Blockchain: The Next Fintech Wave for Digital Lending
While blockchain has attracted world’s attention because of its association with Bitcoin, it is now being seen as a viable technology for the financial services industry. According to a report by Santander, by 2022, blockchain technology is poised to save banks $20 billion a year in infrastructure costs.
Recently, McKinsey published a blockchain technology report where the firm analyzed how the technology is disrupting a range of industries, emphasizing financial services organizations and forecasted commercial deployment of blockchain technology at scale by the year 2021.
Furthermore, a report by IDC indicates that the year 2018 will be a crucial stage for financial services organizations as they would consider making a giant leap from proof-of-concept projects to full blockchain deployments.
But, why Consumer Lending firms are still reluctant to adopt the Blockchain technology?
Despite the seemingly profuse growth of bitcoin and other blockchain technologies, key industry players still appear to be averse to embracing this technology. Because currently there is no legal or regulatory framework for blockchain applications, which also reveals that smart contracts are not yet legally binding. Furthermore, data privacy also becomes an impediment to blockchain adoption as all distributed ledgers need to adhere to each jurisdiction’s data privacy laws, which can be tricky for publicly-viewable ledgers.
- The cost of storage on Blockchain Database– Though the blockchain technology adoption promises many long-term benefits regarding productivity, efficiency and costs, it is extremely expensive to initially put it in place. The software that is required to run blockchain technology in enterprises must be explicitly developed for the specific firm and is therefore costly to purchase, acquire or develop in-house.
- Consolidating with Legacy Systems- An organization must either revamp their legacy system altogether or seek a way to integrate their existing system with the blockchain solution to make a move to a blockchain-based system.
- Energy Consumption- The Bitcoin network as well as the Ethereum network, both consume the proof-of-work mechanism to validate transactions made on the blockchains. The entire mechanism requires the computation of complex mathematical problems to verify and process transactions and to secure the network. These calculations require a significant amount of energy to power the computers solving the problems. In addition to the energy used to run the computers, a sizable amount of energy is also needed to cool down the computers.
Benefits of the Blockchain Technology in Consumer Lending
Blockchain lends itself to some of the common use cases including regulatory compliance, settlements, cross-border payments, custody, asset tracking, trade finance and post-transaction settlements within the financial sector. Many financial organizations have already initiated projects based on blockchain technology for payments and securities trading and spending on blockchain technology to transform existing cumbersome and inefficient processes such as cross-border payments, provenance, and post-transaction settlements. These are crucial pain points for many financial services organizations, and thus blockchain offers an attractive value proposition,
Amongst this, consumer lending is an important genre where blockchain acts as a key value driver—but how blockchain technology can help the Consumer Lending industry?
A few benefits to consider:
1. Identity Authentication
Blockchain networks build a robust system of member identification. This can considerably boost the processing times for stakeholder communication. For example, a single borrower can create a digital ID that contains all their information in one place. This includes information about their mortgage history, outstanding balances, credit score, and income, etc. When applying for a home mortgage from different banks, this unique ID can be used at multiple lenders and even for cross-checking with credit agencies and employment verification.
2. Transparency for Lenders
In a digital world, where lending and borrowing happens on the blockchain, time and resource-taxing business rules and processes are taken care of by algorithms. Reconciliation no longer exists, because the data is authentic and the need for trust is virtually wiped out. The security is no longer in question, as key facts and changes are transparent and this creates a lot of transparency for the lenders. They can find out the transaction history for an applicant from the initial submission to actual fulfillment of the loan.
3. Improved Servicing Efficiency of Loans
Loan servicing businesses face data management challenges during loan collection and transfer processes. Blockchain technology could help make the process more efficient and streamlined. It is even possible to eliminate the entire servicing industry and replace it with a blockchain. In case of changes in the regulatory rules, blockchain can be adjusted to the new legislation more easily compared to the existing model where each firm is open to a different interpretation of the new government policy.
4. A single version of the truth
Moving to a single and shared view of the truth will allow each party in the value chain to remove duplicative processes and save money and time. This approach could also be used in the front-end processes to bring in third-party identity providers and other information providers, who can help to counter fraud and AML risks while making the process easier for customers and sales associates.
5. Empowered users and increased security
Disintermediation takes off both the risk and expense of counterparties and enables more empowerment for users to control their information. Blockchain also enhances the sharing of common data by resolving data inconsistency problems that occur during servicing transfers. Exchanging data through blockchain makes the system more cooperative and adds security.
6. Streamlined Operations and Enhanced CX
Faster and smooth processing for swift banking experience and reduced costs, with lesser complexity in business operations, can be empowered with Blockchains while also creating avenues for evolving business models. Financial entities can reap many more rewards when the clutter and complications of multiple ledgers are taken off, and lower transaction costs can be tapped successfully. Endless days for clearing and final settlement are now a thing of the past as transaction times become real-time and available all the time.
LOOKING FORWARD
The stakes of blockchain are undeniably too enormous for financial services firms to seek a wait-and-see approach. The Blockchain technologies drastically streamline operations and cut down costs while opening new revenue opportunities.
Most of the consumer lending industry remains in a planning phase except a few early adopters that are moving into blockchain production. There is only so much that a lab can prove. Organizations should not only run trials internally but prioritize on conducting them through engagements with outside organizations.
Blockchain undoubtedly lays the groundwork for greater visibility into lending environments, and analytics tools give financial services firms the capabilities they require to turn that transparency into actionable decision-making.
Many consumer lending companies have started embracing the AI-powered digital lending platform and gearing up to ride on the blockchain technology to accelerate their digital transformation journey.
The blockchain is a big boon for lenders and consumers. Isn’t it time when you let the blockchain do most of the heavy lifting?
