Impact of blockchain on FinTech
What is blockchain?
A blockchain is a distributed or shared database that maintains a continuously growing list of records called blocks. Each block has a unique timestamp and a link to the previous block. The data in these blocks once entered into cannot be changed or modified. It is more like an open, distributed ledger that records the permanent transaction details between both parties efficiently after verifying. The blockchain database is not stored privately in any single location that is the records are public and shared with everyone.
Key benefits of blockchain in Fintech:
The settlement time is reduced to seconds due to the removal of intermediaries.
Replacing third parties and intermediaries by proving access to all participants to the cloud-based assets after verifying each party’s identity.
Enhancing security significantly in areas such as payments and credit card fraud by decentralizing all public transaction record and storing details of every transaction after verifying party’s identity.
Real-time tracking of transaction and elimination of error.
Automating all transactional processes, from payment through settlement.
Removal of error due to duplication of records and documentation bottleneck.
Reduction of cost and complexity of storing and maintaining records.
Use cases of blockchain in Fintech
Smart Assets: Blockchain can be applied to the assets in trade finance where all the transactions of assets between parties can be recorded with a clear date and a timestamp in a shared ledger after verification of the party’s identities. Real-time assets management is possible only after digitalizing the bills of lading and letter of credit. A smart asset system cannot only just record information about assets, but also needs to record information about dealers, suppliers, and serial numbers of the assets, tax, government clearance information and more. Thus, banks that are rich in data can change this data into information and gain a competitive edge over their competitors.
Clearing and Settlement: Clearing and settlement is the most active use case area for blockchain in fintech, mainly because it proves to be cost-saving in the short term. Clearing and Settlement cost billions, according to Santander’s 2015 report and if moved to digital, it would save the industry approximately $20 billion due to overhead costs. Clearing and Settlement are more of a three-day cycle for most of the investment markets. It is a complex cycle involving custodial services (CSDs), central counterparty clearing systems (CCPs) and complex collateral management as intra-day and after three days, banks have to ensure that all counterparty balances are matched, reconciled and resolved across global trading system involving thousands of investors, day traders, pensions funds, market makers, asset managers and more. Thus, the introduction of blockchain in Clearing and Settlement would surely make it less complex and more secure.
Payments: Blockchain technology is already being used for payment transactions as it makes payments more secure and cost-efficient by removing third-party intermediaries. Bitcoins or Erethreum, developed by R3 with Microsoft’s Azure-based Blockchain-as-a-Service, are examples of a bank-to-bank global transaction system. The blockchain is used not just for global bank-to-bank transfers but any exchange of value over the internet peer-to-peer. Bitcoins are not just bank-bank transfers but are a payment system in itself where peer-to-peer transactions take place without the need for intermediaries. These transactions are verified by network nodes and are stored in distributed ledger accessible by all.
Digital Identity: A user’s digital identity can be shown as -
Key challenges that digital identity faces include:
• Establishing trust
• Ownership and control of the identity attributes
• Immutability of operations
Introduction of blockchain would remove these challenges and build trust between parties by making the transactions more secure and convenient. A solution is to introduce the concept of a wallet through which the user can self-assert their attributes and manage their public and private keys. This wallet can then be identified through a more convenient user ID (such as the user’s MSISDN) and be unlocked using conventional multi-factor authentication mechanisms. The user can then prove ownership of the private key and hence confirm their identity. The combination of wallets and Blockchain for administering the identity in a decentralised fashion is a perfect solution to providing digital identity and in a way that is ‘conveniently secure’ for the user.
Stock Trading: Blockchain could be used to remove friction, stock hampering, reduce costs, and even the time required to purchase stocks. Whenever a stock is purchased, it has to pass through brokers, exchanges and needs to be settled which requires a lot of time and cost. Adding to these, blockchain would eliminate a lot of grey tactics used by traders as “naked short selling”, adding more transparency to the operational process.
Cross Border Micro Payments: Almost 25% of the global remittances are controlled by big players like Western Union and MoneyGram. However, the fees for transferring money to developing countries like Nigeria and Philippines is huge paying more than $12 per transaction which is equal to their day’s wage.
The blockchain technology used cross border micropayment is more efficient and secure and less expensive for sending money abroad. Start-ups like Sentbe, Abra allow money transfer which are less expensive and more secure.