The Use of Blockchain Technology in Financial Services
As statistics show, 60% of international money transfers are made through blockchain (using cryptocurrencies, money transfer services powered by blockchain and so on). Moreover, researches on blockchain potential in banking and finance sector show that annual savings potential for banks using blockchain technology is estimated to be $8-12 billion. Such a popularity of blockchain in finance and its wide use is caused simply by its ability to resolve most major problems of economic industry that we face today.
The financial sector is, for sure, one of the most important elements of our everyday lives — we use money to buy some goods, we exchange them, we send them to our relatives, we pay for different services, etc. In other words — our life would be impossible without banking institutions or financial services. Despite its highest importance, this industry has many issues to deal with and many problems to fix.
International Money Transfers: Current Challenges and Blockchain Solution
It is obvious that the financial sector needs to be totally reformed to move with the times. Earlier there was no need for frequent and quick international money transfers with low fees. Nowadays, with the development of technologies, people have the possibility to communicate with each other and, what is more important, to work with each other, even when they are located in different countries. The percentage of international working relations is very high and, consequently, there is a huge need in quick international transactions.
The current situation with international payments is complicated. Of course, there is a possibility to make a transfer of funds between different countries, but this process takes much time and requires a big amount of things to do in order to process the payment. Moreover, the fees for international transactions are quite high, and that put the recipients of international payments in a disadvantaged position — people are obliged to give away some percent of their fairly earned salary just to receive the international payment.
Trade Finance and Blockchain: How Does It Work?
Trade finance transactions are also a significant part of the modern world. Trade finance, in this case, means the financing of international trade flows — without these contracts and payments, global trade would be impossible. Of course, WTO has established a clear and fair procedure of international trade conduct, but just as any other sphere, it needs some fresh momentum. Problems in trade finance are similar to problems in the sphere of money transfer — the process is highly expensive, unwieldy, and slow. Trade contracts have to be concluded and/or amended in written form and signed by both parties. Moreover, here we face our previously mentioned problem: slow and costly international money transfers. The exporter can start the process of shipping goods only after he received the payment for the order. As a result, it can take weeks just to prepare the shipment — endless documentation, checks, and slow transactions speed are the reason for it.
Hopefully, blockchain can also resolve this issue and make international trade faster, cheaper and more transparent through smart contract technology, which allows mentioning all the terms, quality assurances and financial obligations between parties to a trade agreement in the smart contract code. Because such contract has a self-executing nature, every obligation of each party to an agreement will be conducted and all payments will be transferred quickly and cost-effectively. In the short term, blockchain technology improves finance trade and makes it more accessible, quick and transparent. Moreover, it eliminates trust issues between parties through smart contracts, which itself are the guarantee of proper execution of obligations under the trade agreement.
Fintech Companies and Blockchain: New Digital Standards
As the technological world quickly develops, banking services are moving to a digital world. Current technological progress allows us not to spend our time in endless queues to make a simple transaction, be it money transfer, opening a deposit account or loaning. 21st century brought us a new phenomenon named Fintech, which means computer programs and other technologies used to support or enable banking and financial services. In other words, it is an automation of all banking services. These days we can make almost any banking or financial operation online: banks are creating online platforms for their clients, many credit organizations can provide their customers with a credit even without their physical presence, different financial institutions are making mobile applications for managing your credit or debit card on the go, etc.
The possibilities of this sphere are enormous and we can see many new Fintech companies appear on the market almost every day. Even though Fintech automates and increases the speed and quality of transactions, it is not perfect and has a few problems to deal with. The rapid development of technologies can be both good and bad — it’s good that we can do almost everything online, but it’s bad that hackers and frauds receive more and more instruments for stealing money from cards or from online-banking accounts. These hacks can be prevented in different ways, for example, two-factor authentication, or complex password, but still, you’re under a big risk to be robbed.
Each year we can witness more than 300 incidents of data breaches and leakage of the credit card information. This number is really disturbing, and that is why Fintech companies started creating their projects and services on blockchain. Currently, this technology is considered the safest because of its specific structure: to process the transaction, it has to be proved by three intermediaries (computers connected to the network) in order to reach the recipient. When the transaction is sent by a sender, it goes to the blockchain in an encrypted form. When a transaction comes to an intermediary, the initial hash-code is decoded (in this case, the decoding means the approval of transaction) and the new hash is generated for the second approval. When the transaction comes to a recipient, it automatically decodes and the recipient receives his money. Such a system is impossible to hack because there is no software that could possibly decode the hash, which was changed four times during the transaction.
Blockchain is the most favorable environment for financial services: it can create a secured platform, where people can send money to one another, make purchases and pay for them, give loans and have a guaranteed on-time return ensured by smart contracts. For Fintech companies, blockchain is a gold mine — it provides total security of transactions, the impossibility of clients’ information leakage and self-executing contracts with mandatory fulfillment of financial obligations.
To sum up, we can say that the implementation of blockchain technology in the financial industry will substantially increase the quality and effectiveness of all financial services. Decentralization of the financial sector may sound strange because we are accustomed to controlling bodies, but if to speak the facts, we’ll see that actually blockchain resolves all the problems that financial industries have right now: slow transactions, big fees, and trust issues. All these difficulties are now in the past thanks to this groundbreaking technology.