A shift towards blockchain technology has begun in the financial industry. Major companies are seeing it as a way to modernize their operations. And to provide a new approach to the way people interact with their services. But this revolution didn’t just happen overnight. Let’s take a look at how and why blockchain is transforming the financial landscape.
The image above shows the blockchain developments that major financial institutions have undertaken over the past year. You can find a comprehensive list of financial companies currently pursuing blockchain solutions here.
Evolution of FinTech
To appreciate the impact blockchain can have on financial services, we first need to understand the evolution of financial technology. The term financial technology refers to the solutions that businesses use to deliver smartphone apps, websites and other services. Though you may have heard it called by another name. A shortened form – FinTech. It has gained popularity over the past decade as a trendy way to describe modern finance companies. However, the concept of FinTech has been around for over a century spanning three eras.
The first era of FinTech (FinTech 1.0) lasted from 1866 to 1967. It began when the first transatlantic cable was laid between New York and London. This provided the necessary infrastructure (or tech) needed for the globalization of financial services. Although the financial world was strongly connected during this period, the technology remained mostly analog.
The era of FinTech 2.0 began with the development of digital technologies for communication and transactions. It was marked by the introduction of the first ATM by Barclays bank in 1967. This era spanned over 40 years and saw the rise of digital stock exchanges, SWIFT transactions and online banking.
The current era of FinTech 3.0 started with the 2008 financial crisis, Which coincided with the introduction of smartphones. This era of FinTech bloomed thanks to an innovative method of delivering financial services to people through mobile applications, no matter where they were. It was also influenced by the growing distrust of traditional financial institutions. Soon, new financial start-ups emerged. And large tech companies began offering financial services through their platforms, like Google Wallet and Apple Pay.
The beginning of each FinTech era was marked by a technological breakthrough. The revolution of blockchain technology is set to boost the world into the next era!
FinTech 3.0 emerged as a response to the inherent issues of FinTech 2.0. But it still faces its own inefficiencies. So, what are the challenges here? And what solutions can blockchain technology provide so we can see the dawn of FinTech 4.0?
Challenge: Exceptionally high power is entrusted to central authorities. The ultimate control over your finances lies with the service provider. If it chooses to freeze or confiscate your assets, there isn’t much than can be done about it. The Cyprus banking crisis serves as an example of this.
Blockchain solution: Blockchains are inherently decentralized and immutable. Meaning the data stored on the blockchain is visible to everyone and cannot be tampered with or changed by anyone.
Challenge: It is difficult for financial institutions to keep up with regulations and policies. Companies offering financial services are subject to time-consuming audits and require continuous monitoring and supervision to ensure regulatory compliance.
Blockchain solution: Blockchain can generate a full overview of all assets and transactions and constitutes a single source of truth. It makes the auditing process more manageable and cheaper.
Challenge: Long transaction periods. With increased globalization, the demand for cross-border and far-distance payments is growing. There is also the issue of transfers between variously regulated institutions and governments. This means transactions can take multiple days or even weeks to be processed.
Blockchain solution: Cryptocurrency payments on the blockchain are far less time-consuming. Even the slowest blockchains need no more than one hour to process a transaction to anywhere in the world.
Challenge: Lengthy and tedious client onboarding procedures and threat of identity theft. Financial institutions must verify the identity of each new user. It causes delays and allows potential identity thieves to slip through the cracks.
Blockchain solution: Users can store and manage their personal data on the blockchain. This will allow them to provide authenticated information at the very start of the onboarding process.
Challenge: Procedures involving multiple intermediaries. Many people are involved in updating and maintaining internal and external ledgers.
Blockchain solution: The use of an automated blockchain-based digital ledger will keep track of all operations with no human input needed. It will also provide an undisputable account available to everyone at any time.
These solutions will lay the foundation for efficiency, transparency and security previously unattainable by the financial services sector. But it will take time before they can be fully adopted. Financial institutions will have to undergo a profound transformation before everything blockchain has to offer can be implemented.
Blockchain is beginning to change the scope of financial services. It is evolving and mainstream users become more familiar with it. Over time, we may see a progressive shift, pushing us into a new era of blockchain-based financial technology.