Out of all the industries that could leverage blockchain to join the 21st century with faster transactions, transparency and smoother processes, the financial industry has more to gain than most. One reason for this is that slow transactions, secrecy and bureaucratic processes used to be an intrinsic aspect of old school finance sectors, but all of that is changing thanks to a new generation of financial technology firms. By adding blockchain to the mix, the FinTech companies have evolved even further.
What Is FinTech Blockchain?
2019 was arguably ‘the year of FinTech’. That is, a hybrid between technology and financial services. Several FinTech companies have thrived since the early 2000’s, but the last few years have seen massive success with companies applying modern technology and flexible, customer-centric ideas to help solve issues in the current conservative finance system. One example of this is the Richard Branson backed TransferWise, which recently became Europe’s most valuable FinTech company.
DeFi (decentralized finance) is the next step in that evolution, by leveraging digital decentralized smart contracts into the mix. Most finance giants have started investing heavily into blockchain R&D for their businesses, so along with the new tech firms disrupting traditional banking services, a new future has arrived. This reinforces the idea that blockchain and finance companies are not necessarily at odds, but can instead complement each other greatly, thus furthering their success.
DeFi is basically the merging of FinTech with blockchain. Although the two are not the same, there is a lot of crossover between their use cases in the finance sector. This marriage of 21st century technologies using trustless, transparent protocols which skip ‘the middleman’, have brought much needed competition to the banking and finance sectors, by lowering transaction fees, becoming more user-friendly, and providing more digital options for their clients. The future is bright for DeFi, in 2020.
The Difference Between FinTech & Blockchain
Blockchain is a decentralized way of digitally recording transactions, which can’t be manipulated or controlled by governments, banks, or companies. Once blockchain is unlocked to its full potential, it will mean the freedom of finance, among other benefits. The situation is slightly more complex, however, because of the power that incumbent finance firms and banks have in the political spectrum, swaying public opinion and governmental policy, to disallow newer technology to dethrone them.
Having said that, the big finance players have seen ‘the writing on the wall’, which shows that the potential for blockchain is so vast, and so difficult to prevent (or control), that many have begun their own blockchain projects, or partnerships. Arguably the most famous of these is Ripple, which now has partnerships with over 200 banks and financial organizations around the world, using their ‘RippleNet’ to process cross-border payments in real-time with end-to-end tracking and certainty.
FinTech is also changing the finance industry with 21st century tech, using deep learning AI for transactions and fraud detection, chatbots for advanced customer service, heightened security via biometrics, as well as intuitive smartphone apps to create omni-channel, customer-centric banking, aka, “NeoBanks”. However, many NeoBanks like N26 or Revolut do not use blockchain, or other decentralized processes, while still improving financial activities with the help of modern tech.
How Blockchain Helps FinTech
Blockchain helps FinTech with its distributed, decentralized, transparent and immutable digital ledger technology, providing a new type of freedom and security. There is no single authority controlling the information. Nobody can modify the data. Besides being safe, it provided real democracy and equality. This is a fantastic opportunity to provide banking services to billions of people around the world, without the need to go to typical banks or black markets for these type of services.
DeFi companies, aka FinTech with blockchain elements, create a global, open alternative to all the everyday financial instruments out there — from trading to savings and loans, or even insurance — making them accessible to anyone on the planet with internet and a smartphone. This is the reality today, negating the need for a middleman, making use of stablecoins (digital currencies pegged to fiat currencies or assets), lending money to strangers, plus more advanced investment strategies.
Blockchain & FinTech Team-up: Changing the World
Some people like to picture blockchain as a revolution against the ‘evil, greedy bank sector’, but in reality, it is more of a cooperation. Although many banks have indeed exploited their power to get away with quasi-illegal operations, most won’t disappear overnight. Instead, they will be embracing the innovations of blockchain and FinTech startups, to survive in the future. In fact, 82% of traditional financial organizations have plans to increase collaboration with FinTech companies in the next 3 – 5 years.
According to PwC, 88% of banks have been concerned since 2017 that they’ll lose revenue to innovators using blockchain. Further reports have found that investments in blockchain tech applications went up nearly 90% from 2018 to 2019 (to around 3 billion dollars), with billions more expected solely from FinTech in 2020. According to Fortunly, nearly 50% of people use digital channels exclusively for their financial needs, providing a huge opportunity for both FinTech and DeFi hybrid companies.
What Are the Major Use Cases of Blockchain in FinTech?
Among many benefits, blockchain greatly reduces transaction fees. For example, a $10,000 international transfer can cost around $200 with all the various fees and currency exchange losses added up, while using blockchain it’s less than $1. It also vastly lowers (or completely eliminates) delays in worldwide online payments, as well as making financial processes safer, immutable and more transparent overall.
Another peripheral benefit is its capability to improve democracy and openness in financial services, by making these services available to the “unbanked”. That is, those without access to the standard banking system of their own countries. Additionally, smart contracts eliminate the need for most paperwork, by automating the transfer of currencies after certain preconditions are completed. Long term, it can drastically lower carbon footprint as well, making it much better for the environment.
Radical Changes that Blockchain is Bringing to FinTech
The most important impact is that blockchain will make business and government operations faster, more secure, efficient and accurate. There are several ways in which FinTech companies can leverage this tech, including using virtual currencies, smart contracts, transparent, immutable digital ledgers to track transactions, etc.
Many non-bank companies have started providing financial services thanks to blockchain and new FinTech-inspired technologies, such as Google, Amazon, Apple and Facebook. They are looking ahead of the curve to provide their customers with a more streamlined and beneficial transactional experience. Skirting around restrictive banking sector regulations allows them to overcome entry barriers to the global financial markets, making them serious competitors to the traditional financial firms.
The Future of Blockchain in the FinTech Industry
One of the most considerable applications of blockchain and FinTech will be the displacement of bad customer experience in the finance sector, such as making payments much faster, cheaper and easier to track. Indeed, FinTechs offering what banks currently don’t will allow them to quickly grow a huge new customer base (including older generations switching over to the more streamlined experience, as well as a younger crowd that is more digitally native), plus customer higher retention.
According to fintechfutures.com, 77% of FinTech businesses plan to use blockchain by 2020. This way they will not only offer advanced financial services to their clients using 21st century tech, but will be able to provide cheaper, immutable, open and decentralized services and transactions to their customers, by leveraging blockchain.
Revenue from enterprise blockchain applications is also expected to reach $19.9 billion by 2025, providing a great opportunity for growth in blockchain FinTech jobs.
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