Blockchain in Fintech: Can Blockchain Solve Fintech’s Biggest Problems?
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More chaptersTraditionally, in the financial industry, currency has been locked away, but now a new wave of digital upstarts is invading the fortress from within. Built upon encrypted innovations that exist on the periphery of current finance, blockchain and financial technology are transmuting finance into an organizational force that is beyond national boundaries—a magician.
As the core element of digital assets and an enabler for digital evolution, the fintech sector has all the chances to be disrupted by blockchain technology. Generally, new data shows that world expenditure in the blockchain solutions market is going to exceed $18.7 billion by 2024, of which the financial sector will be more than 30%. This rise in investment holds testimony to the fact that fintech has started relying on blockchain for solutions to some of its top issues, which include security, transparency, and efficiency, among others.
But why are blockchain and fintech such a match made in heaven? We are going to continue our exploration of the fintech technology that is blockchain and find out why blockchain in fintech is not something that came from an arranged marriage but is more like the digital love that is meant to be.
Fintech’s Major Pain Points
Fraud and Security: Specifically, the fintech sector has been identified as being at high risk of getting involved in cases of financial fraud, mainly driven by the digital environment in which most of these players operate. Hackers never tire of inventing new ways of penetrating the defenses of financial institutions and secure business networks. Data integrity must be maintained, while data confidentiality is another important factor. Security requirements are also highly significant because violations can result in financial and reputational losses. The great interest evidenced toward fintech businesses means that these firms cannot but allocate large sums in advanced security solutions and measures to protect web-based platforms and preserve the clientele’s confidence.
Inefficiency and Cost: Such institutions may take a long time and be costly to transact, hence challenging the efficiency of the financial markets. These inefficiencies are the result of complex and bureaucratic business processes and old-fashioned technological infrastructure that is unable to support the rates of modern financial business. For example, international money transfers may take more than a few days or be very costly, which will result in less customer attractiveness. Such matters are a subject of the fintech sector, which attempts to leverage technology to improve operations’ efficiency and minimize expenses.
Lack of Financial Inclusion: One aspect specifically found to be restricted in the realm of financial operations is budget segmentation, in which customers who are not sufficiently financially included are not given access to financial services. These groups are usually charged high fees, have no documents, and have limited banking structures. The traditional defined banks have not served these groups well, mainly because they have not been given enough attention by these giants in banking. However, fintech startups are standing to fill this gap of needs left by the established giants of banking. Mobile technological application is one of the essential aspects of fintech since it allows firms to deliver efficient, effective, and cheap financial services to the masses, therefore enhancing financial inclusiveness and enhancing people’s ability to manage their real-life wealth.
Regulatory Compliance: One of the critical issues that the fintech industry faces is dealing with the regulations and laws that seem to be escalating in complexity. Banks and other financial organizations are to meet numerous requirements currently differing from country to country and changing at an impressive pace. These regulations can also be cumbersome in several aspects for fintech startups, given that most of them would not have the capacity, knowledge, or even time to keep abreast of the ever-increasing regulatory requirements. Compliance is very important to prevent legal consequences and to promote a sound structure in financial systems. Fintech companies are generally aware of the need for proper compliance measures and the ongoing nature of policy change to work efficiently and profitably.
Addressing Fintech’s Biggest Problems with Blockchain
Improving Data Security and Privacy: It is worth stating the main strength of the blockchain networks here: they are based on cryptography and have no changes. Each transaction in the chain is linked to the previous one by encryption; thus, if one is to be broken, the chain will noticeably shift. This antecedent security feature of blockchain platforms lowers the risks of data breaches because those changes are recognizable and easily avoidable. By so doing, fintech companies can make use of distributed ledger technology that would enable them to enhance the privacy of their financial data for their users and other stakeholders.
Increasing Trust and Transparency: Blockchain distributed ledger and consensus mechanisms help in enhancing the levels of trust in the fintech sector. Unlike traditional financial systems, where a central node aids the transactions, a blockchain network is decentralized. It can mean that all the members of the network have the same information subjected to consensus mechanisms. Consequently, the financial transactions turn out to be more open, and the possibility of the abuser’s commitment is limited. Fintech blockchain solutions can, therefore, help in furnishing more reliable and trustworthy means by which formation activities may be carried out.
Promoting Financial Inclusion: Mobile money is also available in most areas of every continent, which has made one of the biggest shortcomings in the type of fintech, which is providing financial services to the underbanked and unbanked, counteracted by the use of blockchain technology. Fintech organizations can improve those possibilities by using blockchain platforms and providing financial services to individuals who have no access to general banking equipment. For example, smart contracts can facilitate a number of activities that would have otherwise been cumbersome for these populations and hence enable them to access the financial system. Also, blockchain has the ability to increase the availability of finance and financial services, besides bringing about economies of scale by lowering the cost of transactions and assets, thereby increasing financial access and the financial share of income.
As a result, the usage of blockchain in the fintech industry can effectively streamline asset management, improve its security, and increase financial inclusiveness. Regardless of whether one aims to launch their own blockchain network or integrate existing blockchain fintech solutions, the rewards are vast and encompass multiple spheres.
