Blockchain, Bitcoin, Ethereum, and Fintech have been buzzwords in the fintech world for quite a few years now. What each of these technological disruptions has gained on their own merit versus what they can gain when they work in tandem is an entirely different story altogether.
Fintech has been around for only a couple of years. It has revolutionized the world of finance by making processes quicker, more affordable, and more secure. In short, it has achieved way more in the past three to four years than the entire BFSI sector had achieved over decades. Of course, fintech is based on technology, so that does give it the advantage of being technologically dynamic and taking longer strides when it comes to innovation and disruption in the unpredictable world of finance.
Blockchain on the other hand, is a technology that has been around for years now. It was originally created almost three decades back by W. Scott Stornetta and Stuart Haber, back in 1991. However, it took Bitcoin to hit the cryptocurrency market to gain attention towards blockchain as a technology. It was only when people started understanding how the technology could be used in daily processes and how important decentralization is as a function, that blockchain became more and more popular.
Soon after Satoshi Nakamoto’s gift of Bitcoin to the world, followed a number of cryptocurrency-launches and platforms that have been built on the blockchain model. Ethereum, the smart contract enabler; bitcoin spinoff Litecoin; and real-time gross settlement system, Ripple; are some of the best known and invested in cryptocurrencies and platforms, in today’s date.
However, the arrival of cryptocurrencies and related platforms completely overshadowed the huge possibilities of the blockchain technology as a whole, and the prospects it holds for the world of finance, and especially, fintech.
Beneath all the success cryptocurrencies like bitcoin and ether have enjoyed, including the skyrocketing prices, million-dollar fortunes, over 1000% returns, lies blockchain. It keeps working quietly in the background, instilling trust and security in transactions and getting rid of middlemen to provide cheaper transaction costs to the end parties. The technology is multi-dimensional. It is versatile to the extent that it can be used to create multiple applications that could easily manage issues relating to scalability, security, cost, and trust.
Blockchain, also known as Distributed Ledger Technology (DLT) can breathe new life into and create new processes in industries which have been there for decades or even centuries, much like Fintech did in the case of small business loans and personal loans industry, which had been badly hit post the 2008-09 subprime crisis.
Despite the benefits that fintech provides and the projections of experts that the industry would grow on to reach trillion-dollar funding through P2P lending platforms, the fintech sector is still far from realising its goals. In fact, the sector has been fraught with issues of high default rates, frauds, and regulatory issues and recorded a 12% loss in online P2P lending, due to frauds, alone.
This is where blockchain can help make processes more secure and reliable, given its distributed ledger technology. Blockchain allows two parties to record their transactions in an efficient, immutable, and verifiable manner. It provides a strong barrier against unauthorized access which helps manifold in preventing fraud; one of the biggest issues threatening the rapid growth and expansion of the fintech industry. By putting their digital assets such as financial data and contracts on blockchain, fintech companies can curb the issues of fraud and identity theft while restoring transparency between customers and seller, and companies and employees.
According to a report issued by the World Economic Forum, by the year 2025, 10% of the world’s GDP will be stored on blockchain. This figure shows the capability of the technology and what it can do for not only the finance sectors but all sectors collectively, if only employed correctly and optimally. Merging blockchain and alternative lending can not only make the online lending processes easier and more efficient, but also help in expanding the capabilities of the industry by helping them integrate the ultimate blockchain feature: decentralization.
The alternative lending industry, specifically, and online lending as a whole, stands to gain a lot from the features of the blockchain technology. The public decentralized ledger is one of the biggest features that can introduce important reforms in the industry while eradicating the frequent frauds that have plagued the industry, till date. This decentralized ledger can keep a track of fraud databases, payments, and disbursals, in real time. Each transaction when passed through the blockchain receives a unique timestamp which makes each transaction immutable and reduces the chances of misrepresentation of data. Only the parties in transaction who hold the key to it will be able to view the data, using the “hash” that is allotted to each transaction.
With the advent of Ethereum which enables the use of smart contracts built on ERC-20 standard, very soon the age-old documentation of legal agreements will be taken over by blockchain, as well. This will help lenders have access to transparent and immutable repayment records, thus reducing chances of fraud. As the next step to integrating blockchain into online lending, some companies are digitizing collaterals such as land titles and centralizing the same for public use, as more and more lenders look at ways to minimize risks across their value chain. When it comes adoption of Ethereum contracts, Escrows and Settlement transactions have already reached an advanced stage.
Transparency: As discussed earlier, the timestamp feature in blockchain allows all contracts and transactions to become immutable. Backdating contracts is technically impossible to achieve on blockchain This helps in improving corporate governance across company and board and helps instill faith in investors, as well as regulators who know that the data they are viewing is veritable truth.
Decentralization: This particular benefit of the blockchain technology, makes it immune to hacker threats and issues of data security breaches. Till date, alternative lenders use cloud servers or their own in-house servers to store all the data they require. This includes company data, customer data, and employee/vendor data. In an age when data breaches like that of Ascension in which over 24 million banking and mortgage documents which included personal and financial information of customers were leaked as the data was stored sans protection and open to any kind of unauthorized access, string measures to protect data should be taken.
In 2017, Equifax witnessed a data security breach of major scale when 143 million users’ data landed in the hands of hackers, thanks to a software flaw which led hackers to take over the company’s website.
In the view of these events, having sensitive data and information over cloud or even physical servers, does not seem sufficient when it comes to protection of data from security threats. Alternative lenders possess a wealth of information about their borrowers which they store on their servers, such as personal information, social security numbers and bank account details. Blockchain solves this issue by storing the information on the decentralized ledger. Since the record of transactions, deeds, contracts, and all kinds of stored data is distributed all over the network, it makes chances of hacking entire records close to nil. Only the owners of the information, with the right key will have access to the hash and will be able to control and see the information that they had stored on the blockchain. This makes the system much more robust when it comes to security.
Blockchain’s scalability, cost efficiency features make it a great option for alternative lenders both big and small. While the bigger lenders would like to use the technology given its prime benefits of decentralization, smaller firms stand to benefit a whole lot from its features of scalability and affordability when they plan on integrating it into their current systems. Also, the transparency feature helps stakeholders to find out information relevant to them directly from the platform itself, as the platform is open to the public for viewing, without putting the entire database at security risk.
Digital ID verification
Blockchain puts the threat of identity theft, a major component of online lending-related frauds, at rest. Online lending has removed the requirement of the lender and borrower ever meeting in real life, which was common in traditional banking. The former has removed the requirement of lengthy, physical verification, thereby shortening the loan origination and disbursement cycles. But in the absence of a thorough physical verification, how certain can the lender be of the information the borrower furnishes. In this case, integrating blockchain principles of decentralization with identity verification process can help create tamper-proof digital IDs which can then be used as a digital signature to validate all transactions and documents.
The scope of improvement in the fintech industry at a macro level and online lending at a micro level is mammoth, given the integration of blockchain and the disruptive features it brings in are acknowledged and embraced, readily, by the stakeholders in the industry. Fintech has been merging quite a few of blockchain’s impressive features to help:
• Track end-to-end lifecycle of financial transactions,
• Create affordable financial products,
• Come up with technologically sophisticated financial services
Nevertheless, there is room for more. After all, the global blockchain market is poised to grow to approximately $ 7,683.7 million by 2022. How soon that target is achieved and how efficiently totally depends on the adoption of the blockchain technology by the alternative lending industry.