Fintech and Blockchain: an unavoidable bond?

14 December 2020

Last year’s Global Blockchain Market research report forecasts that the worldwide blockchain market will amount to USD 60.7 billion in 2024 (in 2017, the market amounted to 708 million). These figures (that should be taken with a pinch of salt, by the way) testify that businesses are increasingly adopting Blockchain into their workflows and probably Fintech and Blockchain will walk together as a result.

Probably, the FinTech sector was one of the pioneers to start employing this technology. According to MarketWatch, Blockchain in the FinTech market will reach USD 6.7 billion by 2023

McLagan and Accenture found that Blockchain can help banks in reducing their running costs (-70% in terms of central finance reporting; -30/50% on compliance; -50% on business operations; -50% on centralised operations) significantly.

PWC revealed that more than 75% of financial services firms are taking steps to integrate blockchain solutions by the end of this year, and 56% of them recognise the importance of using blockchain technology

5 Blockchain use cases in FinTech

When it comes to the integration of Blockchain technology, FinTech companies’ main goals are:

  • Minimise counterparty risks;
  • Reduce the number of errors; 
  • Improve transparency;
  • Increase security;
  • Enhance capital optimisation;
  • Ensure compliance with regulations.

It could be interesting to focus on how they benefit from the power of Blockchain.

Carrying out financial transactions

Cryptocurrencies are actively used by FinTech companies (mainly start-ups) for completing financial transactions (in those countries in which the use of these means is allowed). People can make money transfers from any place in the world, at a (much) lower cost than traditional cross-border transactions.

Their low cost is critical for developing countries, and relevant everywhere in the world.

Using self-executing smart contracts

Smart contracts are self-executing programs that have an agreement between several parties written into the code.

Providing network decentralisation and removing intermediaries (e.g., notaries), they automatically monitor their own completion.

A smart contract executes what is supposed to happen, in a timely and objectively fashion.

FinTech can take advantage of employing this technology, let’s think of card payments, currency exchange transactions, money transfers, to name a few.

Providing security of data, records, payments, and assets

Blockchain can be used to store and transmit documents, digital rights, records, certificates, royalty fees, and other things. 

It is well-known that, once something is stored on the blockchain, it can’t be changed or deleted. Forgery becomes impossible, and this helps FinTech companies in keeping their data secure.

Enabling digital identity verification

In 2018, the number of fraudulent accounts increased by 50% since the previous year, a DataVisor Fraud Index Report found.

A blockchain-based digital identity verification system is a tool with incredible power to manage personal identity information, login into systems, make investments, digital signatures. 

Ensuring regulatory compliance

Blockchain can help FinTech companies in preventing cybercrimes and fraudulent activities. The client onboarding process, for example, is burdensome, both in terms of the resources and time.

A survey carried out in 2013 in the United States found that more than one-third of financial advisors relied upon filling out paperwork by hand to be their primary method of opening [new] account. Despite the efforts made by financial firms, the KYC process has proven far from effective in avoiding unlawful behaviours and practices.

Blockchain offers a more straightforward onboarding process. With a database of (verified) customer data in place, secured and shareable among different institutions, the time it takes to collect and authenticate data would be reduced drastically.

Further, amendments to a customer’s status could be updated to the entire network of institutions with near immediacy. On this topic, you could find interesting our article Blockchain KYC: an overview with case studies.

Further, when it comes to accounting compliance, what if invoices and receipts (and all the transactions associated with them) are stored on the ledger, and can’t be modified or removed?

This would enable auditors and tax inspectors to check the authenticity of the records, trace the history of each accounting document, ensure there is no counterfeit. 

A little test: can you benefit from Blockchain?

To help you understand if your FinTech company will benefit from using Blockchain or not, you can find a checklist of ten assertions below. Each of them increases your score by one point.

Business logic & performance:

  • The business model is simple;
  • Privacy of transactions is not a must;
  • The business doesn’t need to access external data;
  • A limited amount of data needs to be stored for each transaction;
  • The business model is scalable.

Consensus:

  • In case of a dispute, no arbitrator shall be involved;
  • All participants can be included in the validation process;
  • Records must be strictly immutable.

Network:

  • A significant number (100+) of participants will be transacting on the network;
  • You don’t trust the participants in the network or don’t need/want to know them.

While the list has no scientific claims:

  • If you score 10, you could fully benefit from the blockchain;
  • If you score 8-9, you could need some trade-offs and customisation;
  • If you score 7 or lower, you could build a shared ledger (and the blockchain could make no sense).

The relationship between Fintech and Blockchain seems to be unavoidable with mutual benefits for both businesses and users.

Do you agree? Tell us in a comment below.

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