The rapid adoption of Blockchain technology by FinTech companies clarifies the continuing application of this technology, its expansion, and sustainability.
It was first introduced with Bitcoin as a peer-to-peer payment system for electronic transactions in 2008, Blockchain is now widely acknowledged as a transformative technology disrupting the FinTech industry.
From enabling the industry to generate more revenue to streamlining the delivery process, reducing operational risks, and optimizing risk assessment, Blockchain technology empowers the FinTech industry in a radical way.
FinTech Blockchain – Market Analysis
The expected growth of the global market size of FinTech Blockchain was initially $230 million in 2017. The growth was later projected to be $6,228.2 million by 2023, at a CAGR of 75.9% during the forecast period, as per the report.
In addition, the market size of Blockchain use in banking and financial services was expected to reach 0.28 billion U.S. dollars in 2018, as Statista reports. The report also predicts that the market size of Blockchain technology will reach approximately $22.5 billion by 2026.
Understanding the Concept of FinTech Blockchain
The concept of Blockchain in FinTech indicates how the technology is empowering the FinTech industry. Blockchain, as a decentralized, transparent, and immutable technology is considered transformative for banking and financial services.
DeFi (decentralized finance), for example, is a modern financial paradigm in the context of FinTech Blockchain. It leverages a secure distributed ledger to facilitate a host of services. They include investing, lending, or exchanging crypto-passes by obviating traditional centralized intermediaries.
For example, the technology rules out fees that traditional financial companies and banks charge for using their services. The working mechanism of DeFi is similar to how cryptocurrencies use Blockchain technology, which is a distributed and secured ledger or database.
FinTech Blockchain – At the Forefront of Acceptance
Once mocked as worthless by traditional financial institutions, Blockchain is now in mainstream popularity and at the forefront of acceptance by the global FinTech industry. In fact, FinTech companies are leaving no stone unturned to create a futuristic Blockchain platform to streamline and support all types of transactions distinctly.
Even though most traditional banks have adopted multiple technology integrations and advancements, they have not forsaken the centralized model. Such a business model mandates dependency on third-party intermediaries, like government bodies and financial institutions.
Also, latching onto the centralized model is believed to question whether traditional banks experience declining values of their services in the eyes of customers. To rid of such assumptions, adopting Blockchain appears a practical solution, given how the technology is empowering the FinTech landscape significantly.
Will FinTech Blockchain Replace Traditional Financial Institutions?
I think any straightforward answer to the question would mean a hasty conjecture. That’s because traditional banks that still rely on the centralized banking model are still relevant for many reasons.
- Firstly, you need them for a bank account to prevent financial fraud and theft
- Secondly, you can use the stable currency to store your cash in any country but you can’t do so on Blockchain platforms, as they are still not acceptable in many countries
- Thirdly, the market volatility of cryptocurrencies is another reason for the indispensability of traditional financial institutions
- Lastly, most people still are not confident in using cryptocurrencies, based on their unstable values. It would negatively impact people’s finances in the future
Challenges in Financial Institutions that Blockchain Can Solve
Challenge #01 – Compulsive Reliance on Centralized Banking Model
Even though the FinTech industry is adopting the latest technologies to improve its core business operations, the bottom line is that they are still relying on a centralized system.
The connotation is not lost here when I quote the term, ‘centralized system’.
Of course, it means that financial institutions do not have the latitude of ruling out their dependence on third parties regulating them. Higher authorities still regulate the freedom of financial transactions in banking. As a result, users have to wait for confirmation regarding transactions.
Blockchain, being the distributed and secured ledger or database rules out third-party authorities regulating the transactions. If implemented, the technology would efficiently boost the operational productivity of financial institutions. Say, for instance, executing transactions faster to the satisfaction of recipients.
Challenge #02 – Lower Trust In The Banking System
Most people who use FinTech apps are clueless about the authorities validating their transactions. To say otherwise, they don’t know who verify or validate their transactions.
Obviously, users feel confused and doubtful of whether they are in an “identity theft” kind of situation. The role of Blockchain, in this regard, is reassuringly helpful, thanks to its characteristics of being a transparent and immutable database.
Challenge #03 – Higher Transaction Costs And Slow Processes
The involvement of multiple elements during online transactions not only slows down the process but also increases transaction costs, even for international dealing. A study by McKinsey revealed that remittance companies make $40 billion per year with these fees. That confirms why transaction costs get higher.
Implementing Blockchain is an efficient solution to these higher transaction costs by enabling peer-to-peer (p2p) transactions over the Internet. As a result, it will eliminate intermediaries and their charges, thereby reducing transaction costs and improving the processes significantly.
Challenge #04 – Poor Regulation And Auditing
Most FinTech companies are not well-equipped to handle the demands for regulatory services that keep increasing in today’s financial connectivity worldwide.
To handle the demands better, companies require advanced systems, like Blockchain technology. Blockchain technology eliminates third-party dependence on the financial transactions of the users. It also enables them to view the original document of their trade at any time.
