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Fintech and blockchain are emerging as promising avenues for innovation and transformation in the financial sector. In the last few years, financial institutions and people have significantly changed the way they practice their finance. This is largely credited to the rise of new digital technologies like AI, big data analytics, and the emergence of the global fintech ecosystem. The fintech industry in particular has transformed the payments sector from the bottom, breaking down barriers and reducing or eliminating the deep-rooted advantages the biggest financial firms used to hold. This can be seen right from the proliferation of digital-only banks to the proliferation of mobile wallets and more.
The future of finance with blockchain and fintech does look promising indeed. Fintech and blockchain are breaking and removing financial hurdles, and new developments and advances will only help users to more effectively, securely, and efficiently make payments globally. This article looks at how advances in fintech will transform the financial sector and how blockchain will change the future of the fintech industry.
Cryptocurrency as a digital currency has a rich history of having the potential to disrupt the future of finance. However, to fully adopt digital currency like Bitcoin, financial institutions need to carefully consider the technology underlying cryptocurrencies. The cryptocurrency industry has breached the $200 billion mark according to Yahoo Finance. The use of cryptocurrencies will also reduce transaction costs since cryptocurrency transactions remove the "middleman," thereby effectively reducing or eliminating paperwork, brokerage fees, commissions, and other charges.
Digital-only banks have seen widespread adoption among what used to be considered a traditional customer base of large banks. One major advantage of digital-only banks is that they usually offer better interest rates than traditional banks. Millennials have also taken to digital-only banks intending to seek new experiences. Digital banks will continue to provide real-time data analysis and increased agility, further differentiating it from conventional banking channels. Also, with digital-only banks, customers need not go to a brick and mortar store and can instead perform all their transactions online, further helping them to save time. Banking facilities are also provided through digital channels such as mobiles, tablets, and other devices with the only requirement being access to the internet.
COVID-19 has caused the entire world to sit up and think of new ways to perform tasks without having contact with other people. With social distancing becoming the norm, fintech firms are further making a push toward generating innovations to respond to the pandemic. Contactless payments are one of the innovative solutions thrown up by the fintech industry. Payments can now be made using just a phone (think Google Pay and other vendors) and an internet connection without one having to swipe cards or make contact with sellers. The spread of COVID-19 will only further propel innovations in the future of fintech to create more efficient and effective means to make contactless payments.
There is no doubt that interbank and direct money transfers across the globe have improved over the last decade. However, there remain large gaps caused by the need for multiple clearinghouses and the lack of global standards. Blockchain has the potential to help overcome barriers caused by disjointed and fee-intensive finance infrastructures by providing competitive marketplaces that offer the lowest exchange rates. It is predicted that by implementing AI & blockchain technology in the financial sector, the current average remittance rates of 5-20% can be cut down to 2-3%. However, an international regulatory body in the financial service sector would need to be set up to set fair laws for the use of this technology.
Insurers working on claims management are rightly apprehensive about fraud detection and risk prevention. Some reports indicate that between 5 and 10% of all insurance claims in the US are fraudulent, and this amounts to a loss of over $40 billion a year. Blockchain has the potential to significantly reduce these numbers by helping to quickly and accurately evaluate claims. Insurance companies are already using blockchain to improve transparency and access minute-by-minute geographical information through a distributed network, thereby allowing them to reduce administrative costs and the time taken to settle claims.
Big names in the insurance industry like AXA and Generali are leading the way in investing in blockchain technology to ensure accurate and secure claims processing.
Blockchain is, at its core, a series of immutable blocks that can serve as a foundation for all sorts of fintech apps. Proficient developers can leverage blockchain technology to transform regular financial processes into transparent and fully democratic ones, with secure, quick transactions. Blockchain has the potential to significantly cut down the time taken to send money to locations across the globe. What generally takes days with traditional ways of sending money can be cut down to a matter of minutes with blockchain. Fintech blockchain applications can also come with real-time data updating features that ensure transparent and error-free transacting.
Current accounting processes are based on a double-entry system, which requires the trust of outsiders and independent public auditors to verify a firm's financial information. Every audit is an expensive exercise and takes up the time of the firm's accountants for long periods. Blockchain can be used as a source of trust since it provides a digital fingerprint that is immutably time-stamped and tamper-proof. These features of blockchain can help to do away with the need for external auditors. The transparency that blockchain brings will make the blockchain network both the auditor and the watchdog that ensures financial integrity.
Hackers can presently leverage centralized repositories and single points of failure to shut down entire networks, lure users into cyber traps, steal identities, tamper with data, and carry out other malicious attacks. Since blockchain is based on a decentralized framework, it can increase security by helping to block identity theft, prevent data tampering, and stop denial of service attacks. The financial system will also become more robust and secure when it decentralizes and distributes data over the entire blockchain network. Cryptographically securing every transaction will also help with creating a more secure system.
One study by McKinsey from 2016 states that remittance firms make around $40 billion per year by charging customers fees for orchestrating transactions. Unfortunately, this remains the case with financial regulators still making a fortune just by allowing us to send and receive our own money. Blockchain trends suggest that blockchain applications can significantly decrease the cost of sending and receiving money. Blockchain technology enables direct, peer-to-peer transactions that eliminate the need for any intermediaries, which means that you will not have to pay any unnecessary costs and fees.
It should be noted that will there are significant potential blockchain benefits, having blockchain at the center of our economy will still require regulatory oversight. Even as many in the fintech industry are pushing for a single network available to anyone with an internet connection, there would come a need for effective and efficient auditing of transactions. Fortunately, creating apps on top of blockchain would enable developers to build state-of-the-art auditing protocols. A blockchain stores linear blocks and adds new entries for every new action, but never alters old block irrespective of how large the system becomes. This can provide auditors with the data they need to conduct a secure and quick audit of all transactions.
Over the last few years, we have witnessed immense technological advancements in the areas of fintech and blockchain. The implications are resounding. New developments in blockchain technology promise a slew of benefits such as increased efficiency based on data immutability and transparency, improved customer experience led by better pricing, and improved turnaround times. Investments in blockchain are on the rise with all the major banks investing in the technology. The future of the fintech industry looks ripe for innovation in the near future.
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