How Blockchain Technology Can Be the Future of Lending

Blockchain technology has shown a lot of potential, especially for the financial sector. But there are still challenges that need to be overcome for the sector to fully utilize this technology. Since it was first introduced, blockchain has been one of the emerging technologies in financial services, advertised for its potential to eliminate pain points across various industries, including trade, payment, and lending.

Most of these services — specifically lending — in the financial sector need to be revolutionized. Outdated lending processes can’t keep up with the rapidly changing technology and consumer expectations. Although we have seen P2P lenders being introduced in the market, the majority of the loans in the market still come from banks, credit unions, and financial institutions. Many of these lenders are still facing challenges in providing a more streamlined, quicker process.

The current lending processes involve credit evaluation and loan approval, which is mostly filled with administrative lag and other intermediaries like credit agencies. Getting a mortgage or a business loan can still be filled with inefficiency. For example, data entry into multiple systems and manual data aggregation still require a lot of time and effort.

Apart from that, security is also in question. Traditionally, bank ledgers have been created in centralized databases and outdated software. This centralized model has been known to be susceptible to cyberattacks as all information is saved in one place. The use of blockchain technology in lending is poised to solve some of these problems.

How blockchain is disrupting lending services

According to research published by the Financial Brand, FinTech consumer lending has more than doubled in just four years, growing from a 22.4 percent share of personal loan originations in 2015 to 49.4 percent in 2019. It’s not only banks that are losing clients, credit unions and even traditional lending companies have been steadily forgoing market share as well.

One reason that affects this downturn is blockchain technology’s ability to innovate because of its agile start-ups like approach and less complicated regulatory restrictions. When it comes to lending, new players that are utilizing blockchain technology and data analytics make their products faster, more efficient, easier to access, and most importantly, more transparent.

With non-bank lending gaining momentum, blockchain based-lending platforms are popping out, and FinTech companies offer a more diverse selection of products. Traditional financial entities need new ways to compete. Some have responded by injecting digital capabilities into their current services. However, this isn’t enough. These entities must need to think of innovative ways to keep up with the changing lending landscape.

Innovative solutions by blockchain

Blockchain technology offers a lot of potential in solving the lending issues banks are facing today. For example, this technology can manage, approve, and log any transaction instantaneously, which beats the current system’s slow manual authentication, verification, and data-sharing workflows that traditional banks use. Apart from this, it allows peer-to-peer loans, where borrowers can directly communicate with lenders.

Decentralized finance through blockchain has offered a lot of lending opportunities, including the introduction of lending protocols. One company that launched new lending and borrowing protocol is PARSIQ. The new IQ protocol allows users to earn interest from lending their tokens to other users. Compared to traditional finance, where lenders are limited to centralized entities, blockchain protocols such as PARSIQ allow ordinary users to become lenders.

“Blockchain technology offers transparency that traditional banks are having trouble providing. For example, lenders and borrowers can see the entire lifespan of their transactions, which reduces the need for expensive and time-consuming third-party verifications. Transactions are also secure because sensitive information isn’t stored in one location, and most of all, users are in the center of the lending equation, giving them full control over their data,” explains Tom Tirman, CEO of PARSIQ, a platform that provides automation solutions for businesses.

Conclusion

For traditional financial entities to gain back momentum in their lending services, they must adopt a bold, technology-centric approach. Blockchain technology is here to stay, and if banks can leverage such innovations, financial institutions can see more progressive and improved loan offerings to their customers.