Blockchain Opportunities, Challenges and Application in the FinTech Industry
Jan, 30 2019 | blockchain

At this moment in the technology world, there is no doubt about blockchain being a technical discovery that has creatively impacted virtually all useful and well-meaning sectors of the human world that support comfortable living. From health application to industrial use, pharmaceutical inclination, management functions and so on, there is an endless list of areas and industries where the technology has proven very worthwhile and useful to man with huge burden of proofs existing already. Much can be said about a lot of articles proclaiming how to implement blockchain in FinTech and other huge industries too.

Obviously, there is an unending discuss about its increasing adoption across the various fields and areas which appear not so late to the party of ease and comfort presented by the mouthwatering technology which is revamping lives and creating the many new narratives in our current world.

Blockchain and FinTech: Understanding the FinTech Ecosystem

You may have heard about blockchain performing wonders in many industries but the FinTech industry seem fundamental to the technology. Blockchain and Fintech seem an inseparable Siamese twin since its first call. Basically, the ecosystem is a fluid environment where surprising winner and losers of the financial world are created. The FinTech industry according to Jeff Koyen, a blockchain investor, is a great and interesting space to watch. This is because the technology is considered as one with a lot of potentials to bring the best out of the financial world in terms of efficiency and innovation.

The FinTech industry is growing at a pace of approximately 23 percent annually, favoring startup and entrepreneurs in the process. Each participants in the ecosystem have huge roles to play and they have to hold their grips so as not to lose their stance. Participants include;

  • Financial Service Companies
  • FinTech Startups
  • Government, all seeking more ways and approaches to implementing blockchain in FinTech.

The financial institutions are both traditional and incumbent, always looking for development strategies and approaches to leverage on their best outcomes by adding new technological discoveries to their existing legacies and achievement to stay on top of their game and remain relevant in time. They are perhaps the one that ask most questions about how to implement blockchain in FinTech given their approach to development and sustenance of relevance in the industry. This is why banks and other financial institutions are investing heavily on innovations. They are however skeptical as they are always scared of possible threats those innovations may have on their huge clients and existing systems.

In contrast to their roles in relation to blockchain adoption and application in the FinTech world, FinTech startups are technology entrepreneurs, looking for the slightest opportunities to disrupt existing institutions by scaling up their businesses while facing higher costs, increased regulations and larger infrastructures. Opportunities are massive for these individuals now as the value for global investment in them has increased massively between 2013 and 2018 significantly in the US from three billion USD to eight billion USD. They have consequently been considered as important driver of the economy especially in a capital driven atmosphere.

On the last arm, the government is a participant in the ecosystem, usually trying to balance activities and the use case of blockchain in FinTech world in a way to encourage innovations without inhibiting evolution through carefully selected and proposed policies and programs. They engage all relevant stakeholders to ensure a future that benefit all is shaped in the ecosystem.

Since the most significant challenge in the FinTech ecosystem is trust, blockchain has been able to revolutionize the industry to bridge that gap, hence financial services industry is moving with a fast pace from exploration phase of the technology to its application phase. Everyone in the industry are thus interested in learning more about the technology so as to harness its benefits and potential to the maximum length.

Participants Roles and significance
Financial Services Companies
  • Traditional financial institutions
  • Plays game of relevance by leveraging on technological developments
  • Invest heavily on innovations
  • Takes care and analyzes innovation’s possible threats so as not to lose clients and relevance
FinTech Startups
  • Individuals, groups and/or corporations
  • Hunt for and exploit opportunities
  • Compete in their own way with existing and traditional financial institutions
  • Collaborates with existing traditional institutions to leverage on technology opportunities for relevance and development
  • Participant are interested in learning and harnessing potential benefits of technology to improve service and business conduct
Government
  • Regulatory figure
  • Balances ecosystem activities to encourage innovation without inhibiting evolutions
  • Manages ecosystem with proposed policies and programs

