How Lending Industry is Affected by Blockchain as a Technology?
In 2004, 53% of Europeans owned homes and in present times only 48.1%. Why?
In the extended wake of the Great Recession, it had become difficult for not businesses but also a regular customer to avail loan. Blockchain is trying to resolve this issue by giving birth to concepts like ICOs, STOs, where a large number of lenders could lend money to businesses as well as borrowers at competitive rates in a transparent environment. People with extra rooms and cars made more money with platforms like AirBnB and Uber, it only seems fair or rather logical for people with extra cash to lend it on these crowdfunding platforms. The middleman (like banks, legal firms) are cast aside and businesses raise money directly from willing lenders.
The visible positive effects of the blockchain technology seems to have rubbed on the Fintech companies. As a result, the decentralized, trustless blockchain technology is now being considered as the future of finance. Moreover, thanks to smart contracts, there is no need to verify the legitimacy of counterparties, validate transactions and perform routine account administration. As the finances are tracked in a more intuitive way on blockchain and this simplifies regulatory and risk management processes.
The stringently regulated banking industry is also not far from joining the blockchain bandwagon and that too on full scale. Private and permissioned blockchains like Corda and Quorum being developed by banking giants are the proof that the emerging technology has been welcomed in the industry with warmth.
With blockchain, it will be easy for the banks as well as finance institutions to streamline and optimize lending operations, the lenders and borrowers will all be connected directly with the lending institution with real-time accounting information available on an immutable ledger. Moreover, blockchain allows safe sharing of data with auditors, regulators and investors along with secure transmission and storage of sensitive data.
As reflected in statistics, lending fraud is a massive issue across the world, and the figures are growing rigorously. Financial fraud, losses across payment cards, remote banking and check in the United Kingdom reached a whooping figure of £844.8 million in 2018.
Multiple factors are cited as the reason for the increase in lending fraud like shift from a refinance –heavy market to a purchase market. Increase in mortgage finance leads to loss for lenders, brokers, and borrowers alike.
Blockchain Solution for lending fraud problem: To begin with blockchain powered lending platforms are going to be working on a digitally secured network. Moreover, the platforms owners can procure financial documents like pay stubs and tax histories from authorized sources. Based on these financial documents, lending platform can predict a borrowers returning capacity with a high margin, reducing frauds on the platform or otherwise. As lending platforms, these blockchain powered ones are likely to have different concepts and layouts however, each one of them will seek to make the process of lending more secure, cost-effective, and less risky.
Yes, blockchain lending solutions will be as great as they sound but let’s not forget with stringent regulations and compliances in Europe, this type of lending model is still in its infancy. There are a few hurdles still laying in the way of blockchain lending especially when it comes to know-your-customer (KYC) rules and establishing smart contracts legality. A global regulatory framework would be needed to recognize smart contracts as legal way to do business.