The financial services industry is all set to undergo a sea of change. This is because of blockchain technology, which powers bitcoin transactions, offers many advantages compared to traditional banking. These include better accessibility, greater transparency, lower fees, and quicker transactions. Ignoring these benefits would be like using a handheld pager for communication instead of a smartphone.
Even NASDAQ head Bob Greifeld has predicted that the global economy is ready for this change. Financial biggies such as Visa, Standard Chartered, DBS, and ING are already paying attention to the blockchain.
Fintech is all agog about blockchain’s future. This industry has proved itself over the past few years with useful contributions to online forex trading, payment gateways, and bitcoin transactions. Fintech leaders believe they can go a step further with blockchain.
Fintech impact on banking
Though bitcoin has been used as a currency for quite a few years now, it is only recently that Fintech has attracted the financial sector’s attention. Fintech is expected to make an impact in three important ways: new customer generation, banks’ compulsion to make more profits, and tech improvements that merge the two.
Millennial customers are ready
Today’s young generation of clients has grown up on peer-to-peer dealings. They include profitable tech businesses, their employees, angel investors, and millions of closely networked customers.
These customers are accustomed to online transactions, crowdsourced wisdom, and real-time results on a personal as well as professional level. Whether reading about suitable software solutions and SaaS trends in a reliable B2B directory, hiring the closest Uber cab, or getting details about the latest restaurant deals, these customers are ready to embrace Fintech’s promise of transactions without middlemen.
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New technology
Fintech’s importance lies in the growing use of beneficial technology such as internet infrastructure and access, bandwidth, security, mobile platforms, and mobile app development. All these advancements are making this alternative transaction model go mainstream.
Banks face the major issue of cyber security and Fintech is actively addressing this problem.
This has resulted in industry-wide adoption and attracted more VC spending.
Investment in blockchain was estimated to be $3 billion in 2013 and grew to a whopping $20 billion in 2015. The resources and capital being invested in blockchain show that this technology is growing at full speed.
What does blockchain promise?
Nobody is sure about the impact blockchain, and its improved version will have on banking over the next few years. But right now, it offers three main advantages over conventional banking which is why Fintech is confident about its future.
- Quicker transactions
Conventional financial transactions consume a lot of time as they travel through some third parties. For instance, a normal payment goes through a gateway, stock exchange, or clearinghouse. As many as ten entities may be involved in the transaction, exchanging messages, reconciliation, or security which means the seller receives payment only after days.
Blockchain shows the potential to reduce this extended timeframe by decentralising everything. It can do in seconds the securities and cash transactions that conventional stock trading takes three days to complete.
Similarly, the forex experience offered by Fintech where buyers and sellers deal using an online platform to trade in real time looks a promising technology for the banking sector.
- Transparency and Accessibility
Compared to firewalls, mobile encryptions have the advantage of allowing users to access transaction details anytime, anywhere with internet access. Authorised parties can access the transactions stored in blockchain’s shared ledger.
Blockchain records and locks transactions and users can access the full historical data easily. Thus, it offers greater transparency compared to the more secretive traditional banking sector.
Fintech still faces the problem of reliable security. But sophisticated processes are being developed, and transactions get uniquely validated by software, which eliminates the need for third-party verifiers.
Likewise, blockchain informs users about the entire transactional story, which makes the exchange of messages between parties that takes place in conventional banking look obsolete
- Reduced transaction costs
Blockchain accelerates transactions which reduce the costs involved. It renders third parties and their charges unnecessary. Therefore, businesses that do multi-nation transactions stand to benefit.
Conventional international transactions travel through the central banks of the countries involved and then through local banks. This means a global enterprise may end up paying as high as $25 for a transaction.
Blockchain creates a ledger providers network enabling businesses to directly transact with one another across nations. Enterprise Irregulars forecasts that transaction costs will come down to a mere few cents.
Challenges faced by Fintech
Blockchain still has quite a long way to go before it can become mainstream. To realise its full potential, Fintech needs to address three main challenges:
Security
Banks face the pressing issue of cyber security risks (KPMG 2016). Three cyber attacks in recent years on the banking industry’s SWIFT network resulted in a loss of $100 million to the sector.
Blockchain allows only authorised users to access and view its public ledgers. However, banks are wary of letting financial data sit outside their secure firewall.
To alleviate fears, Fintech needs to build use cases aggressively and simplify process information to make blockchain appealing to bankers. For instance, hacking has become associated with online transactions and blockchain is also dragged into this picture.
But in the blockchain, in addition to direct parties, multiple other parties named miners to verify daily records. Thus, some players take care of the verification of the blockchain financial ledger, which makes it very difficult to manipulate or hack the financial records.
But this security measure also has a disadvantage. Since transactions are irreversible, manual data entry errors such as adding an extra digit by mistake can prove catastrophic.
Regulatory hindrances
Central bank rules, bank secrecy regulations, and other red tapes can adversely impact the effort to introduce blockchain into the mainstream financial sector.
Blockchain implementation depends on governments’ inclination to adopt it as well as their keenness in fighting powerful banking industry lobbyists who may battle against this disruption.
Industry hostility
Fintech also needs to tackle resistance from financial institutions and banks that form an old boys club. Plus, there are legitimate fears such as cyber security and the possibility of banks spying on one another using the shared transactional platform.
Some entities are also not eager to let Fintech take control of the game. This Financial Times report was one of the first to reveal this development which strays from the main goal of blockchain advocates.
Many people are enthusiastic that bitcoin and its blockchain model can lead to the democratisation of banking as they can perform their transactions without intervention from big players such as bankers and the government. Bankers are also open to the idea of using blockchain technology without bitcoin as it promises cost reduction and efficiency.
Peter Randall, CEO of UK-based blockchain vendor Set, reports that banks are discussing a scenario in which only trader insiders, regulators, and bankers, can access and use blockchain to improve the financial services sector.
Conclusion
Who will win the battle, Fintech or the financial services industry? The young Turks are battling hard to change the attitude and mindset of the old guard.
Bankers think blockchain has the marketing potential to improve their margins. Fintech will benefit from the turning tide if this technological disruption takes place.
Our opinion? As history repeats itself, we think Fintech will win the battle as no force or industry can stop the constant march of technological growth and evolution.
Alex Hillsberg, Chief editor of review team at FinancesOnline Alex Hillsberg is an expert in the area of B2B and SaaS related products. He has worked for several B2B startups in the past and gathered a lot of first hand knowledge about the industry during that time.