A guide to blockchain and the financial industry

Blockchain is one of the most crucial innovations in the finance sector since the advent of money, and there is already a buzz out there on how it would change the world. The same way Uber transformed the private-transportation sector, and Airbnb the travel industry is the same way Blockchain will revolutionize the financial industry.

Some of the benefits this new technology is bringing on board include; decentralization, reliability, simplification, transparency, traceability, cost saving, reduced room for error, faster transactions and improved data quality.

In this post, we shall expound on the specific ways in which Blockchain is revolutionizing the financial industry. So, let’s dive in and explore:

Fraud reduction — Money transfers

Recent reports indicate that about 45% of financial institutions such as money transfers and stock exchanges suffer from economic crime annually. You see, a majority of these institutions are intermediaries that operate on a centralized database. A centralized database is susceptible to cyber-attacks simply because it has a single point of failure which once a hacker breaches he can get full access to data in your system.

Blockchain (a shared digital ledger that approves recording and electronic verification of transactions over a network of computers with the absence of a central ledger), solves the problem of a vulnerable centralized database by introducing a decentralized database.

Claims processing- Insurance

In finance, every action ought to have a contract that clearly defines rights as well as duties. The problem with traditional contracts (written on paper) is that their issuance is time-consuming, and they can easily be forged or even destroyed.

Blockchain smart contracts enable you to overcome these imperfections since transactions to relocate titles to goods and money is automatically executed. This drastically lowers costs since it eliminates fees associated with the middlemen, and further creates a network of guaranteed authenticity as well as the origin of goods being supplied.

Smart contracts have come in handy in executing insurance policies. It promises transparency as well as traceability for every claim that could lead to a pay-out. As such, Blockchain will break down the existing silos, boost risk modeling for the insurance sector, and greatly reduce fraudulent claims by seizing the source and ownership of insured assets.

Compliance — Know Your Customer

Know Your Customer (KYC) is an essential compliance requirement for all financial institutions. The intention of this regulation is to help minimize criminal activities like money laundering and terrorist activities. As important as it is, the KYC process can be extremely slow and expensive in a centralized model where different teams are required to carry out this task. Latest surveys indicate that financial institutions annual expenditure on KYC and customer due diligence ranges from $60 million up to $500 million. Now that is a lot of money.

Blockchain eases the workload by providing one digital source of ID information, and further allows an independent and smooth sharing of documents among banks and other external agencies. As such, this technology will reduce administrative costs for compliance departments, support automated account opening while still maintaining data privacy.

Moving Value- Trading platforms

The global payment sector is huge- it moves a lot of money on a daily basis. But doesn’t it bother you that most institutions are slow, costly and prone to error. Since Blockchain improves speed and reduces friction, it will become a common standard for moving value- titles, stocks, currencies and bonds. The Australian Securities Exchange (ASE) and NASDAQ are now gradually leveraging on Blockchain solutions to enhance efficiency and reduce costs of operation.

Payments

Blockchain use could exponentially transform the payment process. Currently, the payment processing system is infested with many intermediaries. Blockchain eliminates intermediaries and the absence of a third party not only saves you time and money but also the cumbersome process of going through legal documents just to ensure you are not being swindled.

Banks such as Santander are now using Blockchain-based payment apps to enable customers to make real-time payments any time of the day to any country in the world. Real-time payment helps to minimize operational cost, human error and fraud.

Asset Management

The conventional trade processes within asset management can be cumbersome and risky when reconciling and matching. And it can get even more complicated with cross-border transactions and for non-standard investment products e.g. loans. All parties in the trade lifecycle (e.g. custodians, intermediaries, broker-dealers, clearing and settlement departments) here keep their own copy of the same transaction record, these results to inefficiencies.

Blockchain technology streamlines and simplifies the process through automating the entire trade lifecycle. Here each party in the transaction is given access to data about the trade, leading to faster processing cycles, substantial infrastructural cost savings, minimal reconciliation, effective data management and transparency.

New methods of raising capital

Traditionally new businesses had to target angel investors for necessary funding in the early days of setting up a new business. The funding pattern changed with the advent of venture capitalists and then entered the IPOs (Initial Public Offering) via a stock exchange that still is the more advantageous route for self-established businesses. Nearly all these forms of fundraising are infested with many intermediaries including exchange operators, investment bankers, lawyers, auditors and crowd-funding platforms.

Blockchain technology is transforming the equation by allowing businesses in spite of size to raise funds on a peer-to-peer platform through share offerings distributed worldwide. The startup industry is already under transformation by this new funding mechanism. Blockchain companies in 2016 were able to raise some $400 million from traditional venture capital investors and about $200 million through ICOs (Initial Coin Offerings).

Final word

All said and done; there no doubt that the Blockchain technology presents many opportunities that will transform the financial sector. Blockchain is exponentially opening up global markets the same way the internet revolutionized access to information. Its potential has no barriers- consumers as well as entrepreneurs can achieve access to any service or assets they need where they are and when they need them. If you care enough to recognize what Blockchain technology can offer to the future of financial technology, then your future is bright.

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