Why do FinTech companies need to adopt blockchain technology?

As the Market Study Report informs, the worldwide blockchain market is anticipated to amount to $60.7 billion in 2024, growing from $708 million in 2017. Since blockchain provides various benefits such as data confidentiality, safe trading, secure information exchange, protection from fraud, network transparency, and supply chain traceability, businesses are increasingly adopting it into their workflow. 

The FinTech sector was one of the pioneers to start employing this innovative technology. At Arateg blockchain development company, we have already helped many financial services firms resolve their challenges. So, we’ve decided to show how you can take advantage of using it. Let’s get started!

How blockchain is transforming the FinTech industry

According to MarketWatch, blockchain in the FinTech market is predicted to reach $6.7 billion by 2023. Representing an inconvertible digital database that maintains a continuously increasing number of transactions, blockchain uses cryptographic algorithms to ensure the security of sensitive information. 

Through the complete network decentralization, it removes the need for intermediaries and regulatory bodies, allowing peer-to-peer transfers between the two parties. Due to hashing and the inability to delete or alter data, blockchain enables protection against fraud. 

Blockchain technology in FinTech:

  • Analysts at PWC revealed that nearly 77% of the financial services firms are going to integrate blockchain solutions by the end of this year.
  • Today the number of blockchain-based startups is quickly increasing. MRFR forecasts that over 65% of startups will incorporate blockchain into their operations in 2020.

As long as the technology meets the majority of FinTech purposes—providing the security of transactions, the privacy of data, assistance in the regulation compliance, etc.—a growing number of financial services companies are investing in blockchain projects.

Top 7 blockchain use cases in FinTech

Since there are so many advantages, many FinTech companies and startups are going to integrate blockchain technology into their workflow. Their key objectives are to:

  • Minimize counterparty risks
  • Reduce the number of errors 
  • Improve transparency
  • Increase security
  • Enhance capital optimization
  • Ensure the compliance with regulations

Now, let’s have a look at how financial companies leverage the power of blockchain-based FinTech software and how you can take advantage.

1) Carrying out financial transactions

Blockchain solutions are actively used by FinTech startups and large businesses for completing global and domestic transactions. As this technology is totally internet-based, people can make money transfers from any place in the world. These peer-to-peer operations are carried out with the help of public and private keys that can be accessed only by the two involved parties.

What’s more, blockchain significantly—sometimes by up to several times—reduces commission fees for cross-border transactions. This is especially important for developing countries where it can offer users access to a range of financial services. 

2) Providing security of data, records, payments, and assets

FinTech firms are widely using blockchain cutting-edge technology to ensure the highest security of their assets. It is noteworthy that via blockchain you can transmit not only payments but also royalty fees, documents, digital rights, records, and other things. 

In the decentralized ledger, each block in the chain contains a hash linking it with the previous one, which makes any substitutions impossible. Once something is uploaded on the database, it can’t be changed or deleted. Therefore, nobody is able to forge data, which is one of the main advantages of blockchain. 

3) Enabling digital identity verification

According to the DataVisor Fraud Index Report 2018, the number of fraudulent accounts increased by 50% since the end of 2017. This is one of the primary reasons why a blockchain-powered digital identity verification system is one of the most popular FinTech software solutions.

For example, blockchain can allow customers to:

  • Manage personal identity information
  • Login into the system and manage personal finance
  • Make investments
  • Sign in without passwords
  • Share data with other network participants via secure channels
  • Digitally sign various documents 

As the blockchain ledger is transparent, any participant is able to read information kept in it, make own records, send and track transactions. However, if your financial services company operates with large amounts of sensitive data and must provide the highest security level, it has to establish control over the network. 

In this case, you should implement features like identity verification, role-based access permissions, and user authentication in the system. Permissioned blockchains were invented to meet these business needs. 

They differ from other types, for instance, Ethereum and Bitcoin, by imposing some limitations: only certain identified users can view data, process and monitor transactions. 

However, it doesn’t mean that they are totally private: permissioned blockchains may let any individual sign up and contribute to the network once his or her identity and role are identified. This is especially useful when there are many parties involved, say, the company’s employees, the leaderboard, the client, and insurers. 

