Blockchain technology offers several benefits when compared to traditional banking, such as accessibility, transparency, ease of use, reduced costs and speed. These obvious advantages have grabbed the attention of financial powerhouses and FinTech companies believe they can take their ongoing popularity and success a step beyond with this unique technology. The appeal of Blockchain technology has seen increased interest in 2020, as the world seeks speedy and secure solutions in times of financial uncertainty; but is Blockchain the right solution today?
FinTech as an industry is expected to impact the financial sector through three main aspects: generating new customers, encouraging banks to make more profit and providing tech improvements that merge both together.
Millennials are eager and ready
A generation that is very familiar with peer-to-peer services, Millennials are accustomed to crowdsourcing information, taking Ubers and generally using their peers and connections to get results in real-time and make decisions. Similarly, this generation of customers is ready to embrace FinTech products & services without the hassle and loss of time of middlemen and brick-and-mortar financial companies.
FinTech might be a growing and powerful global concept, but eventually it all comes down to its digital nature that would not exist without a robust Internet infrastructure and significant advancements in technology. Tech like bandwidth, security, mobile platforms and mobile app development have surely contributed and empowered FinTech services and digital banking in general, enabling it to go mainstream and rise in popularity; a popularity that is amplified by a global population that wants to manage its finances in the safety and comfort of their homes. Perhaps a key player in all these advancements is cyber security and banks’ inefficiency to fully tackle that issue; an issue that FinTech is actively addressing, which inevitably led to industry-wide adoption and furthermore attracting VCs to empower these FinTech solution providers.
The future is yet unknown, but currently there are three advantages that Blockchain can provide over traditional banking:
Conventional financial transactions go through third parties like gateways, stock exchange or clearing houses, which could reach up to ten entities being involved in transactions. This time-consuming process is greatly reduced when using Blockchain since everything is decentralized and operations can be done in mere seconds as opposed to three days, in the example of stock trading. Along the same lines, the FinTech forex trading experience through real-time online platforms stands as a viable, promising alternative for the banking industry.
Transparency and Accessibility
The use of mobile encryptions allows users to access their transactions safely, anywhere and at any time, and authorized parties can access these transactions records too in Blockchain’s shared ledger. This delivers greater transparency and ease of access, as opposed to a centralized system that takes time to provide customers with requests, if at all.
In terms of security, FinTech platforms still have a way to go, but advancements are happening almost every day and currently transactions are verified and validated using sophisticated software, removing the need for third parties. Blockchain similarly lets users know about their entire transactional records, yet another advantage over conventional banking.
Reduced transaction costs
One of the most popular and desirable aspects of Blockchain is reducing costs, for obvious reasons. It removes third-party fees and accelerates processes, greatly benefitting multinational business transactions. Blockchain creates a ledger providers network that allows companies to conduct transactions directly with one another across geographical borders, and forecasts are indicating that transaction costs will only be a few cents going forward.
FinTech entities need to address these challenges in order to allow Blockchain to become widely adopted and mainstream.
Banks have faced and are still facing cybersecurity issues. Blockchain on the other hand only allows authorized users to access public ledgers and transaction histories, but banks are still reluctant to allow financial data to wander outside their firewalls, being centralized by nature. Where validation and verification are concerned, Blockchain uses multiple parties called miners to verify and validate daily transactions and financial records. These key figures make it very difficult for hackers or similar cyber criminals to access and manipulate these ledgers.
Enter FinTech as the mediator, where the sector needs to present decisive case studies in order to make Blockchain desirable for banks and FIs. It should also be mentioned that these measures also have a disadvantage: since transactions are irreversible, manual data entry mistakes can prove disastrous, such as adding an extra digit here or there.
The word ‘traditional’ entails that change will be met with some degree of resistance, and this is what is expected from an age-old industry such as finance. FinTech companies need to be aware of and tackle the resistance from FIs and their counterparts, keeping in mind that banks are centralized by definition which could mean that a shared transactional platform might nurture spying practices between banks and their competitors.
Although people - the customers - are enthusiastic about the decentralization of banking and also some banks have expressed interest in using Blockchain technology in some of their operations, FinTech still has a long battle in terms of using Blockchain as a widely accepted mainstream approach, and for now they need to prepare for an inevitable digital future of banking coupled with a certain degree of resistance from conventional FIs.
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