Summary of the roles and significance of the participants of the FinTech industry

 

Blockchain Application Challenges in the FinTech Industry

If you ask many about blockchain and Fintech, possibilities are that they would claim that the FinTech industry has enjoyed more attention when it comes to blockchain technology adoption over others since much has already been written about its application and prospect in the industry. Its powers and disruption is a popular topic of discuss even though a significant population of people still struggle to understand how it’s most prominent features (distributed ledger technology) work. However, like every emerging technology passes through the hype stage, blockchain technology in similar vein has taken some time to get it right or integrate itself into existing systems to shift the curve to broad adoption. But with more banks and FinTech companies posed to join its list of adopters, there are promising future and prospects to transform transactions and other functional processes execution in the financial sector. Although the real deal, it hasn’t yet become the mainstream, but it has significant roles to play in becoming one so as to take the FinTech industry to the next level.

All the praises garnered and promising prospects dashed to blockchain technology however is not to mean that there are no confusions about the nature of the technology and how it works differently when compared to conventional shared databases as well as the differences that inform the set of its suitable use cases. The fact is that the current form of the technology is perhaps too difficult to use. Users still have dozens of steps to go through before understanding the technology, even to acquire and use cryptocurrencies (which appears the simplest of its uses in the financial sector). Users also struggle to understand how public and private keys work, while probably only public chains guarantees the specific properties that present blockchain as unique and different from standard databases.

While the immutability feature cum resistance to collusion owing to its consensus scale appear by far the two major factors that lure many financial firms to the adoption of the technology, its public chain have presented it with quite multiple drawbacks especially in the areas of privacy and salability. The lack of user manuals and structured standardized courses to teach its use is perhaps a huge barrier to transformation and adoption of the technology in the FinTech industry too. It seems so easy to misunderstand the technical abilities of the invention because of the lack of general awareness about what it does, thus creating a huge problem on its adoption. Many FinTech industries surprisingly still neither know what blockchain is, nor what it does, not to say how it works or its advantage over conventional technology systems.

Further, if evidences and challenges against adoption of the technology should be summarized, it perhaps comes down to terminology confusion and unrealistic expectations. There seem to be no profound knowledge of the technology and its abilities. This is perhaps traceable to the fact that blockchain technology arose from digital currency (Bitcoin) itself.

Overcoming Challenges of Blockchain Adoption in the Fintech Industry

Having realized the major threat to adoption of blockchain technology and the major concern about how to implement blockchain in the FinTech Industry to be that the technology is still nascent, probably still largely unregulated and lacking standardization, the best approach is to determine how to overcome such vulnerabilities to grow its adoption. One sure thing about the technology with its increasing burden of proof of importance across industries is that, trust is sure to grow and this will definitely make crucial changes to its adoption in the next few years.

To overcome its adoption challenges in the FinTech industry, a standardized clarification needed to be made to decipher and demystify the significant difference between the underlying technology (blockchain) and digital currency (bitcoin) involved. Also, because blockchain could mean different things to different people and industries, such thin line of differences and utility should be clearly separated in their use cases to avoid contradictions and unsubstantiated hypes as we probably have it at the moment. This is in a bid to curb overblown and unrealistic expectations between blockchain and FinTech.

More importantly, when blockchain are being considered for application to new industries, businesses and investments, such should be allowed to drive the introduction and not the other way round. This means that the technology should be fostered at meeting a need and/or solving a problem before its being applied. This way, there would be a standard to measure our expectations in course of the application.

 

Blockchain use case in Fintech Industry

 

The valuable applications of Blockchain go far beyond the operation of cryptocurrencies like the popular Bitcoin, Ripple or Ethereum. We tell you about the benefits that block chains can bring to the financial industry. The economic and financial sector was the first in which the block chain technology reflected its numerous advantages, with Bitcoin cryptocurrency being the most notable and exemplary application to date. And is that the security, speed and decentralization that this technology offers far exceeds any way of transferring money today, so the revolution that has achieved this digital currency in the economy and banking is not just a fad, it is basically the future of money today.

