Blockchain technology has been stealing the limelight from other revolutionary technologies for some time now. While it promises a benefit galore to a bevy of industries, none of them has gone through a digital facelift that is bigger than the fin-tech industry. In fact, the investment in blockchain technology by the financial sector in 2018 had reached a high of $552m. Although the technology has already made waves in the fin-tech world, there is still too much it can do to contribute toward improving the efficiency of services.
Here is how blockchain will continue to revolutionize fin-tech and the challenges to its adoption:
Blockchain Adoption Statistics
- 53% of respondents to Deloitte Blockchain Survey claimed that adopting the technology is a top-5 priority for them. Only 6% of respondents claimed that they didn’t see the need to make an investment.
- Blockchain promises to slash the infrastructure costs of eight of the ten world’s largest investment banks by up to 30%. This can translate into anywhere between $8 and $12 billion in savings.
- In the same survey by Deloitte, 71% of respondents claimed that they felt that blockchain technology offered their businesses more security than conventional IT solutions.
- The global blockchain market is anticipated to be worth $20 billion by 2024 as more businesses continue to adopt it.
What Makes Blockchain Attractive To The Fin-Tech Industry?
- It Is Decentralized
There isn’t a single governing body or individual in charge of blockchain technology. Instead, the technology is run by network nodes that make it decentralized. The power over your information and transactions lies completely in your hands.
As long as you have your private key, you can store digital assets like cryptocurrency, documents, and other vital assets. Simply put, blockchain technology gives the power and rights of ownership back to the users of the technology (instead of being governed by a body such as how governments have power over a country’s currency).
- It Is Highly Secure
With the current rate of cybersecurity attacks, upholding high levels of security has turned into a necessity for fin-tech businesses looking to have a competitive advantage. The fact that blockchain technology is decentralized makes it ideal for such businesses. With no third-party being in control of the stored digital assets, the chances of anyone altering the integrity of the data are quite low.
Also, blockchain technology adds another layer of security through cryptography. Any data that is to be stored within the blockchain is typically taken through a mathematical algorithm that changes its true value. As such, no one who doesn't have the private key can gain access to the data and use it.
- It Is Immutable
Altering or changing the data on a blockchain is typically tough, which makes it incorruptible. This ideal for a fin-tech world rife with fraud and corruption. Ideally, blockchain technology has features that ensure that the stored data remains as is.
Every node in the blockchain network has a copy of the digital ledger, and the nodes will require to check a transaction’s validity before adding it to the ledger. Information can only be included in the ledger as long as a majority of the nodes consider the information as valid. Also, once a transaction is added to the ledger successfully, it cannot be changed.
- It Offers Faster Transactions
Bank transactions can be slow at times, with some of them taking a few days to be fully settled. In comparison, blockchain technology is quite fast. The whole process of storing information, processing it, and coming up with the right conclusion can be done in a fraction of the conventional time taken. This makes it easy for users who want to send cash across borders, which greatly impacts global trade.
Ways Blockchain Is Improving Fintech
While the fin-tech industry has been thriving for some time, there have been some hurdles that companies and customers have had to live with. This is because the technology that could help solve these hurdles hadn’t been invented yet.
For instance, consumers have had to live with slow transactions, the risk of data breaches, the risk of corruption and fraud, and reduced control over their digital assets. By solving such issues, blockchain has come up with revolutionary innovations that change the world through:
- Improving Online Identity
The fact that people need to log in to different sites using their personal information creates a diversity of digital clones of themselves on these platforms. This increases the risk of this data falling into the wrong hands. That’s why cases of identity theft have been on the rise over the last few years.
Also, the current method of handling digital identity data leaves the data in the hands of a third party. Such third party organizations can then offer this data to other parties or even use the data in other places. Although the goal isn’t always malicious (such as in the case of e-commerce businesses using your data to offer you suggestions on items to buy), it brings up the question of how much power individuals offer these third party agencies.
Blockchain offers a solution by requiring individuals to be authenticated once and use the authentication document all around the world. In turn, these individuals can easily:
- Share personal data with others without safety concerns
- Have control over their personal data and reputation
- Log in to digital services, including those offered by fin-tech businesses, without needing passwords
- Sign documents and contracts digitally
A great example of a business looking to improve the fin-tech industry through such innovation is uPort. It has created an online identity management solution that caters to the need of both individual clients and enterprises.
- Regulation and Compliance
Other than being a necessity in the fin-tech industry, compliance to regulations helps give such business a competitive advantage. It ensures that they can attract compliance-conscious customers and investors. However, the cost of compliance can be quite high, from the need to invest in the right tools for data governance to the process of data collection and compliance reporting.