Besides, the technology also makes available all the data and analysis reports at a single source. This, in turn, enables better auditing for verification and accounting.
Challenge #05 – Low security and higher operational costs
Traditional banks and financial institutions are more exposed to cyber threats than ever in today’s connected world. While they are exercising due diligence by adopting relevant security protocols to reinforce their banking security for customers’ data, that’s not enough. Why? Because they don’t have advanced technologies to prevent security threats entirely. Blockchain, being a decentralized and immutable system is an efficient solution to this problem.
For example, transactions that users initiate get recorded in blocks, in the Blockchain. Validation of the transactions happens only after other users verify the same, thus concluding the closure of the block. Later, another new block is created containing the data of the previous block within it.
In addition, traditional banks incur heavy operational costs by depending on third-party remittance companies. With Blockchain implementation, such dependence gets eliminated, as the transactions are done quickly without third-party regularization, thus reducing the time and costs.
FinTech Blockchain – Benefits Of Distributed Ledger In FinTech
Blockchain as a distributed ledger presents tremendous opportunities for growth in the financial ecosystem. From unbreachable security to faster transactions without third-party dependence, the FinTech industry can maximize the benefits of distributed ledger for its growth. Here is our rundown on the advantages of Blockchain for financial institutions.
1. Quick & User-Optimized Settlements
Blockchain facilitates instant transactions compared to what traditional banks take a week. Moreover, the technology enables user-optimized settlements, saving a considerable amount of time and money for the users and parties involved.
Also, the technology eliminates the necessity of back-office staff at banks or intermediaries, as it helps settle transactions quickly. Real-time transactions executed through Blockchain also accentuate the transparency of the technology.
Moreover, FinTech apps using the power of Blockchain can also help reduce transaction costs drastically through the P2P decentralized communications model that eliminates any intermediary. This means saving costs on unnecessary expenses and fees. It also yields improved capital optimization for banks.
2. Unparalleled Security And Better Data Quality
The distributed ledger proves quite efficient and productive in providing secure transactions. Banks and financial institutions which are constantly under the threat of cyber attacks can utilize Blockchain to make transactions thoroughly and completely secure. None can divert payments or capture transaction information.
Blockchain is designed to store any type of data by leveraging high-level cryptographic technology. This ensures that only authorized network nodes can access and read the data. The use of both public and private keys ensures the security of data transactions. Therefore, any likelihood of data theft is virtually eliminated.
3. Top-Tier Transparency And Efficient Transactions
Blockchain-based apps ensure faster and more efficient transaction auditing. FinTech developers can use these apps to create top-notch auditing protocols. The distributed ledger works as a storage of linear blocks to add a new entry for every next action. However, previous or old blocks in sequence don’t get compromised in the process. Data is safely provided to carry out a quick and secure audit of transactions. As a result, it yields top-tier transparency and efficient transactions.
4. Managing High Transaction Volume Without Slowing Down
One of the most significant benefits of Blockchain technology for financial institutions is to leverage it to handle huge transaction volumes. And without compromising the speed of the process. This feature of Blockchain also means banks reap a viable competitive advantage. As already stated, the technology eliminates intermediaries and so transactions made through it are efficient, secure, and faster.
5. Lower Operational Expenses & More Opportunities For Growth
Financial institutions can significantly lower their operational costs by using Blockchain technology. A feature known as Smart Contracts in Blockchain technology is a self-executing program that significantly reduces human intervention and other related operating costs.
In turn, financial institutions can maximize the saved operating costs to boost their profit margins. In addition, Blockchain technology also enables financial institutions to experience more opportunities for growth in the competitive FinTech industry. For instance, using technology, banks can process huge volumes of transactions efficiently which would enable investments in the stock market.
Blockchain in FinTech is not a new concept of technological revolution. It is already happening. Though the pace of financial companies adopting Blockchain technology in their business operations is slow, its significance remains unquestionable.
For instance, it not only facilitates speedy transactions securely but also ensures that they are transparent. Thanks to the unbreachable security standards and immutability it maintains, Blockchain technology can revolutionize the way banks operate in today’s highly competitive FinTech industry.
While the prominence of Blockchain technology in the FinTech industry is well-known, it also requires FinTech companies to consider building Blockchain-based apps. In fact, apps that harness the power of distributed ledger can efficiently bring forth automated efficiency in the banking processes of financial institutions. These apps can facilitate large volumes of transactions in seconds without compromising the speed of the process involved.
With the unparalleled quality and top-tier data quality that Blockchain maintains, the relevancy of FinTech Blockchain is tremendous. From helping banks to streamline and optimize their processes to reducing operational costs and human intervention, adopting Blockchain-based apps is lucrative for them. The transformative impacts of Blockchain on the operational excellence of financial institutions are what accentuates the commercial and implementation viability of the distributed ledger.
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