The outlook for blockchain technology in the lending ecosystem
By Micky P
By 2027, at least 10 percent of GDP will be blockchain-related, according to the World Economic Forum.
Blockchain may have been born as a means of supporting cryptocurrency, but technology has spread its applications far and wide today. The statistics above reflect that the technology has the potential to positively affect money transfers, financial exchanges, insurance, real estate, NFTs, logistics and supply chain, IoT and lending. When we talk about the latter, blockchain technology transforms the lending ecosystem by allowing the lender and borrower to establish a direct agreement through decentralized financing. Aside from smart contracts, blockchain allows financial transactions to be transparent and highly secure, making it the next big thing when it comes to the global financial system.
What are smart contracts?
Smart contracts are nothing more than self-performing electrical codes that come with transaction rules such as loan amount, interest rate and the expiration date of the contract. When the conditions set for them are met, these rules come out by themselves, thus eliminating the requirement for a third party. Everyone is qualified to secure a loan in exchange for cryptocurrencies on a decentralized financial platform, and this makes the process very inclusive other than already proving to be more efficient, offering higher execution speed and lower transaction costs.
Blockchain’s huge potential for cutting labor and other costs results in some of the largest financial institutions spending huge sums on exploring the best way to implement the technology.
Traditional vs. modern lending
The traditional loan scenario involves an intermediary, ie if a borrower wants money, he will approach a bank and receive a loan in exchange for jewelry or real estate, etc. On the other hand, a bank will earn interest. But over time, lending has undergone a change. With technological disruption across all sectors, even the entire lending ecosystem has been given a facelift.
Blockchain has made financial management bankless with digital wallets, loans and payments. Supported by blockchain, digital wallets are completely secure as they come integrated with private keys while their unique public address allows them to make transactions efficiently. While in a traditional scenario, banks are responsible for securing money, under blockchain technology, wallet holders with private keys can fully own, manage and control their assets.
Prevention of risks and fraud
Over the past 24 months, 46% of the organizations surveyed reported having experienced fraud, corruption or other economic crime, according to PWC’s Global Economic Crime and Fraud Survey 2022.
Financial organizations usually store their data in a central database, which makes themselves extremely vulnerable to cyber attacks. But blockchain is a decentralized ledger, and allows real-time fraud analysis and prevention. This is because each block comes with a timestamp, which secures blocks with distinct transactions while having a link to a previous block. This makes the system foolproof against cybercrime. Thus, the lending industry needs full implementation of blockchain technology to make it secure, efficient and transparent.
Know your customer (KYC)
KYC is another very important aspect of the lending industry, which must cross-check and authenticate the customer documents before starting the lending process. Financial institutions can easily do this by storing a customer’s KYC documents on the blockchain. This allows other institutions to use the same KYC without having to go through the whole process again. And because the data on the blockchain is tamper-proof, the reliability is extremely high.
Time-saving, secure and cost-effective
People often wait a long time for financial institutions to approve loans and transactions. Apart from charging a large fee for the same, institutions have the ultimate authority to approve or reject transactions between a sender and a recipient. With blockchain technology in place, however, the role of intermediary is eliminated, making the approval time reduced to less than a day. Therefore, the technology is economical, secure and fast compared to banks. Blockchain also reduces reliance on physical documentation, which can often invite fraudulent activities, while smart contracts reduce service and administration costs.
As we move into the future, there is a strong need to innovate and upgrade the centralized banking ecosystem and pave the way for a futuristic, secure, reliable, transparent and efficient way of taking and receiving credit. It is also time to upgrade the rules that are in line with current technology and trends and that have the potential to bring about a change in the current credit industry.
The author is co-founder and chief technology officer, The Fair Trust
