Blockchain: Democratising Access to Credit
If you want to know the value of money, go and try to borrow some - Benjamin Franklin
By now, we all know what a blockchain is and how it works. Subject to major discussion is that there are only limited places where a blockchain could viably be applied. Blockchain makes perfect sense for industries which are generally fragmented and where users have a heavy dependence on the trust factor on service providers.
For any economy to flourish, it is paramount for individuals and organisations to have secure and easy access to credit. Due to the nature of the credit delivery industry, access to credit can be often very difficult and have multiple middlemen to jump through. These middlemen provide some level of convenience, but in doing so, charge high fees, and add unnecessary layers of complexity.
Let’s look at how blockchain is on its way to disrupt the loan industry.
The core protocol of blockchain allows for customer’s financial information to be stored in a secure decentralised manner as compared to the conventional centralised storage systems. This distributed ledger technology provides a secure and trust-less environment for online lenders, agencies and customers to operate within by ensuring:
Transparency — User data is saved in a ledger on a private/public network (depending on the choice of blockchain codebase) and hence can be easily accessed by the relevant stakeholders with due permissions ensuring there is no opacity in the business flow and operations. All the data that is stored is shared with all the nodes that share the same network.
Incorruptibility — It prevents history from being modified by allowing information to be extended, but never over-written, that ensures complete integrity of all parties’ data.
DLT-based Digital Identities — Probably the most significant feature of using a blockchain is to create DLT-based digital identity works on the public key cryptography principle. For example, once the customer shares KYC documents with a DLT-enabled financial institution to authenticate themselves and qualify their digital identity on the DLT platform, the institution can share customers’ data with other entities for legitimate purposes, only after receiving the customer’s consent.
Audit Trail: The transaction chain ensures that it is possible to track any transaction back to its roots. Consider a dispute in a transaction in terms of interest payments over a period of time. Blockchain makes it easy to refer to historical data to verify the previous transactions or validate policy agreements, eliminating any chances of a random dispute.
Smart Contracts: Smart Contract is a piece of code that defines how businesses & departments interact with each other on top of the chain. They can automate parameters such as the amount, term, par value, start time, suspension, locking out possibilities and liquidation of any loans.
Blockchain has the power to democratise the industry by bringing the Customers, Loan Aggregators, Banks & regulatory Authorities on a common blockchain network. It instills more transparency in the way book-running is done for loans resulting in a more economically optimal structure discovery. It has an immense potential to reduce settlement times, thus improving liquidity and driving more efficient capital allocation and most obviously, it reduces middle office and back office costs in servicing syndicated loans during the firm’s life cycle from booking to payoff.
This is a post in our on Medium blog, ‘Blockchain for Everyone’.
Sign up here to discuss any use cases. Thanks to Rohit Taneja for reflections and feedback.
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Sabarish Nair
Blockchain Analyst
