Even though we now use mobile phones to initiate transactions and AI-powered chatbots to check our financial transactions, the core of how the financial sector operates has not kept pace with the 21st century. While financial regulators now have a lot of tech at their disposal, they still operate in much the same way as they did decades ago. Although financial entities are fueled by our money, they still retain the power to block our transactions, take innumerable fees, collect and keep our data, and dictate to us the terms by which we can use our paychecks. Most of us have been programmed to think that this centralized model adopted by the financial sector is the only feasible way of managing our money.
However, the fintech industry has been exploring various other alternatives for years, and one such alternative is the use of blockchain technology. Fintech and blockchain have the potential to transform the way the financial sector works. Blockchain is a series of immutable blocks that can serve as the foundation for all sorts of fintech apps. It can eliminate trust issues between two transacting parties and provide bulletproof identity authentication protocols as well as enable rigorous governance of smart contracts. Adoption of blockchain in fintech would enable the creation of some of the most secure pieces of software in the industry. This article looks at some of the main blockchain and fintech trends and how blockchain looks poised to lead the fintech revolution. Read on to find out more.
8 Most Important Advantages of Blockchain in Finance
Blockchain Will Enable Faster Transactions with No Middleman
Transferring funds can be a very frustrating process if you only rely on traditional banking routes. Even sending small amounts can turn out to be an infuriatingly long drawn out process while two banks go through all the necessary protocols required to green-light the transaction. With blockchain, which at its core is a series of immutable blocks, the process of sending and receiving money can be cut down to a matter of minutes from a matter of days. Blockchain can also serve as a firm foundation for all types of secure and quick fintech apps. Besides, high-quality fintech apps can incorporate a real-time data updating feature that provides users with real-time data on their transactions and ensures error-free and transparent transacting. This ability for quick transactions without middlemen is one of the main blockchain trends that will change the future of the fintech industry.
Blockchain Provides Secure Digital Identities
One of the most promising blockchain use cases is its ability to provide secure digital identity management. With blockchain technology, secure and robust peer-to-peer networks are used for exchanging money and this applies well to a financial context. In the future of the fintech industry, as long as blockchain developers ensure that the registration process is secure, end-users will not have to worry about who the other transacting party is. The risk of accidentally dealing with the wrong person would be eliminated and most know-your-customer and anti-money laundering protocols would become mere formalities. High-end blockchain apps would also require the registration process to occur only once, thereby saving users a lot of time and effort.
Blockchain Smart Contracts Will Guarantee Peer Integrity
Smart contracts are essentially multiple-outcome arrangements that are executed when specific conditions are met. They are quite simple pieces of code within blockchains that can essentially take on the role of what banks and other financial entities do in the current financial environment. With smart contracts, there is a guarantee that specific funds will be transferred if particular conditions are met. Smart contracts also provide a strong sense of integrity between peers as any arrangement in the system will be enforced impartially and automatically. However, there will still be a need to create apps where there's no need to doubt the validity of arrangements since fintech startups still don't have the experience and track record to automatically introduce trust among new users.
Blockchain Enables Secure and Quick Cross-Border Transactions
While interbank and direct money transfers to locations worldwide have improved over the last decade, there still are large gaps that are present and caused by the need for multiple clearinghouses and the absence of global standards. Blockchain technology is completely internet-based and does not require any particular setup to operate. Therefore, there is no need to deal with any local entity, thereby allowing users to access their information and manage their funds from every part of the world. This is a huge step up from the present way in which cross-border transaction occur, with transferring of funds between countries taking days to complete. However, with the decentralized blockchain system, blockchain developers can turn global transacting into quick, routine protocols.
Expensive Auditing Exercises can be Reduced with Blockchain
Current financial accounting processes are based on a double-entry system, whereby outsiders and independent auditors are required to verify a company's financial information. Each auditing exercise is expensive and binds the time of a firm's auditors for long periods. Blockchain technology can serve as a source of trust since it provides a digital fingerprint that is immutably time-stamped and tamper-proof for all transactions. These potential blockchain benefits indicate that eventually there will be no need for external auditors and expensive audit exercises. The use of blockchain technology will introduce transparency and trust, eventually causing the entire network to be the auditor and watchdog that ensures financial integrity.
Blockchain Will Enhance Cybersecurity
Hackers can and do shut down entire networks, lure people into cyber traps, steal and misuse data, steal identities, and perform other malicious attacks by identifying and manipulating vulnerabilities in centralized repositories and single points of failure. Since blockchains are based on a decentralized framework that is robust and secure, it can help to enhance security by stopping denial of service attacks, preventing data tampering, and stopping identity theft. Blockchain trends indicate that by decentralizing the data and distributing it across the entire blockchain network, every transaction in the financial system will become more secure. Cryptographically securing every transaction will also result in a more robust financial system.
Blockchain Will Help Reduce Transaction Costs
A study by McKinsey from 2016 revealed that remittance firms worldwide make about $40 billion per year by charging customers fees for enabling transactions. This has remained largely the situation over the last decade with financial regulators making a fortune by charging us fees to enable us to use our own money. However, the future of fintech with blockchain looks set to dramatically reduce the cost of sending and receiving funds. Since blockchain fintech applications enable peer-to-peer and direct transactions without the need for any intermediaries or middlemen, all extraneous and unnecessary fees and costs can be eliminated as well, resulting in much lower charges for transacting.
Blockchain Will Enable High-end Regulatory Auditing
It should be noted that while there is significant room for cutting-edge fintech blockchain applications, placing them at the center of our economies will still require robust regulatory oversight. Even while we are making the case for a single network that is available to anyone that has an internet connection, there would still be a need for efficient and effective auditing of transactions. Fortunately, developing apps on top of blockchain technology will enable fintech developers to create cutting-edge auditing protocols. Since a blockchain stores linear blocks that add a new entry for every new action and never tampers with old blocks regardless of how big the system gets, it can provide developers with all the data they require to conduct a fast and secure audit of transactions. The use of blockchain to improve transparency is one of the most significant upsides to using blockchain.
Conclusion - Blockchain With be a Game Changer for the Finance Industry
The use of blockchain in the fintech industry can provide a much more seamless and effective alternative to traditional banking channels, one that is rooted in the ideas of decentralization and fairness. However, even while blockchain technology is being used in areas such as supply chain management and real estate tokenization, it will still take quite a few years for the technology to become a fully mainstream financial model. While the financial services sector is investing heavily in AI & blockchain, it will still require more proof-of-concept for the technology to entirely replace traditional financial models. It is also hard to deny the many advantages of blockchain technology such as quick funds transfers, extremely low transaction fees, transparent financial tracking, highly robust security, and no need for middlemen.
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