Blockchain technology: a path to transparent financial systems?

Over the last few decades, technology and finance have converged to provide better experiences and streamline financial operations. The marriage between the two has given birth to financial technology (Fintech) and a myriad of disruptive innovations such as blockchain technology. Just like any other technology-centric sector, the Fintech sector is constantly evolving. As a result, we see a number of innovations emerge every year. These innovations play an important role in restructuring and improving the various aspects of our traditional financial systems.

While these technologies work magic, it is safe to say that millions of people have pinned their hopes on blockchain technology to transform the world of finance in the future. We expect blockchain to play an important role in driving the growth of Fintech in the future. This means that the use of blockchain technology in the Fintech space will witness a steady increase in the coming years.

Today we will shed light on blockchain’s role in the current Fintech space and what awaits us in the coming years.

But before we get there, let’s get to know the terms Fintech and blockchain.

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What is Fintech?

Fintech, short for financial technology, is a field that encompasses the use of technology to improve, automate or disrupt financial services and processes. Fintech companies often develop and offer digital or electronic financial products or services that aim to improve efficiency, ease of use and accessibility in the financial services industry.

Some examples of fintech include mobile banking apps, peer-to-peer payment platforms and online investment platforms. Fintech has the potential to revolutionize traditional financial systems and has attracted significant investment and attention in recent years.

What is blockchain technology?

Blockchain technology is a distributed database or ledger that allows multiple parties to record and verify transactions on a network without the need for a central authority. Each transaction is recorded on a block that is linked to the previous block, forming a chain of blocks. This structure makes it difficult for transactions to be changed or tampered with, as any changes must be made to all subsequent blocks in the chain.

Blockchain technology has the potential to disrupt a wide range of industries by enabling secure and transparent record-keeping and the transfer of value. It is most often associated with cryptocurrencies, but it has many other potential uses as well.

Blockchain technology in fintech

We have waved goodbye to 2022 and entered 2023 with a lot of excitement when it comes to Fintech. Over the past decade, a number of Fintech companies have plunged into the mainstream financial sector with great success. Their success can be attributed to smart use of modern technology combined with a strong focus on implementing customer-centric ideas to address the pitfalls of the current financial system.

Today, it is safe to predict that Decentralized Finance (Defi) is the next big thing in the financial sector’s evolutionary path. Many notable financial companies have begun investing large sums in blockchain and financial R&D. This trend indicates that blockchain and technology companies are likely to join forces to create a secure, user-centric and seamless financial sector soon. It is worth noting that the confluence of blockchain and fintech is detrimental to the success of Defi. Although blockchain and Fintech are not the same, there are many overlapping applications in the current financial sector.

Are blockchain and fintech the same?

Many people, especially those who do not work in the financial area, do not know that Fintech and blockchain are not synonymous with each other. Fintech and blockchain are not the same.

Fintech primarily means leveraging technology to improve, disrupt and automate existing financial processes and services. On the other hand, blockchain is a type of technology that paves the way for more secure and transparent record keeping and value transfer.

Blockchain is actually one of the many technologies that come under the Fintech umbrella. Also, a company can use blockchain technology as part of its Fintech offerings, but not all Fintech companies can use blockchain.

How blockchain technology in fintech is a potential game-changer?

There is no doubt that blockchain has gained immense popularity in recent years. That said, the technology is still in its infancy compared to some of the other technologies used in the current economic space. Blockchain technology, with great potential, has emerged as the vanguard of a revolution in today’s financial world.

Here are some ways blockchain in fintech could be a potential game changer.

• Transparent financial transactions

Financial transactions on the block can create peer-to-peer networks, lightning-fast transactions and total transparency without the need for intermediaries. The use of blockchain in finance goes beyond transparency. Users can regain complete control over their assets, opening the door to a fully democratic financial system using blockchain technology.

• Bankless financial management

Will banks become obsolete soon? Are we moving towards a bankless financial management ecosystem? Read on to find answers to these questions. Currently, blockchain has enabled thousands of individuals from around the world to manage their finances without a bank. How?

People who have invested in cryptocurrencies, including Ethereum, Bitcoin and more, have done so via a digital blockchain wallet, without involving banks in the process. In this scenario, a private key ensures the security of wallet holders. Furthermore, each user also has a unique public address that enables them to send and receive payments.

Unlike traditional currency, in this case all wallet holders with unique private keys are sole owners of their assets. This is only possible thanks to blockchain technology. Here, the banks do not take responsibility for securing your assets. There are already several projects working on creating bankless financial systems using blockchain technology. It is still early days for blockchain-based financial systems, and it is difficult to predict exactly how they will develop.

• Blockchain in fintech paves the way for the KYC revolution

Today, identity and trust verification is primarily carried out by inexperienced and incumbent intermediaries. Blockchain eliminates this problem. Blockchain technology in Fintech has the potential to transform the way users place their trust in the financial system.

The entire know-your-customer or KYC process will see a noticeable change with blockchain. Customer information will be stored cryptographically after a single digital entry, eliminating the need for multiple verifications and entries. These game-changing innovations have yet to be seen across wholesale banking, conventional payment networks, lending markets, and more equity crowdfunding. However, this may change soon as the use of blockchain in Fintech continues to grow.

• Transparent financing models

Do you know how a crowdfunding process works? Let’s go through the basics. Usually it involves raising a large number of funds by asking several people for small amounts of money. In most cases, this is done online.

Blockchain, with IEO and ICRO, can play an important role in accelerating this process and making it more transparent. Today, ICOs have overtaken interest in venture capital fundraising models worldwide. By carefully analyzing this trend, we can confidently say that crowdfunding is moving towards a more transparent future.

• Streamlined and transparent borderless payment with blockchain technology

Blockchain technology has the potential to make borderless payments easier. As mentioned earlier, one of the main advantages of using blockchain for payments is that it allows for fast and secure peer-to-peer transactions without the need for intermediaries. This means that payments can be made directly from one person to another, regardless of their location or the currency they use.

In addition, many blockchain-based payment systems use cryptocurrencies, which are digital assets that are not tied to any particular country or currency. This makes it easy to send and receive payments across borders, as the funds can be converted into local cash as needed. There are already several blockchain-based payment systems in use today, and their popularity is growing.

For example, Bitcoin, the first and most famous cryptocurrency, has been used to make millions of borderless payments. Other cryptocurrencies, such as Ethereum and Litecoin, are also used for international payments. In a nutshell, the use of blockchain-based payment systems is likely to continue to grow, making it easier for people to make borderless payments.

Final note

Now it is very clear that blockchain will play an important role in shaping the financial sector in the future. It is only a matter of time before we see blockchain make a solid impression in both the banking and non-banking financial services sectors.

Financial institutions of all sizes should ask for help on how to incorporate and use this cutting-edge technology in their business model to define the goals of greater efficiency, cost reduction and customer satisfaction throughout the value chain.

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Feature image source: Photo of Shubham Dhage on Unsplash

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