We heard many positive things in recent times about Blockchain, also known as a distributed accounting book. This technology is about a distributed database that registers blocks of information and interlaces them through hash pointers to facilitate the recovery of information and verify that they have not been modified. Among its features, it is a distributed and consensual technology, open and secure, thanks to cryptographic verification. On the other hand, there are several types: public, private, hybrid and databases.

 

The use of the Blockchain is valuable to restore confidence in the data, ensure the traceability of food chains, make signatures and contracts, improve privacy and security of the health system, improve legal management, implement high-value solutions in the chains of logistics supply and regulated industries, such as energy, pharmaceutical products and the cold chain or automate fiscal tasks, among many other applications beyond Bitcoin.

 

Today we want to focus on the financial field: how Blockchain can contribute to optimize numerous aspects of business or banking through alternatives such as smart contracts, stock trading or identity management.

 

Blockchain Applications for Finance

 

The Blockchain will be the main tool in the finance sector after 2020, according to experts, data storage and data transmission technology is already becoming the mainstream in financial applications and, according to Bitcoin Foundation founder Jon Matonis, will be used “on a large scale”.

 

Accelerate and Simplify Payments

Since the transfer of value has always been a slow and expensive process, especially in the case of cross-border payments, the Blockchain can reduce and accelerate it significantly. Moreover, the agreements can be virtually instantaneous, lasting minutes or seconds with respect to some settlements that can currently be delayed a week. In this way, banking transactions will be more agile and effective.

 

Intelligent Contracts

This technology may allow us to make a testament of our digital heritage or to settle the smart contracts or smart contracts, defined as “contracts that have the ability to be fulfilled automatically once the parties have agreed to the terms”. Of course, they imply the voluntary consent of all the parties, the object of the contract (good or service), and a just, true and lawful cause. Smart contracts, in essence, are computer programs. They are not written in natural language, but in virtual code programmed to carry out this task.

 

Online Identity Management

Thanks to the Blockchain, users can register in the chain of blocks and use their personal data for all kinds of services. As they stand out from Retina there are already public blockchain as uPort with Ethereum or Blockstack and hybrid block or federated solutions such as Evernym by the Sovrin Foundation. Without going any further, the MyData study carried out by the Government of Finland analyzes how to generate a model of management and processing of personal information focused on social needs.

 

Loyalty and Reward Programs

The financial benefits of the Blockchain also go through the transparency and traceability of transactions, a feature that will allow banks and insurers to implement a loyalty and rewards program adapted to 24-hour performance management.

 

Better Capital Optimization

As this technology eliminates the need for a trusted intermediary and enables transactions between equals, it could render intermediaries who charge commissions, such as custodian banks or liquidators, useless. In this way, it significantly reduces operational costs for banks, ensures greater transparency among financial institutions and improves monitoring by central banks, as well as regulatory reports. In addition, since all the data that is recorded in a chain of blocks and can be tracked in real time, there is always a very detailed audit trail, radically reducing errors.

 

Conclusion

The time is far gone beyond how to implement blockchain in FinTech industry, the more focus is presently on how many more industries have joined the ship of adoption to better their operations and take them to the next developmental level. The technology has presented itself as the solution to the most worrisome challenge in the FinTech world, trust, providing a transparent alternatives to transaction processes among other rubies. Summarily, with the growing blockchain use cases in FinTech and the whooping testimonies of importance trailing application, blockchain and FinTech are perhaps the next big duo to witness the finance sector.

References

https://www.fintechtalents.com/the-blockchain-opportunity-and-the-challenges-for-adoption/

https://www.henrylab.net/pubs/ijwgs_blockchain_survey.pdf

https://www.romexsoft.com/blog/blockchain-technology-in-fintech/

https://www.techracers.com/blogs/blockchain-technology-in-fintech-industry/