Blockchain is the latest technology to create an impact on the Fintech landscape and has already brought disruption to the financial industry. But why is it important to understand the concept of Blockchain and the impact it may have on the finance sector?
Despite historically having been one of the most immune sectors to technological disruption, banking is now more focused around the introduction of technology to restablish trust with their clients, following events such as the global financial crisis.
Blockchain has become critical for banks to provide faster settlement to clients through efficient banking systems and processes. Why?
• Blockchain is a distributed ledger system that enables transactions to be verified and approved by all participants in the exchange before it becomes part of the chain. As this computer network is decentralised there is no one central computer system that can be hacked and corrupted making the system much more secure.
• One of fintech’s main advantages, apart from its ability to be far more agile then its billion dollar counterparts, is its ability to tackle highly regulated areas where banks fear to tread due to the possibility of billion dollar fines. In the future, fintech companies and banks will be able to offer services with much less friction. Hence, processes such as equity settlements to cross country payments will be made easier being facilitated by new technology such as blockchain. The big challenge will be how regulators respond to this ever changing environment do.
The banking industry is already focused on regulatory requirements which are currently estimated to cost banks $70 billion with the prediction to rise to $120 billion in the next three to five years.
What does Blockchain mean for the future of banking?
• Economic theory predicts that a low-cost competitor enjoys cost advantage only when high-cost competitors are still involved in the market. Once a number of banks have adopted blockchain, the market competition will pressure all banks to pass on the initial profit made back to individuals.
• Blockchain technology can be utilised towards much more than just digital currencies such as Bitcoin or developing new financial technologies. This smart contract can be used for other areas, such as documents provenance, ownership rights, digital or physical assets or to stop fraud. In the diamond industry for instance, the digital ledger for diamond identification and transaction verification has enabled to bring more transparency in a once very opaque diamond market.
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