Blockchain can ease this cost and make the compliance process quite easy, owing to the immutable state of the blockchain. Ideally, companies can leave an incorruptible document trail as they input data about their compliance progress into the blockchain.
In turn, fin-tech companies can then offer regulators read-only real-time access to compliance data and their audit trail. This ensures that regulators are more of participants than customers of the compliance process. It will also reduce the cost of compliance through improved quality, accuracy, and confidence of regulatory reporting.
Blockchain technology can revolutionize KYC (Know Your Customer) regulations. For financial institutions to avoid fraud, they are often required to take potential customers through lengthy and detailed onboarding processes. With blockchain, however, customers can have all their validation data stored in immutable documents.
By using such documents, financial institutions will cut down the customer onboarding time by a large fraction as well as reduce the ad hoc costs.
A great example of a company building on how blockchain affect regulations is EY with its EY Blockchain Analyzer. The solution revolutionizes how cryptocurrency transactions can be reviewed.
- Smart Contracts
There exist some inefficiencies in how businesses handle paper-based contracts. For instance, when purchasing a house, the seller might need the buyer to meet certain criteria before they can buy the house. Once this is done, a third party (escrow business) will help with the finalization of the transaction (sending the cash to the seller and offering the buyer the deeds to the house.)
However, this process might take a number of days and is contingent on the reliability and availability of the third party. Ideally, smart contracts reduce the need for this third party. In a nutshell, smart contracts are customized self-executing programs that are formed on blockchains. They can be triggered by predefined events, which further help to change another part of the blockchain.
For instance, if the condition set by the buyer and seller of the house is met, the smart contract will initiate the transfer of value between both parties. Once this technology becomes mainstream, it will have the ability to replace most of the inefficient intermediaries in the fin-tech world.
Despite the promise that these contracts offer, they are far from ready. A great example of their failure is in the much-publicized DAO debacle. In this case, a savvy Ethereum user took advantage of poorly formulated contracts to get themselves rich. Ideally, the technology behind smart contracts needs to become stronger before their widespread adoption in the fin-tech industry.
A good example of a business thriving from this is Populous, which has a solution to help businesses with unpaid invoices. The buyer pays the cash upfront, which is stored on the blockchain, and the cash reaches the seller once the entire transaction is done.
- Improved Cross-Border Payments
While innovations in the fin-tech world have changed a lot with regard to how businesses to process payments, only a small fraction of these innovations have affected cross-border payments. Ideally, the process for processing transactions between banks is lengthy, frustrating, and often involves multiple intermediaries.
Ideally, for company A to transfer funds from the USA to India, it will require its banks to contact other partner banks in India. Once it sends the money to these banks, they will, in turn, send it to the recipient’s bank. Other than being lengthy, this process can be costly, owing to the number of intermediaries involved.
In fact, the average global cost of remittance is at 6.82% of the amount sent out, according to the World Bank. Blockchain can help reduce this cost by eliminating the need to rely on these intermediaries when making cross-border transactions.
The transacting parties can have their funds sent out and received almost immediately. Also, the fact that blockchain technology is immutable will make such transactions transparent. Fintech businesses and their customers could also benefit from the secure nature of blockchain technology.
- Improved P2P Payments
Blockchain can also revolutionize daily transactions between people. Ideally, these transactions typically go through the same inefficiencies as cross-border payments, though maybe at a smaller scale. P2P payments involve intermediaries and can also take a long time, be quite costly, be insecure, as well as prone to fraud.
The fact that blockchain technology uses cryptography to secure transactions makes it an ideal solution for issues with fraud and data security. It also eliminates the need for intermediaries in financial transactions. This reduces the chances of other parties being in control of how the transactions go as well as the underlying data.
The lack of an intermediary also reduces the costs of such transactions. Individuals will barely have to pay any transaction fee to make a transaction. Transacting with blockchain is also quite fast, making it a convenient option.
Challenges to Blockchain Adoption
The hype around blockchain technology initially arose from the introduction of Bitcoin. The cryptocurrency promised a completely revolutionized way of handling transactions. As people became familiar with bitcoin, the idea that blockchain can help improve other areas of life, especially in the fin-tech world, came to life.
Sure, there has been plenty of revolutionary ideas that stem from blockchain technology. In fact, more businesses are choosing to adopt it to gain some competitive advantage. However, with the promises that it has in store for the world, blockchain technology ought to have a faster adoption rate than its current one.
