Blockchain Applications in The Finance Industry: The Most Updated Facts
Experts are optimistic about the opportunities to apply blockchain in the finance industry.
It is not just the cryptocurrency bitcoin you have heard about recently. Blockchain has unlimited applications because of its properties of being secure, transparent, and immutable.
Thus, we publish this article to help you fully understand how blockchain is changing the finance world now and in the future!
Common Applications of Blockchain in The Finance Industry
For the time being, blockchain expands its presence in four categories: Money transfers, financial security, smart contracts’ automation, and the storage of customer data.
Money transfers are the process of transferring money from one party to another, usually made through an electronic payment system of credit unions, banks, or financial service institutions. Those using such a process need to pay transaction fees, which can be expensive if the money transfers are across the countries and in a very short time.
The advent of blockchain technology has rewritten the concept. Accordingly, companies adopt digital currencies like bitcoins as an alternative to money to enable remittance services. Such an application solves the issues of time and cost since blockchain is accessible to people worldwide, then the transactions are automatically executed by smart contracts in no time.
Some prominent examples of businesses applying blockchain in their financial services are Align Commerce (US), Coins ph (Philippines), CoinPip (Singapore), Volabit (Mexico), etc.
Financial transactions are always targets for hacking and fraud. In addition, they risk stolen information when transactions pass through payment processors or third-party intermediaries.
Many businesses now leverage blockchain to create a decentralized-trust system instead.
The technology use algorithms of cryptography to process and record transactions without interfering with third parties. As a result, it limits the possibilities of fraud and exploiting efforts. Transactions must also meet all conditions of smart contracts, or they will be rejected.
Smart Contracts’ Automation
Smart contracts are key to the blockchain.
They are smart enough to automate pre-determined conditions to execute contracts between parties. Besides improving the security of transactions, as explained above, smart contracts eliminate human resources and avoid delays in running financial contracts.
For example, a mortgage business used to run an outdated and laborious framework to approve loans. It involves third parties and employees reviewing different financial documents and sending them via email to facilitate the process. Their documents also need a signature to track and make progress. Meanwhile, smart contracts digitalize and largely automate the payment process upon collecting e-signatures.
Read more: What is a smart contract?
The Storage of Customer Data
Customer data is important to secure and proceed with financial transactions.
Businesses must carefully identify and verify their clients’ information to prevent money laundering and fraud. This costs money and takes significant time.
Applying blockchain is an alternative to storing customer data that various financial institutions can access and extend. Accordingly, whenever there is a new client, the business undergoes the know-your-customer process and adds the data to the chain. Other companies can use the data immediately rather than repeat the know-your-customer process.
Facts of Blockchain’s Financial Applications
There are several reports to predict the applications of blockchain in the finance industry and other sectors in the future. The results, again, prove the prominence of the technology.
- Reportlinker.com predicts that blockchain in banking and financial services will globally increase from $1.17 billion to $1.89 billion in 2021-2022. The compound annual growth rate (CAGR) can be 61.9%, considering the recoveries of businesses after the COVID-19 impacts.
- Reportlinker also expects the market to reach $12.39 billion at a rate of 60% in 2026.
- Meanwhile, Allied Market Research has a prediction regarding a larger market – the Bank, Finance Services, and Insurance (BFIS). The overall market can reach $22.46 billion at a CAGR of 73.8% in 2026.
- The report of Allied Market Research also indicated that smart contracts dominated the application of blockchain in the BFIS market in 2018, and the banking sector generated the highest revenue in the same year.
Why Apply Blockchain in The Finance Industry?
From all the above facts, blockchain applications in the finance industry are significantly beneficial. Blockchain is also helpful for your business as long as you understand the nature of the technology.
Specifically, blockchain in finance is a ledger of recorded and distributed financial transactions in multiple locations. The blockchain runs its pre-determined contracts upon a new transaction to validate and add the information to the block. The transaction, then, is copied to each node of the ledger with an accurate historical record.
Check later: How does blockchain work?
Benefits of blockchain result from key properties:
- Enhanced transparency
Since blockchain is a decentralized distribution, numerous copies exist through the ledger, meaning everyone accessing the network can view new transactions. Thus, businesses can share information with stakeholders when there is a change or update.
Moreover, every transaction has its timestamp so that stakeholders can check the history of transactions and be aware of suspicious frauds.
- Enhanced security
A blockchain offers a chronological and accurate history of transactions. Each party has a copy but can not alter, delete, or add information to verified transactions. Such an immutable characteristic prevents deliberate attempts to exploit and damage the data within a block.
However, we confirm that a blockchain is not completely hack-proof if hackers go to any lengths to guess the smart contracts. Fortunately, even when there is exploitation in a node, it will not affect other nodes within the blockchain. This helps minimize the time and cost of recovering the damages.
- Improved speed and efficiency
From the examples of blockchain applications, it is undoubted that blockchain gets rid of paperwork, communication, and the intervention of third parties. Hence, the technology streamlines the data faster and at a lower transaction cost.
Supposing you are involved in financial transactions, it is good to know blockchain applications in the finance industry and plan to use the technology for your business.
However, you should also know that implementing blockchain in your business requires knowledge and strategies. If you are hesitant about where to start, continue checking our article on blockchain implementation and contact our experts for further consultation.