The year 2020 has officially come to an end, and this year was tough for all of us. Meanwhile, Blockchain arose as one of the most anticipat...
I have been writing and researching about Blockchain tech for some time now. I am not an expert and still hovering at the learning stage around Blockchain technology; I try to understand the real-life challenges that demand the application of Blockchain.
Although Blockchain was initially associated with cryptocurrency, after a short period, this technology was seen disrupting some of the biggest players of the economy. From Healthcare to the financial sector, this ground-breaking technology has metamorphosed the working of all the major industries.
Here’s why various banks are moving towards Blockchain tech:
Source: Business Insider
Sophie and Jack
Talking about the real-life challenges, a close friend of mine ‘Sophie’ recently encountered an unfortunate event of a fire accident at her place which resulted in huge losses. To renovate her home, she wanted to claim the property-casualty insurance, but the process was taking a long time. She and her kids had to face a lot of difficulties due to the delay in the insurance claim settlement process.
A few years back Jack loaned some money from a local bank. Jack was very serious and punctual towards paying his monthly installments, but as he was about to finish his installments and had repaid more than half of the loan, the bank started accusing him of loan theft.
Not only Sophie and Jack, but many people face issues due to deregulation of the financial sector. Apart from the two mentioned above, there are various other inefficiencies and fraudulent activities involved in this sector.
The main question that comes here is what could we do to overcome these inefficiencies? To find how Sophie and Jack can solve their issues, you need to continue reading this blog.
What are the current bottlenecks in the Financial sector?
Let me start with educating you all on the most prominent challenges in the Financial sector. This would help you all in building a clear image around Blockchain’s application in the financial sector.
Trillions of dollars of cash is being sloshed unknowingly around the world due to an unregulated system of slow and delayed payments. For instance, if you are putting up in San Francisco and want to transfer some of your paychecks to your family in London, the additional charges that you are going to endure are a $25 flat fee for wire transfer, and an additional transfer fee up to 7 percent. Your bank and the receiving bank charge you a cut, and you have to pay an exchange rate fee. Even after paying extra charges, your payment may take up to a week to process.
According to a report, 45 percent of financial intermediaries like stock exchanges and money transfer services are prone to financial crimes and frauds routinely. Most of the banking systems across the world are built on a decentralized database, which makes them vulnerable to cyber-attacks. Imagine losing all of your banking details and your life-time savings, isn’t this scary?
So, apart from Sophie’s and Jack’s problems, there are way too many issues in the financial sector that can be addressed with more innovative and efficient technologies such as Blockchain, Artificial Intelligence, and Machine Learning.
Now you might wonder how Blockchain, cryptocurrency, bitcoin, or other commonly associated terms with Blockchain are going to tackle the challenges in such a major sector – The financial sector. Here’s where most of us go wrong. Blockchain is much more than cryptocurrency and we can explain that to you how. Just read the following blog to know about Blockchain’s use-cases and benefits in the financial sector:
How is Blockchain helping?
According to a report by Jupiter Research, blockchain deployments will enable banks to realize savings on cross-border settlement transactions of up to $27 billion by the end of 2030, reducing costs by more than 11 percent. Blockchain creates a more open, inclusive, and secure enterprise network that enables more efficient processes and reduced costs in banking and finance. But how does that solve Sophie’s and Jack’s issues? Let’s find that out.
The digitization of the financial instruments, comprising digital assets and smart contracts further enhances the power of Blockchain in finance by forging unprecedented levels of connectivity and programmability between various assets and services. Insurance companies operate in a highly competitive atmosphere in which both retailers, as well as consumers, expect the best value for their money.
Smart contracts for the insurance sector
Smart contracts enable its users to transparently transfer valuable assets without many interferences from middlemen. Smart contracts are much similar to physical contracts that stipulate rules between two parties. But the main advantage of smart contracts, in this case, is that we can easily track insurance claims and hold both parties accountable.
Insurance policies can be written as coded, decentralized smart contracts in which an individual agrees to pay the insurance amount in return for the organization’s promise to cover the person’s associated costs for the asset, like in this case, for the house’s costs. Smart contracts create immutable data based on the insurance policy owner’s records that can immediately accept and deny any claims made to the organization.
Real-life use case: Lemonade, a New York-based organization that combines AI with Distributed ledger technology that offers insurance to renters and homeowners starting at $5 a month. Blockchain here comes into action through smart contracts. The fixed fee taken from each monthly payment is allocated for future claims. When a claim is made, the smart contracts would immediately attempt to verify the loss so that the claim could be processed quickly.
After learning about this use-case of Blockchain, Sophie can easily switch from traditional methods of insurance to a better blockchain-based system to ensure that next time she doesn’t have to face any harassment as she used to with regular insurance companies.
How is Blockchain helping ease the loan process?
Smart contracts would also help solve issues related to mortgages and loans. Blockchain-based smart contracts ensure that real-time contracts validate and record transactions so that people like Jack could have full access to installments slips and other important data. One such application of Blockchain technology is ‘Figure’.
Real-life use-case: Figure combines Artificial Intelligence and Blockchain to help the members to access lines and credit loans. Since this is a platform working on Blockchain technology, decentralization and transparency are at their core. This organization also facilitates the loan process by reducing the time taken for loan approval. If any false or fraudulent claims are made by a bank or company, as mentioned in this case, the smart contract would be immediately dissolved, and installments would be transferred back to the individual.
So, these were a few real-life Blockchain-based solutions for Sophie’s and Jack’s problems. While Blockchain might not be the most common solution for the financial sector just yet, its advent has improved various sectors in the financial industry. Here are a few areas Blockchain is being used in the financial sector:
Apart from these, there are various other applications of Blockchain in financial institutions. We would be writing about other applications of Blockchain in fintech in the next part. So, meet you there!