Financial Liberty-Open Banking and Blockchain synergy
As Bill Gates said, “Banking is necessary, banks are not.”
Banking is intertwined with our day to day activity like a ledger. Which is recording all our daily life activity quantitatively. Most of us aren’t aware of how banking is affecting us actively and how it influences our lives. It is impacting all aspects of our lives, but we are still unaware of its impacts. This drawback is because of one of the fundamental flaws in the banking system, which is asymmetric information. Asymmetric information is a blessing in disguise to bankers worldwide ages ago. Its effect can be traced back to the beginning of the banking system itself. Even though it’s a boom to the bankers, but it’s a bane to them as well. As many customers are still in the dark about how banking works. In the worst-case scenario, customers don’t have any access to the banking at all.
Banking is now:-
1. Camouflages accounting activities and banking transactions.
2. Gives undue advantage to one side of the party, and even though the other party also gets impacted directly, they are not informed the same.
3. Individuals are reluctant to ask for further details and refrain from doing the same as it hurt their pride.
This is where open banking would come in handy. Most people in the Financial and Fintech industry are well aware of the phenomenon. It’s not a new concept as such. The issues of asymmetric information have been around for centuries, and people have come up with different ways to address this issue. But recently, with the release of PSD2 by the European Union. It has become a mandate that banks must open up their data to third parties to become competitive and innovative.
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Here comes the issue. This would mean that banks aren’t competitive and innovative. Is that what this means? Or is it that intergovernmental organisation accusing banks of not being creative enough. This is where we need to look at the financial crisis of 2007–2008. This had a massive impact on our lives, and we felt its tremors even in a closed economy that never believed or followed globalisation. People started losing jobs, shops closed economy of the world began to fall like dominos. All this started with the fall of Lehman Brothers, which had a track record of being on the wealthy and prosperous bank. With the downfall of a behemoth, which no one expected would come. It triggered something which no one ever thought of about banks. Banking itself was based on this particular relationship with its clients, “trust”.They started questioning whether we can trust banks, and it is a lot of time for people to trust banks again. So, where does this leads to Open banking?
Open banking is all about the relative freedom of the data that one has on himself. This data can be used when they feel like it needs to be shared with the financial institution, again based on the user’s permission. Once the customer says yes, he can start sharing his banking data to any financial institution and instantly avail the financial institution and avail the financial services.
Sounds good, right? This simple sharing of information is needed to overcome the that most countries worldwide are now facing “Financial Inclusion”. Most of the population all over the world are excluded from the financial services or you can say they are deprived of the financial services, and this has lead to the rise of shadow banks all over the world. Financial literacy also plays a vital role as most people are unaware of managing their finances or don’t know what personal financial management is, leading them to an ever-increasing pile of debt. Most people are literate, but hardy 5% of the overall population worldwide is aware of managing one’s finances or, you can say, financial management. This has led to people losing trust in financial institutions and the rise of shadow banking as a primary financial service provider. These shadow banking organisations are accessible to the uber-rich people or those aware of the financial system.
Open banking is the answer to these shadow banking systems and provides transparency to the financial service deprived worldwide. To a large extent, it would provide financial literacy to many people by having them exposed to financial services. This leads to another problem whether all the people exposed to peer-to-peer networks would make the same consensus. This has been one of the major issues since the beginning of time or otherwise called Byzantine Generals Problems, which extends the Game Theory.
This issue can be resolved with the inclusion of blockchain technology into the system. This would provide a scenario where one would solve the major problems regarding privacy, and the API consensus mechanism aims to ensure that the open API or open banking can’t maliciously tamper.
Blockchain can be the middle man between the customers and the third party. This can be the platform based on which the whole infrastructure of open banking can be built as it would provide a system of API consensus mechanism which would indirectly reduce the is a platform being tampered maliciously and acts as one of the mechanisms to boost the privacy issues. This would also bring in the transparency of the financial transactions and empower the open banking scenario, leading to open finance and an open economy.
Potential Use cases of this synergy
KYC Verification: Customer verification is an essential aspect of the banking system, and a blockchain-based decentralised solution would make the whole process of customer identification easy and quick. This can also help in mitigating the risk of identity theft.
Credit Rating This is an algorithmic number that gauges a consumer’s overall ‘creditworthiness’. With the open banking standards, accessing the credit score and maintaining the rating on Blockchain will bring transparency and efficiency in the system, making it completely transparent.
Compliance Management Blockchain-based KYC systems can help initiating, controlling, execution of transactions against the assigned cryptographic key and help tracking the provenance of the transactions and help in the transparent transfer of transactions. This, in turn, can be beneficial to track and minimise financial crimes.
Lending and trade finance is still done on papers such as bills of lading or letters of credit, sent by fax or post around the world. As the Blockchain maintains immutable digital accounts across different stakeholders, the reconciliation will bring massive efficiency to the whole ecosystem and make lending more accessible. Getting this initiative done would enable decentralisation of the loan process and increase the efficiency of the process.
e-Invoicing and Bank reconciliation, an innovative e-invoicing platform integrating with significant banks to reconcile invoice payments to complete the e-invoicing workflow and help auditors verify it using Blockchain, is a massive move.
We are still in the very early stages of all these changes. Which can change the way we live our lives, but it’s interesting to see and witness these changes happening all around us.
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