be used to do so. In this way, banks can compete with fintech startups and provide their own fintech-related services.
4. Invest and lend
Most investment bankers require credit histories and financial details before investing. They need to make sure their money is in the right hands. Through cryptocurrency, it is very easy to validate accounts and keep a record of investments.
Even without an investment company, there are many ways that startups can leverage blockchain to generate investments. These days, instead of just big companies, the general public can also invest in cryptocurrencies and blockchain startups. There are many other options such as IEO (Initial exchange offerings) and STO (Secure token offers). They require their due diligence but are easy investment options.
Of course, banks have yet to validate them through securities protocols, and these options must comply with government standards. But through these, startups can generate investments from many investors and get advice from global strategists instead of relying on a hedge fund manager.
5. Auditing
Auditing is a process that verifies the accounts and limits any inconsistencies. For most banking sites, this is a slow process and takes many hours of work as it checks the requirements and compliance set by the organization and government. For most organizations, data integrity is the most important control factor.
Auditing is made simple via the blockchain. Through it, you can add records directly to the ledger, which allows for a more efficient way to store and update data. Additionally, companies have unparalleled proof of real-time fund transfer as 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 are not logged by users. Smart contracts and automatic billing systems will allow your business to charge customers without manual intervention. Furthermore, since the blockchain is immutable, there is no question about the transparency and accuracy of the records.
Conclusion
There are many interesting applications of blockchain in fintech. There are also so many blockchain companies that are working on cryptocurrencies and blockchain applications that seek to provide fast and transparent fintech services. While blockchain does come with some risks, it can change the way banks do business by allowing for faster payments, easier audits, and complete identification.
Of course, to integrate blockchain into systems, banks and fintechs need to make changes to their existing infrastructure. But rest assured, these changes will have significant returns. There are ample opportunities to transform existing solutions into new use cases, leading to an even better customer experience.
Malcolm Ridgers, tech savvy, BairesDev
