This is part of a blog series Can Blockchain Save Our Financial System?
In this blog we cover the some of the advantages that blockchain technology offers for credit rating agencies.
To read the previous blog post about Smart Contract Benefits for Borrowers, click here.
To learn about how Bloxable is building the most advanced debt platform using blockchain and smart contracts, visit us here.
It is widely understood by financial experts and technology chiefs that blockchain technology can significantly improve the speed, accuracy, transparency and security of our existing payment systems. There is no better alternative to record keeping than blockchain technology, which is a cloud-based, hack-proof, fast and accurate system.
However, the technology has yet to be implemented effectively in the credit rating business. Just as most investment banks and financial institutions have been slow to catch on to cryptocurrencies, the credit rating firms seem to have been wary of making use of the technology to improve their systems.
However, we do have strong signs that some of the more influential players in the industry have picked up on the signs.
Moody’s Notes the Potential for Blockchain
One organization that realized the effectiveness of blockchain for the financial services sector early on was Moody’s. The credit rating agency identified more than 120 projects in financial services that make use of the blockchain tech.
The agency recently acknowledged that a move by the Saudi Arabian banks to use blockchain in their cross-border payments system could potentially save up to $400 million annually.
The ratings agency believes that the cost of remittances from the Kingdom could also fall by more than 50 percent for users who regularly send money through traditional banking channels.
Problems with the Existing Credit Rating Systems
The existing credit checking services are using an obsolete model that leaves millions of people without basic credit rating services. It is estimated that less than 10 percent people from the developing world have ever taken credit through a financial institute.
Similarly, many people in the developed countries do not qualify for credit due to inefficiencies in the rating system. These people are forced to take credit from shady services or at exorbitant rates from a pawnshop, which further increases their financial difficulties.
Another problem faced by individuals looking for credit is the government monopoly on the credit rating agencies. The vast majority of people use FICO score for getting a loan approved. Which is a highly monopolized system.
Credit Rating Startups Pick Up
But Moody’s isn’t the only credit rating agency to realize the potential of the blockchain technology. A number of tech companies are looking to build platforms that will improve credit access for millions of potential borrowers from around the world.
Take the example of Bloom for instance. It is a tech startup that seeks to integrate a large number of lenders to its blockchain platform and build a comprehensive database of transactional history of borrowers. The platform would help lenders verify identity, assess risks and score credits for borrowers based on their transactions with the lenders.
Implementation of Blockchain Technology in Credit Rating
Two main properties of blockchain technology that translate very well to the credit industry are transparency and immutability.
An openly accessible public record of a borrower’s entire transactional history is far better than making credit approval decisions on the basis of a single score. Blockchain ledgers can be accessed from anywhere in the world which also open up the possibility of extending credit to borrowers across borders.
Second, the distributed ledger system of blockchain makes it impossible to hack. For example, in the recent hack of Equifax, one of the largest credit rating agencies in the world, the hackers were able to steal credit information of more than 143 million US users.
It would be nearly impossible for someone to hack a blockchain based credit rating system as the connected nodes would simply reject any attempts for manipulating or making incorrect entries.
Given the potential for improvements that blockchain has to offer for the credit rating business, we can hope great things and more enhanced systems in the near future.
To read the next blog post in our series, about Blockchain Benefits for Market Data Providers, click here.