Blockchain’s Applications in Fintech
Based on these fundamental premises, the application of blockchain has no determinable prospects within the framework of the fintech industry that apply to numerous practical aspects.
Optimizing KYC and AML Processes
Know-your-customer (KYC) and Anti-Money Laundering (AML) are two major legal requirements in the financial field that aim to fight against fraud, money laundering, and other unlawful incidents. KYC involves establishing the credibility of the clients so as to distinguish them as either genuine or fake. This normally entails identifying the customer, for instance, by name, physical address, identity cards, and the like. Whereas fraud monitoring is performed with the specific purpose of detecting cases of fraud, AML involves monitoring transactions in an effort to expose money laundering practices.
IT can facilitate these processes a lot if it uses blockchain as a tool to build a transparent and permanent record of customer data. When you create a customer identity and save it on the blockchain, the record is permanent and easily accessible by well-connected financial institutions. This lowers the likelihood of identity fraud, as there is also a stated simplification of the identification process. Third, because of the high levels of transparency extended in the sphere of blockchain-based transactions, it is easy to monitor and recognize such transactions in real time, which enables us to meet the AML regulations.
Enabling DeFi
DeFi is therefore a Decentralized Finance that has emerged as an application of block chain that seeks to build one permission system of finance. In contrast to centrally held forms of finance based on banks and brokers, DeFi is based on distributed blockchain technologies so that consumers can engage directly with the services.
DeFi platforms rely on smart contracts, which are contracts whose terms are embedded in code and, when executed, will automatically implement the terms of the contract. These smart contracts do business-related transactions between the parties in a certain manner once certain conditions are met, and they do not involve third parties in an effort to minimize possible errors. DeFi covers a vast area in the financial world, such as P2P lending and borrowing, DEX, and yield farming. For example, in peer-to-peer lending, the assets can be lent directly to other people through an opportunity offered by the DeFi platform, and the lender earns interest on the lent assets without the need to approach a bank. Similarly, decentralized exchanges allow people to swap coins using smart contracts with no intermediation of a trading platform.
Blockchain Adoption Challenges in Fintech
Despite its immense potential, the widespread adoption of blockchain in the fintech sector is hindered by several challenges.
Regulatory Uncertainty
Similar to most industries, the implementation of blockchain in fintech is facing major problems with policy and regulation. The legal requirements concerning financing furthermore differ from one country to another, which is worsened by the fact that blockchain technology is relatively new and is swiftly growing, not leaving enough time for the formulation of laws governing the same. This regulatory limbo can act as an albatross on fintech’s repurposing of blockchain solutions, which will invariably have to operate within the gray area of the law. It is also very costly and time consuming for companies to monitor new and changing laws while also preparing for a future that will likely bring more changes—a challenging industry that is often especially difficult for fledgling fintech operations.
Integration with Legacy Systems
Some of the financial companies still use known legacy systems, which have been functioning for as many as four decades. Usually, adopting these systems can be a very costly and involved process when integrated with blockchain technology. The degree of compatibility, data conversion problems, and large-scale redesign are also some of the challenges that can interfere with the implementation of blockchain solutions. Also, there can be change resistance, meaning that an organization’s employees and stakeholders may not be ready to accept novelty technologies, which in turn require changes in business processes and actions performed.
Security Concerns
Although blockchain, by its principle of operation, is quite secure because its data is encrypted, it is not invulnerable to threats. There is, therefore, always the risk of a hack because of smart contract bugs, 51% attacks, and so on. So, too, are there always risks in blockchain networks. In order to protect blockchain applications, a lot of testing, proactive monitoring of all blockchain transactions, and the integration of profound security measures need to be taken. Fintech firms that are developing applications on the blockchain must engage in technologies that would secure the system from hackers.
User Adoption and Education
In the case where blockchain is to become a popular solution in the sphere of fintech, the challenges are connected to the actual usage and understanding of the utilized technologies. The positive characteristics that blockchain offers often may be overlooked by the users or not well understood, resulting in reluctance or even refusal to use the financial products and services built on the blockchain. The power of influence as applied to blockchain and its benefits like better security, openness, and speed cannot be underestimated, as users need to be explained what the technology is and why it is better. Understanding and prioritizing the customer experience, simple and intuitive interfaces, and delivering blockchain technologies to the masses is crucial for fintech companies.
That indicates that for fintech organizations that want the localization of blockchain and the executives of that improvement, championing diverse and professionalizing blockchain professionals is significant. Orient Software is a top blockchain solution developer company with a rich experience that can assist you in implementing blockchain technology in your fintech business.
With the help of Orient Software’s solutions, you can successfully solve the issues related to blockchain implementation, improve the effectiveness of your KYC and AML policies, and discover the potential of DeFi. By cooperating with us, you can achieve your business goals with the help of blockchain technology to develop a new, more efficient, and safe financial world. This is, therefore, a good chance for companies to contact Orient Software and learn how our blockchain solutions can assist them in realizing their fintech objectives.
