Blockchain: The Next Fintech Wave In Lending?

Since the inception of the terms and the underlying technology, blockchain has drawn much speculation. Although traditionalists have been cautious about the use of the digital currency, bitcoin; blockchain,...

Snehal Fulzele 24th November 2016

Since the inception of the terms and the underlying technology, blockchain has drawn much speculation. Although traditionalists have been cautious about the use of the digital currency, bitcoin; blockchain, the platform to power and regulate crypto currencies, is being looked at as the next milestone in fintech big bang and has garnered an optimistic reception from financial institutions and regulators.

Experts predict a disruptive change in the methods and procedures of the banking industry with an increased inclusion of blockchain in the existing system. It is projected to intensify the already prevailing competition for banks, from the fintechs, by simplifying entry of more technology driven non-financial players in the market.

On hindsight, if banks prudently leverage this technology, blockchain can offer a platform that ensures flexibility, transparency, and security via its digital ledger which records and distributes transactions in real time.

Per a report from the Santander, Oliver Wyman and Anthemis Group, it is estimated that this technology could cut banks’ infrastructure costs for cross-border payments, securities trading and regulatory compliance by $15bn-$20bn a year from 2022. Chris Skinner, Chief Executive Officer at The Finanser Ltd, hails blockchain to be the ‘uber’ of banking and the infomediation tool between those who have value and those who need it.

Amongst the multiple banking channels, lending can be an important genre where blockchain acts as a key value driver. The lending process, with significant risk and limited trust across the value chain, has an indispensable need for verification and evaluation at every step. The contract-intensive nature and extensive lifecycle of loans, renders the process more complicated. Moreover, once the loan is packaged into a security, the complexities and risks multiply and it is under constant scrutiny by third parties, holders of bank bonds, and industry analysts.

Blockchain as a technology, has the potential to address all these innate intricacies of the lending process. With the inherent concept of open ledger, decentralized platform, smart contracts and integrated central database, blockchain achieves transparency, cost effectiveness, regulatory compliance and risk analysis in the lending process.

To harness the advantages of the technology, Mizuho in Japan has already announced a partnership with Microsoft to explore the use of blockchain in syndicated loans.In the United States, J P Morgan has moved on from testing and decided to speed up its plan to leverage blockchain enabling quick and easy loan transfers.Leaders such as R3, the Hyperledger Project, Post Trade Distributed Ledger (PTDL) and Digital Asset Holding are already carrying out pilot tests for blockchain prototypes.

While it is reasonably clear that this technology can bring in constructive changes, one cannot overlook the probable risks and uncertainties related to it.

The technology is still in the testing phase and therefore, the knowledge and experience related to it are limited. Although banks have initiated projects based on the blockchain technology, they have steered clear of experimenting with it in their core business functions. The current projects on blockchain are majorly directed towards their peripheral or internal system and process.

Blockchain also disrupts the current working of the banking system and will require the banks to revamp and adapt to the new infrastructure. This process is going to be slow and arduous. Furthermore, for blockchain to be incorporated at a global level, it needs to establish its scalability and reliability, which at this stage is still unwarranted. The absence of regulations to monitor the market is an added apprehension, especially amidst the current uncertain regulatory environment and political changes.

It is too soon to predict the precise impact of blockchain on the current banking scenario, nevertheless it seems apparent that it is a technology to look out for. Given the strong wave of cloud based applications already changing the game in the market today, only time will tell if this technology is here to stay and can be leveraged constructively in the overall ecosystem.

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