Blockchain in Fintech — The Future of Financial Services

In the ever-evolving financial services landscape, blockchain technology has emerged with a transformative capacity promising to redefine the industry’s core. There are several fintech companies using blockchain. With blockchain in fintech, the traditional fintech ecosystem is becoming more secure and decentralized, reshaping traditional banking procedures, payments, and investment mechanisms.

In this article, we will explore several use cases of blockchain in the fintech industry. We will see how it can change the tapestry of the existing financial system and improve it. Therefore, let’s begin…

What is Blockchain?

A blockchain is a distributed database shared amongst the different nodes of a computer network. As the name suggests, a blockchain-based database stores data in blocks linked together in a chain. Each block contains a cryptographic hash on the previous block, known as a timestamp, along with transaction data.

Benefits of Using Blockchain

There are several reasons why someone would like to use blockchain in fintech. However, before that, we are covering the basic benefits that any industry can reap. Therefore, let’s begin with it:

• They are inherently secure and tamper-proof because of the way they are designed
• It is difficult to alter the data in a block of blockchain without affecting the subsequent blocks
• A single entity does not control it but instead by a network of computers
• Blockchain is public and can be viewed by anyone, thereby promoting transparency
• Once a blockchain is recorded, it can’t be altered or deleted

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Challenges of Fintech that can be Resolved using Blockchain

The blockchain technology in Fintech is a boon to the industry. However, before jumping to a conclusion, let’s assess why blockchain in fintech industry is a must by understanding the associated challenges:

• Fintech deals with a great deal of financial losses due to data intrusion, recording financial transactions, and storage problems
• Lack of transparency leads to fraudulent transactions and corruption in the financial system
• Complex workflow that increases effort and time of execution
• The reach of financial services in multiple areas is limited due to a lack of physical presence
• Struggle with cross-border payments in terms of speed, cost, and security
• Complex trade finance process
• Compliance issues of financial institutions
• Capability to create new financial products that can serve people across all continents

Blockchain in Fintech — Use Cases!

There are multiple use cases of blockchain in fintech. Below, we will be discussing the most prominent ones. Let’s start…

1. Reducing the Cost of Transactions

One of the biggest challenges that can be resolved using blockchain in the Fintech industry is reducing the cost of transactions. This is why fintech software development companies are heavily interested in including blockchain for their clients. There are so many intermediaries between the customer and the fintech company that the transaction cost rises radically. Additionally, if the fintech service wishes to charge something, they are increasing the price of the overall product.

2. Resolving Issues related to Identity Theft

Identity theft is a much bigger problem than anyone can estimate. There are so many cases of identity theft that the fintech industry needs to reinforce its security. The best way to reinforce it would be to use blockchain technology in fintech with the help of blockchain development companies.

Banks and fintech firms have to implement know-your-client and anti-money laundering procedures. For this, they require lots of paperwork, which makes the process slow. In fact, at times, it can take weeks to identify and complete a single online transaction. The lengthy and non-standardized paperwork also needs verification, which further increases the issue.

The Fintech industry has long tried to resolve this problem, and with fintech in blockchain, they could pull it off. With blockchain in fintech, the user must provide their identity once. Initially, they are given a verification document that can be used to conduct transactions in any part of the world. They can also use this document to manage and share personal data without sharing passwords and e-sign documents.

3. Cross-border Payments

A fintech service is supposed to have the capability to provide cross-border transactions with minimal charges. This will encourage users to make more transactions and liberate them from the feeling of losing more money.

It was a much bigger challenge before the intervention of blockchain in fintech. With blockchain technology in fintech, one can access any data point to reach the recipient in a peer-to-peer fashion and conduct a transaction. This can be done from any part of the world by simply using public and private keys. In fact, since the inclusion of blockchain, a 2016 study by Statista shows that 60% of transactions in the fintech industry are blockchain-based. Therefore, if you haven’t thought about it, then it’s high time that you start to at least learn how to hire fintech app developer.

4. Regulation and Auditing

One of the major setbacks behind any operations could be regulatory concerns. The problem is that regulation and compliance change from one geography to another. Therefore, there are chances of a particular service being available in a country but not other countries. This can also be the case with data. For instance, European countries strictly abide by GDPR (General Data Protection Regulation); on the contrary, India has the Digital Personal Data Protection Act. Both of these regulations seem similar. However, some dissimilarities create issues with recording and saving the data.

Additionally, if we talk about fintech and blockchain, then blockchain as a technology is decentralized in nature. Therefore, it creates new areas or blocks for every further action without tampering with the older blocks. Also, it creates a non-deletable record for every transaction in its log. It also saves all the original documents fed to the system.

Furthermore, all the data in the blockchain is stored at a single source. This makes the process of auditing much easier. This decreases the cost of verification and auditing and reduces the time acquired to perform the operation.

5. Handling the Credit Reports

A credit report is an analysis of a user’s transactional data. Banks and financial institutions record the financial transaction data of users monthly to analyze customer behavior and other attributes. For this work, these institutions use a centralized database. However, the issue with it is that if someone gains access to it, the entire private data of multiple users is vulnerable.

On the contrary, institutions can create something much more reliable with blockchain in financial services. It is because blockchain doesn’t store data in a single space. There are also security algorithms and identity verification algorithms that further enhance security.

6. Lending

Lending is important for the economy to run. Most businesses run on lending from banks to firms for performing the operations. However, some small businesses often struggle with finding this service because they are fairly nascent. This creates hindrances in terms of them getting this service from established banks.

Furthermore, some investors are willing to invest in a company for short-term gains. This can be backed by using blockchain technology in fintech by creating small contracts. This is a great way to match individual investors with the business seeking a loan. With blockchain in finance, you can transfer assets, sign deals, and enhance transparency for both sides. This helps in debt management and its executions by mitigating risk on both sides and giving businesses and investors looking for another chance.

7. Trading of Financial Instruments

There are several investment options in the finance sector. For instance, cryptocurrencies and NFTs. Private blockchain networks are redefining how financial assets have been traded for years. In this process, there are approvals, audit trails, and accessibility for multiple roles that are pre-verified as brokers, advisors, etc.

This is achieved by treating every unit as a separate entity. The blockchain ecosystem is virtual, and businesses can meet with full accountability and transparency of actions. These solutions reduce reasonable times and errors by large proximity and help ease the process.

Wrapping Up!

The inclusion of blockchain in the fintech industry has been a game changer by providing myriad solutions. These solutions have not only helped reshape the way the industry operates but have also removed intermediaries within the process. With blockchain in finance, the capacity to streamline operations, reduce paperwork, and enhance security is a reality. The future of blockchain in fintech holds multiple promises to further improve the existing ecosystem and make the financial future much more inclusive.

FAQs:

Q1. Name some fintech companies using blockchain?

A1. Some fintech companies using blockchain are:

• Ripple
• Circle
• Binance
• Gemini
• Kraken

Q2. What is the relationship between blockchain and fintech?

A2. There is no inherent relationship between blockchain and fintech. However, fintech and blockchain together can provide amazing financial solutions.

Q3. What is the use of blockchain in fintech?

A3. There are several use of blockchain in fintech which are payments solutions, digital wallets, smart contracts, tokenization of assets, decentralized finance, etc.

Q4. How to use blockchain technology in finance?

A4. Blockchain technology in finance can be used by hiring a fintech blockchain development company or creating an in-house to develop and manage the service.

Q5. List some blockchain applications in finance?

A5. Several blockchain applications in finance are:

• Cross-border payments
• Digital currencies
• Smart contracts
• Identity verification
• Supply chain finance

Q6. How blockchain is changing finance?

A6. Blockchain is changing finance by enabling the development of decentralized, secure, transparent services that can reduce time and operational costs for processes.

Q7. What are some blockchain fintech companies?

A7. Some blockchain fintech companies are:

• BitPay
• Paxos
• Abra
• Aave
• Chainlink

Q8. What are some blockchain use cases in fintech?

A8. Blockchain use cases in fintech are:

• Decentralized finance
• RegTech and compliance
• Securities trading

Q9. Explain the use of blockchain in banking?

A9. Some use of blockchain in banking are:

• Enhanced security
• KYC and AML compliance
• Securities settlement
• Trade finance
• Instant payments

Q10. List some blockchain use cases in banking?

A10. Here are some blockchain use cases in banking:

• Central bank digital currencies
• Loyalty programs
• Interbank transactions
• Trade finance
• Digital identity management