Since its inception in 2008, blockchain has revolutionised almost every sphere. It is a digital ledger capable of recording almost anything. The biggest impact blockchain has had is on how we conduct financial transactions. The financial services industry has also witnessed a large number of changes in over the last decade. KPMG US has termed this transformation as the FinTech Revolution, which aims to use newer technologies and innovations to optimise the design and distribution of financial services.
Blockchain is expected to further revolutionise the financial services industry, just like Uber changed how we use public transportation. The technology will bring transparency, reliability, decentralisation, faster transactions and data security, among many other advantages, to the fintech arena. Here’s a look at the key ways in which blockchain is changing the financial services segment.
1. Enhanced Data Security
Records indicate that a major share of monetary transactions suffer from fraud and economic crime. A centralised server, like the ones used in banks and other financial institutions, is prone to hacking. And, once breached, the entire data can be accessed easily by bad actors. On the other hand, data on a blockchain is stored on decentralised servers, making it next to impossible to hack. The key characteristic of the decentralised ledger is its immutable and incorruptible nature.
2. Smart Contracts
In the finance industry, it is compulsory to have a contract for every type of transaction, with clear cut rules and regulations. The usual paper contracts are time consuming and can be manipulated or even destroyed. Blockchain-based smart contracts provide a solution to all problems associated with traditional contracts. Transactions are automatically executed when the terms of the contract are met, reducing time, cost and the need for a third party. This has proven to be useful for insurance claims, since smart contracts provide transparency and traceability to every claim that leads to payouts.
3. Customer Verification
The ‘Know Your Customer’ or ‘KYC’ process is a slow and tedious one in institutions with a centralised database. Teams are required to carry out this task manually, making it expensive and time consuming. Blockchain technology simplifies this complex process by providing a single digital source ID, which can be used by banks and other financial institutions for authentication of customers. This will reduce administrative costs, while providing foolproof data security.
4. Trading Platform
A lot of monetary transactions take place on a global level, daily. Most institutions and platforms are slow, costly and prone to breach and failure. Since blockchain increases speed and transparency, while being cost-effective, it is expected to emerge as the choice of technology for platforms offering trading in bonds, currencies, stocks and such like. NASDAQ and the Australian Stock Exchange are now using blockchain technology to enhance efficiency and reduce operational costs.
Blockchain is well on its way to revolutionising payment systems. Today, payment systems are filled with middlemen or intermediary institutions. This means that during financial transactions, there are intermediary fees involved. However, with blockchain, there is no third party required for transactions, resulting in lower fees. It also saves time and complications of paperwork and other legalities. MasterCard, American Express and VISA have already started using blockchain in their payment systems.
6. Asset Management
The traditional trade process within asset management can be complex and risky. And, it can get even more complicated with cross-country transactions and loans. All stakeholders keep their own copies of the transaction record, which leads to inconsistencies. Blockchain automates the complete trade lifecycle. Each stakeholder is given access to data related to the trade, ensuring quick processing, transparency and cost effectiveness.
7. New Platform for Raising Capital
All traditional means of raising capital, such as IPOs, bonds and VCs entail middlemen, such as exchange operators, investment bankers, lawyers, auditors and crowd-funding platforms. Blockchain has provided a peer-to peer platform through which businesses can raise capital from all across the globe. ICOs (Initial Coin Offerings) have been in high demand ever since they proved to be a lucrative fund raising route. In 2017 alone, ICOs raised over $5 billion, a figure that was surpassed halfway through 2018. ICOs have attracted 3 times more investment than VCs since 2017.
Blockchain will revolutionise the financial services industry, just as the internet revolutionised the global market, especially for shopping. It offers great opportunities for innovation in fintech. Over 40 banks across the globe are already investing a huge amount of time and assets to incorporate blockchain technology into their systems. They believe it will eliminate the middleman and help save billions. No technology today has the same potential as blockchain to influence the world.