FinTech and Bank: Blockchain can balance the scale for lending
Blockchain, the disruptive technology, which has become famous as the platform that powers crypto currencies such as bitcoin, offers the potential to disrupt banking and financial services. Various banks are working on harnessing the power of the blockchain technology for banking transactions.
Blockchain uses cryptography and a distributed messaging protocol to create a shared ledger between trading partners. The trading, either, a simple transfer of asset ownership or a complex transaction is recorded on the ledger in the form of a contract at that point in time. This data on the ledger creates a reliable footprint as it cannot be lost or corrupted by anyone. Blockchain thus has the potential to make trading processes more efficient, improve regulatory control, eliminate the intermediaries, reduce the cost of transactions, and eliminate errors and reconciliation. Above all, it has the capability to disrupt existing business models.
While the implications and applications could be wide ranging, this write-up looks at potential uses of blockchain technology in lending. If contracts or agreements between the parties are recorded on a blockchain, it could eliminate the chances of a fraud because once the transactions are done they would be visible to everyone and could not be manipulated later. The cost of recording these transactions by each party would also come down drastically as there would be only one central database accepted by everyone. Possible use cases of this shared ledger approach could range from anti money laundering and know your customer (KYC) compliance to security and asset transfers.
It has been reported that Honduras is already beginning to build a land title registry on blockchain in order to make it more secure and agile. Although this proof of concept project has not been completed, it is being closely watched in Ghana, Sierra Leone, Libya, South Africa and Cameroon. While a number of similar experiments in real estate registrations have been spoken about, none of them have yet taken off the blocks in real life application.
The FinTech companies have used technology to their advantage to power disruptive models in lending. Banks have been trying to adopt innovative ways to counter the threat posed by FinTech companies. Blockchain has the potential of simplifying some of the core tasks in banking and hence it might help the banks enhance their services in a big way. Banks feel that blockchain is one such technology that can give them the much needed boost in this transformation.
The transparency which blockchain brings could be a big enabler. For example, imagine a situation where it is possible for the bank to quickly, cheaply and irrevocably validate the ownership of an asset which is being used as a security for loan. Further, blockchain could make it simpler to ascertain if an asset has already been used as a security for a loan elsewhere. In addition to preventing fraud, blockchain would also help speed up verifications and loan approvals tremendously. A blockchain based possibility for loan settlement has been recently explored to eliminate third party players, speed up the process and reduce the costs involved in syndicated loans. Mizuho in Japan has announced a partnership with Microsoft to explore the use of blockchain in syndicated loans. In the United States, J P Morgan has moved on from testing and decided to speed up its plan of leveraging blockchain to cut down the time required for loan transfers.
The regulators have also shown willingness to get involved in exploring the potential in a number of places, including the UK, Europe and Hong Kong. After all, apart from the benefits for the bank and its customers, blockchain could also help reduce the complexity and cost for compliance; a long standing ask from the regulators. Think of the way this could impact audit trail investigations, risk assessment and speed up reforms. Although the regulatory involvement is still in the very early stages, the interest shown is an indication of their commitment to the technology and the potential it offers.
As with any technology, there is bound to be a gestation period before we see an actual, real-life, working application of blockchain in lending process transformation. However, what is different this time is the fact that a lot of sharp minds have already come together to make it actually work. One of the reasons could be that the banks are betting on blockchain as their saviour while they hunt for more ways to beat FinTech. For lending and consumers, it sure appears to be a very promising scenario.