Here are some reasons behind the slow adoption rate of the technology:
- Blockchains Aren’t Interoperable
Owing to the promises that blockchain offers the fin-tech industry, a lot of businesses and players have been looking for ways to innovate through it. This has led to the development of a variety of business networks to fulfill different purposes. While these networks are quite helpful, there is the issue of limited communication between them.
Currently, most of the blockchains work in silos, which makes pulling information and data between any two blockchains a nightmare. Any two blockchains might have different privacy measures, coding languages, protocols, and consensus mechanisms. For any communication to exist between the different blockchains, some form of the translation will have to take place.
This lack of standardization makes it tough to come up with solutions that utilize more than one blockchain. It might also make it tough to run business operations that depend on each other on different blockchains, even though one blockchain is exemplary at a task than the other.
However, some businesses like Ark have been working on this problem. Through its SmartBridges architecture, Ark allows different parties to enjoy universal interoperability and cross-blockchain transfers and communication.
Ii. Lack of Blockchain Talent
Blockchain is typically still in its infancy. Companies have only recently started taking it seriously and are integrating it into their daily operations. This brings about a need for skilled labor in the blockchain world, an issue that has led to high demand for it. In fact, blockchain-related job openings had increased by 200% between 2017 and 2018, according to Glassdoor.
Learning institutions have only started training students in blockchain technology. This means that it might be a few years before the demand for skilled labor around blockchain is quenched by a healthy supply. Ideally, the salary for blockchain developers is bound to be quite high for these students once they are done with their studies.
Iii. Integration with Legacy Systems
For businesses to integrate blockchain into their current infrastructure, they might need to restructure their legacy systems to accommodate it completely. This requires multiple hours of work, along with a hefty investment to do in-house. However, since there is a shortage of skilled blockchain developers, this might be an issue for most businesses.
The closest solution to this problem would be to hire third-party businesses to help with the integration of blockchain and the business’ infrastructure. However, this is only half of the problem. Trying to integrate blockchain technology with legacy infrastructure also comes with the risk of data loss, or the loss of data integrity.
The risk of data loss is enough to make most businesses shy away from embracing technology. The other alternative would be to invest in the latest, blockchain-friendly technology, but this can be quite expensive.
Luckily, businesses like Modex provide solutions for this issue. The Modex Blockchain Database allows businesses to connect their current IT infrastructure to the backend of a Blockchain without the risk of data loss.
Iv. Energy Consumption
The energy required to run blockchains is quite high. In fact, it is estimated that Bitcoin uses more energy than Ireland and other small countries like the Vatican. This can be linked back to the proof of work that drives blockchain technology.
The consensus mechanism used to validate transactions and improve trust levels throughout blockchain networks is typically difficult and inefficient. Ideally, the mechanism requires a lot of computation power to process transactions, verify them, and keep the network secure.
Businesses that need to use bitcoin in their daily operations will need to provide enough energy to run the algorithms. In turn, they will also need to use more energy to cool down the systems. This can result in high costs for businesses looking to use blockchain.
As a result, most businesses would rather embrace alternate and cheaper methods to solve their problems. The good news is that most companies behind blockchains are working on ways to make the technology more energy efficient.
There Is Little To No Regulation
The decentralized nature of blockchain makes it tough to create regulations around it. A single blockchain might have nodes in different places all over the world, making it tough for a specific jurisdiction to control it. In turn, it can be used for fraudulent activity and even in funding crimes.
Some businesses might be afraid of adopting it due to its non-regulated nature, with most fearing or the state of their digital assets. However, there is the question of how much regulation is enough for blockchain technology.
Little to no regulation leaves room for fraudulent activity. If it is over-regulated, there is a chance that the regulatory bodies will make innovation tough. Regardless, some form of regulation has to be implemented, and some governments have already started implementing them.
The infancy of blockchain technology has come at a well-deserved time in the fin-tech industry. The fact that it looks to eliminate issues with security, transparency, accountability, transaction speeds, and transaction costs makes it an ideal innovation. In a world where convenience is a commodity, any new innovations will be welcomed with open arms.
However, the primary actors behind blockchain technology still have a lot to do. They need to cope with the challenges in the industry to ensure that blockchain can live up to expectations in the fin-tech industry, among others. The fin-tech industry can expect a lot more innovations from blockchain as long as there is enough talent in the industry.
Also, making the technology more energy efficient will both increase its adoption among cost-conscious businesses and reduce its environmental impact. Lastly, the primary actors should work on ways to increase the interoperability among blockchains for more adoption.