Seeing crypto and blockchain being name-dropped all around, you may wonder - what are blockchain applications in fintech? To what actual practical implementation does blockchain owe its popularity and rapid growth in fintech and the overall finance industry?
The concept of blockchain has been popping up everywhere in fintech product development lately. Its uses extend beyond just buying and selling cryptocurrencies. Just like with embedded finance, fintech takes a trend or a notion and turns it on its head.
Let’s learn more about this still relatively young and full of promise technology and its use cases in the financial sector.
What is blockchain? Is blockchain fintech?
A blockchain is a digital public database or a ledger that is distributed across multiple locations and storage nodes of one or several computer networks, meant for electronic storing of information. Blockchain’s innovation is based on its decentralized nature, allowing the data to be structured and stored in encrypted blocks that later form a chain (hence the name), making it secure, untraceable, and irreversible.
Blockchain’s allure is the way it manages data distribution - no one has complete control over it, and the record of any transaction (distributed ledgers) cannot be altered or deleted. This, in turn, completely changes how data transactions are handled, adding a new level of transparency and reducing security risks. That’s why many industries picked up on it, including fintech.
In fintech, blockchain plays many roles, not only the one securing the transactions as one would assume based on blockchain’s primary purpose. One of the roles involves decentralized self-automated smart contracts that remove middlemen from buyer-seller agreements written into code. This blockchain fintech application is represented in the form of decentralized finance (or DeFi).
How does fintech use blockchain technology?
A few major attributes of this decentralized ledger made it highly suitable for all kinds of applications within the financial sector. It is transparent, meaning the transaction details are available to everyone, which solves the issues of trust and credibility. It removes third parties from deals and reduces fraud thanks to the use of peer-to-peer networks. Finally, it caused transactions to be reliable and unchangeable.
Now let’s delve deeper into blockchain uses in fintech. First and foremost, by creating a digital ledger, blockchain helps both banking and accounting institutions keep an accurate track of all transactions, improving the efficiency within these industries.
Also, smart contracts we mentioned earlier. Especially in escrow arrangements in trading, investing, and lending, blockchain-stored contracts are automatically executed if predetermined conditions are met.
Apart from banking, blockchain applications in fintech are also scattered across trade finance, aiding in data verification and faster settlement, as well as crypto lending, auditing, regulatory compliance, crowdfunding, and digital identity confirmation.
How banks are using blockchain
One of the most significant changes blockchain technology introduced to the banking industry is the transformation of payments, which is basically the foundation of financial services. Recurring transactions, particularly business-to-business and cross-border, have long suffered from a long completion.
Now, payments have become faster and less expensive, all because of the disposal of third-party authorization, reducing the remittance costs in the process, which are now ten times lower.
Such areas of banking as clearing and settlement have also benefited from blockchain integration. Their efficiency has skyrocketed, which can lead to banks saving almost 10 billion U.S. dollars. Another performance boost has come to share trading, thanks to removing unnecessary intermediaries from the deals.
And last but not least, identity verification in all online financial transactions. What’s more, blockchain also helps maintain a mandatory Know Your Customer (KYC) regulation without giving away the customer’s true identity.
Who uses blockchain? Examples of current blockchain fintech companies
Primarily, blockchain is being used by numerous crypto companies, particularly those centered around Bitcoin. For example, companies named BitPay, BTCJam, and BitPagos all deal with bitcoin-based services - P2P lending, payment processing, or loans for online payments. For crypto exchange, there’s Coinbase or Kraken.
But many go beyond just bitcoin. Here are some more examples of current blockchain fintech companies:
- Blockstream, a global blockchain-focused company with products like bitcoin miner hosting, a liquid network for digital asset issuance, etc.;
- Ethereum, a prominent blockchain platform with countless decentralized money applications;
- Chain, a blockchain-based technology company offering cloud infrastructure and cryptographic ledgers;
- Wirex, a personal banking tool consisting of a mobile app, instant payment service, and 2-way debit cards.
Are blockchains the future?
Blockchain applications in fintech and the rest of financial services have proven their willingness to adapt and innovate. This is why blockchain’s potential is only projected to expand in the future, weaving itself even more into gaming, art, and health industries, data management, supply chains, etc.
Regarding banking - will blockchain eliminate banks altogether? Not quite. But it will make them more effective and secure by increasing the speed of international money transfers, leaving a clear record trail, reducing human error, and removing middlemen from the equation.
Decentralized finance and blockchain will continue to spread across countless industries. We bet you may have already experienced some of its benefits in one or two fintech solutions you frequently use yourself - for instance, personal banking, instant payment tools, or perhaps even crypto exchange. So, if you haven’t integrated blockchain into your daily lives, now is the time to start.