The advancement of technology has changed the business models of many businesses. In the wave of emerging technologies, Blockchain is considered a “key” technology for digital transformation and building a future information technology platform. The popularity of Blockchain will lead to changes in financial technology (Fintech).
Blockchain technology powering Fintech revolution
What is fintech?
The term that is pushed around, and marketed interchangeably with the now fast-fading term Finance, is a 21 century-incarnate of the latter. Finance, as we all understand, is a domain that deals with the details of money management, more or less. The services revolving around money management are Financial services. Conventional Finance rested on paper bookkeeping until digital transformation hadn’t forced businesses against the wall to modernize legacy systems. When unhindered technlological change introduced a way to put legacy systems on fast track mode, that was when Fintech was born.
Finance + Technology = Fintech
In simpler words, when technology finds a way to optimize a traditionally resource-consuming, finance-related task, that comes under the territory of Fintech. We already have a whirlwind of Fintech development that is reshaping Consumer to Business (C2B) interaction and vice versa. The global Fintech microcosm is projected to grow with a CAGR of 24.8%. That estimate cap-sizes the industry’s valuation at $309.98 Billion by 2022.
Blockchain-enabled growth among its service sectors is expected to play a major role in this transformation. If you’re new to the concept of Blockchain, you’ll find our in-depth guide on the topic helpful. For this post, its a touch and go for a Blockchain overview.
What is Blockchain?
Blockchain is an ever-growing list of records run on a network. Its system architecture is no different from a database. The records are called blocks cryptographically linked to one another forming a chain. The credibility of the chain is maintained in that the mathematical hash of the last block will be found in the subsequent block. The blocks are added to the network, depending upon the consensus mechanisms deployed by the Blockchain developers. Further properties attributable to the Blockchain include:
- Decentral – No central authority enforces the rules of engagement, placing the trust in the hands of the participating nodes that run the network.
- Permissionless – Anyone can join the network with the requisite computational (mining) power in validating transactions and earning rewards as cryptocurrencies/tokens.
- Data Tampering – Data once recorded using the blockchain technology is unchangeable, at least in theory. The blocks are immutable and near impossible to impose new data on.
Contemporaneous developments in the Blockchain Technology make it a multi-functional concept, one that the Fintech technology can take justified advantage of. Here’s how its service sectors could harness that power:
1. Payments – Instant cross-border transfers
Cross-border payments are a chronic pain-point for Banks who’re parallyzed by a lethargic and snail-paced process. In some cases, cross border payments take up to a week to be realized. The middlemen have a crucial foothold on transfer fees charging anywhere in the region of 5-20%. Similarly peer-to-peer fintech applications in the market limit transfers within restricted geography taking their respective slice of transfer fees.
There has to be a better way to stay devoted to regulatory obligations and processing payment transfers faster. Is there?
Financial institutions are analysing the prospect with a Permissioned-style template of the Blockchain technology. They’ll act as the central authority propagating the rules for remittance over the blockchain. As per Deloitte, blockchain based payments from business-to-business and peer-to-peer results in 40% – 80% reduced transaction costs. They’re also settled within seconds. Yes, it would be a paradigm shift but as per a projection by Mckinsey & Co. blockchain could drive $50 – $60 Billion in transcontinental B2B and $3 – $5 Billion in P2P payments respectively.
Westpac and Australian Bank partnered with Ripple, an Enterprise Blockchain company for cross border payments. Wirex is another Fintech company integrating blockchain into its workflow. Its a standalone vendor allowing instant international remittances. Users can avail of the mobile application for purchase orders selecting from 12 (total) fiat and cryptocurrencies. Wirex designed a 2-way Bitcoin debit card with a Visa debit card soon to be released easing point of sale transactions.
2. Stock Exchanges – Real-time settlements
There is a lot of conjecture around eliminating third parties from this space but truth be told, Stock markets wouldn’t move a dime without them. An atypical scenario – you sell shares today, but the ownership certificate is not merited until T+2 days, where ‘T’ is the day when you sold the shares. The lag is owing to a few operational bottlenecks such as regulatory approvals, and mandatory clearances. Not to mention the cost of the brokerage eventually levied on the customer in commission fees.
The Fintech Blockchain marriage could wipeout such intermediaries with decentralization where the dystopian exchange runs on nodes dispersed around the globe. They would earn DEX tokens for keeping the network up and running.
The Blockchain technology would assume its pure potential if interoperability is achieved. Once that happens, retail or daily traders with small orders could be stashed in local groups, by partitioning the blockchain into smaller ‘shards’. Order calls will be recorded entirely on the sidechains, running parallelly while only the transfer of certificate will be recorded onto the main blockchain. The result – increased transactional volume and low network redundancy.
DEX, Decentral Cryptocurrency Exchanges like Changhero, Waves Dex and OpenLedger Dex are powering this subset of the Fintech revolution forward. Their algorithms effectuate peer-to-peer trading. Being non-custodial in nature, funds are transferred directly to the users’ wallet, reducing the risk of online heists. The barrier to entry is low for retail customers due to lack of background checks, however, decentralized crypto exchanges often face liquidity issues for pairs with low trading volume.
Fintech NewsRelated posts: