Before we dive into implementing Blockchain in Fintech industry, let's understand what's all the fuss about Blockchain.
Wikipedia defines Blockchain as
"A blockchain is a distributed ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes."
Blockchain
In a traditional system, data is shared in a central database. Let’s take the example of our bank. All our financial records are kept in one database, and banks use Core Banking Solutions (CBS) to perform their day-to-day transactions. Instead of relying on one central system, Blockchain relies on storing data on different computers (nodes) all over the world with a copy of the data. So even if the hackers tampered with data on one node, it would not do much as others wouldn’t be so easily accessible to him.
Due to the hack-proof nature of blockchain, cryptocurrencies have adopted this technology. For example, Bitcoin.
In addition to that, blockchain isn’t governed by any authority, and it relies on mutual consent among users, which increases transparency.
Now you understand why hackers are relying on such currencies for transactions because the authorities cannot track them.
Applications of Blockchain in the Fintech Industry
Payments
An Non-Resident Individual(NRI) working abroad only understands the challenges associated with sending funds to his local country.
For example, while I was employed in Nigeria, to send my salary to my Indian account, I had to pay $75 in transfer fees. (Note: This applies to any amount and increases depending upon the amount, even if I am sending $100.) Then comes COVID, due to which the Federal Bank restricts dollars throughout the country, so I had to resort to other means to send money with additional costs.
Generally, I have to fill in all these details to do a wire transfer.
Full name and address
The name and address of the bank
Account number and account type (checking or savings, etc.)
Bank’s IBAN (if applicable)
Bank’s BIC/SWIFT code
The amount of the transfer
The reason for the transfer (mandatory; if banks find it fishy, they won't proceed)
A reference to include on the transfer, if you want it
If everything goes smoothly, I will receive payment after 7 working days.
Imagine that I, as an individual, can send money (of any denomination) with the bare minimum amount and within a fraction of a second. That is the power we will get if blockchain is implemented in the fintech industry.
Digital KYC
Once data has entered into a blockchain, it is immutable(cannot be tampered again). So if we are to provide our personal information and identity documents, it would be secure and private and there would be very less chance of it getting compromised. Additionally, while we are doing transactions, we do not have to provide our identity each time and thereby reducing the risk of identity theft and fraud.
Trade Finance
Traditional trade finance is governed by a central authority, and regulations are imposed regularly. This makes it difficult for traders as they have to go through plenty of rules, reporting obligations, and documentation requirements, which can be time-consuming and resource-intensive. Secondly, exchanges charge heavy fees for trading. Blockchain, on the other hand, isn't governed by any authority and the regulator body is still evolving and the fees are minimal or no fees at all.
How payments are improved in Blockchain?
Following are some of the benefits of using blockchain over traditional banking system.
No Middlemen
Blockchain removes all the middlemen and it also helps them reduce all the additional resources that are involved in sending funds.
Unrestricted boundaries
Blockchain isn't restricted to geographical boundaries and payments can be made worldwide without additional regulations
Real time transactions
Payments occurs in realtime and that significantly increases speed of the transaction.