4) Using Ethereum self-executing smart contracts 

Proposed by Vitalik Buterin and released in 2015, Ethereum is an open-source distributed computing platform based on blockchain. Ethereum runs smart contracts and has its own native token—“Ether” (ETH)—that represents digital money. It allows developers to build decentralized applications (DApps) using many programming languages that involve Solidity, LLL, and Serpent.

Smart contracts are self-executing programs that have an agreement between several parties written into the code. Providing network decentralization and removing intermediaries (e.g., notaries), they automatically monitor the contract completion. 

FinTech is among the main sectors to take advantage of employing this Ethereum technology. Сard payments, currency exchange, same-day merchant settlements, international and domestic money transfers are facilitated due to smart contracts. 

There are many FinTech projects that achieved success thanks to them. For instance, Everex, an Ethereum-based platform and electronic wallet, was created to optimize various financial operations. They involve digital asset management, cross-border transactions, withdrawal of funds, etc. On September 1, 2017, Everex raised $10 million in the crowdfunding round.

5) Using blockchain for stock and cryptocurrency trading

In stock and cryptocurrency trading, this innovative technology can allow businesses and individuals to significantly facilitate financial operations. You can make, for example, a blockchain-enabled FinTech service for issuing, buying, and selling various securities. As you don’t have to connect third-parties, their speed will be improved. What’s more, blockchain contributes to increased security.

Тake a look at how Arateg team built a cryptocurrency exchange platform for trading cryptocurrencies and fiat money. This blockchain-based product provides data visualization in real-time, analysis of numerous financial metrics, as well as lets users replenish e-wallets and withdraw funds. 

6) Enabling a trusted blockchain-based scoring system

Financial services institutions can use blockchain solutions for deploying an innovative credit scoring system to reduce costs and ensure data accuracy. In many countries, especially in the United States, it’s difficult to obtain credit without a long successful credit history and high score. In addition, some records may be lost or updated with a delay. Blockchain technology helps organizations address these challenges. 

Considering practical examples, Colendi introduced a blockchain-powered credit scoring and microcredit platform. Through the decentralized engine and used protocol, the solution analyzes distributed data—financial information, merchant transactions, shopping data, telco billings, etc.—and generates the score. Final results are put into the Colendi financial passport.

7) Ensuring regulatory compliance

As long as the number of cyber crimes and fraudulent activities is increasing, government, security, and financial regulations are constantly evolving to cope with them. Providing compliance with the help of advanced technologies like blockchain, FinTech companies are able to prevent fraud attacks.

Once the data appears on the ledger, it can’t be modified or removed. In addition, each action—uploaded or sent information, verified transactions, etc.—made on the network is tracked with the ability to view an activity history. 

This enables auditors to check the authenticity of records or documents, look through the original versions, and ensure there is no counterfeit. For instance, Elliptic helps financial organizations and crypto businesses from all over the world to protect from malicious activities associated with cryptocurrencies. It also assists in ensuring compliance with the AML (anti-money laundering) regulations. 

On November 29, 2019, Elliptic announced the launch of the first XRP (currency of the Ripple payment network) transaction monitoring system that allows companies to prevent cybercrime, establish digital trust, and provide the highest security level. 

Blockchain perspectives in FinTech 

Blockchain-based solutions are anticipated to play an increasingly important role in the FinTech industry. Companies will be investing in blockchain startups and initiatives to ensure security, comply with regulations, and protect against fraud.  

This technology is expected to be actively used for operational risk management (ORM) involving AML, cybercrime, and geopolitical issues. Numerous FinTech firms are adopting this technology in their mobile applications to increase customer service, enable digital payments, funds withdrawal, and other services via smartphones.

If you are thinking about building a blockchain service but doubt, read our article “Does My Business Actually Need to Adopt Blockchain Technology?” that contains a checklist to define whether you should integrate it or not.

In case if you have questions about the topic or want to request a consultation, feel free to contact our team of software experts. Having been delivering FinTech software services since 2014, we’ll be glad to help you solve business and technical challenges.

Andrew Volchek: Andrew Volchek is a Co-founder, CEO at Arateg Custom Software Development Company, focused on helping SMEs and startups work smarter, grow and increase productivity with the help of modern technologies. Contact Andrew via email to discuss how to develop your IT project or solve a business challenge.
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