With the inception of new age technologies, almost every sector is undergoing major transformation. The world of financial services, too, is undergoing rapid and fundamental transformation process, elicited by the new technologies. These new age exponential technologies include artificial intelligence, cybersecurity, machine learning etc. For the financial sector, blockchain, perhaps, holds to be the most crucial one. It is altering the way financial transactions are handled today. As the predictions say, blockchain is going to have significant implications on how traditional financial world operates itself today. It is going to alter the businesses by enabling new business models, deliver new value propositions and solve longstanding challenges, with the well-needed transparency and security in transactions that nowadays involve multiple parties and large amounts of data.
Though it is still at a nascent stage, it is going to disrupt the world hugely as soon as its true potential is realized. The most common question or the topic of discussion among the financial leaders today is: How is blockchain technology going to drive disruption in the banking industry, what would the main areas be that will be touched and what shape will the financial sector look like in the time span of another five to ten years. Let’s delve into it.
Today, an average bank transfer takes three days to settle clearly speaks about our financial infrastructure. A simple bank transfer, from one account to another, is necessitated to go through a complicated system of intermediaries, from correspondent banks to custodial services, before it reaches its final destination. The two bank balances have to be reconciled across a global financial system, comprised of a wide network of traders, funds, asset managers and more. Not only is it a pain for the customer, but almost a logistical nightmare for the banks.
The blockchain technology, that acts as a decentralized “ledger” of transactions is going to change the current scenario. Blockchain operates on a decentralized network, that is acting on a peer-to-peer basis. This implies that the technology will operate similar to a bank, however, without any central authority that monitors all data. Consequently, it potentially cuts out the middleman, giving back the power to the owner of the assets.
All the information is stored across its network via blocks. These blocks, that are time-stamped and linked together with all past and current transactions, are permanently recorded and consistently reconciled and updated in a cryptographically secure way. By storing data across its network, blockchain eliminates the risks that come with data being held centrally.
Simpler Access to Loans and Credit
Traditional banks and lenders underwrite loans based on an inaccurate and insecure system of credit reporting. The usual process of securing a loan is: filing an application for a bank loan; the bank has to evaluate the risk which is usually done by looking at factors like your credit score, debt-to-income ratio, and home ownership status. This information is achieved by accessing your credit report provided by one of the major credit agencies based on which banks price the risk of a default into the fees and interest collected on loans. This centralized system is often hostile to consumers and small businesses.
With the introduction of blockchain, the lending will become cheaper, more efficient, and more secure by making personal loans accessible to a broader pool of consumers. With a cryptographically secure, decentralized registry of historical payments, consumers could apply for loans based on a global credit score. This will, particularly, benefit the individuals and small and medium enterprises (SMEs) as blockchain will make the entire process of attaining loans more seamless and reducing the amount of time the process takes.
Improved Trade Finance
Many trade finance activities still involve lots of paperwork, such as bills of lading, invoices, letters of credit etc. All participants in the trade chain must maintain their own database for all transaction-related documents, that must be constantly reconciled against each other. It is as a result a time-consuming activity.
Blockchain-based trade finance can streamline the entire trading processes by getting rid of this time-consuming paperwork and bureaucracy. It eliminates the need for several copies of the same document and can integrate all necessary information in one digital document, which is updated in real time and can be accessed by all network members.
The future financial eco-system will look very different and interesting from now. Induced by blockchain technology and its disruptive character, this eco-system will be one of open innovation, collaboration, bank-fintech partnerships and increased competition. While there will be much lesser need of middlemen, there will be a stemming need to cooperate between banks and other parties in order to get the most advantage from this and new technologies.