The incredible advancements in technology have been solving numerous problems in today’s world. The finance industry has been facing many challenges from a very long time. Financial service providers are looking for a solution which can suit them best and meet all their needs. Blockchain can be helpful in streamlining banking and lending services, thereby reducing the counterparty risk, and decreasing issuance and settlement times. Blockchain technology is a decentralised, distributed, and public ledger that is used to record transactions across many computers within a network. This technology is transparent, secure and impossible to alter because of its design and properties.

According to a recent study, the global blockchain market size is expected to grow from USD 3.0 billion in 2020 to USD 39.7 billion by 2025, at an impressive Compound Annual Growth Rate (CAGR) of 67.3 percent during the period 2020-2025. Blockchain has huge potential to improve many aspects of Financial Services. “As Blockchain powered cryptocurrencies and NFTs, it has the power to bring a radical change in financial services too”, says Nischal Shetty, WazirX CEO.

Applications of Blockchain in Financial Services

Blockchain technology can be used primarily for the payments. It is a well-known fact that domestic payments take only a few minutes whereas cross-border payments usually takes several days to complete the transaction. The reason behind this is that banks needs to make sure that they comply with all the necessary regulations.

Transferring money across borders has traditionally been a slow and expensive process, as systems typically pass through multiple banks on the way to the final destination of payment. As well as, there are many developing countries which actually lack the IT infrastructure to process the faster transaction. Blockchain Technology has the potential to make the transfer process across borders faster in a more accurate and less expensive way.

Verification of Digital Identity

With the help of Blockchain technology, banks and other financial institutions can identify the individuals using specifically developed blockchain enabled IDs. Through this technology, banks and financial institutions can regain the trust of public by making them feel that their money is safe at these places and there are no chances of fraudulent activities. Also, the accurate and precise recording capabilities of blockchain can help in faster transactions.

Reporting about Credit

Everybody knows that credit reports have direct impact on financial lives of customers. A recent study found that blockchain based credit reporting is safer and secure than the server based reporting. Many times in the past it is seen that server based credit reporting got leaked due to some malicious cyber activities. Blockchain technology has the potential to stop all these fraud activities.

Provides Better Lending Platforms

Earlier in the lending process, people required intermediaries to create trust and make a transaction happen. But after the introduction of Blockchain technology, borrowers can directly deal with the lenders and discuss about the rate of interest, instalments, and duration of the transactions. Blockchain allows borrowers and lenders to negotiate terms on the smart contracts. In case, a borrower fails to abide the terms of contract, smart contracts can also add late payment fees to the actual amount.

Limitations related to Scalability

The cumulative processing power of the Blockchain directly depends on the computational power of the devices involved in it, as Blockchain is a distributed system. For example, on an average Visa can process 1,700 transactions per second whereas Blockchain can process only around 5 transactions per second which implies that there is a huge gap between these two. This gap is seen as a challenge by many banking and financial services related firms due to which at present they are hesitating to adopt this technology. This problem of scalability is becoming more visible with the increasing popularity of Blockchain.

Security Issues

The hash power of the Blockchain nodes decreases due to splitting. As a result, it becomes easier for the cyber criminals to penetrate any single shard of the blockchain and steal the important data stored in it. Data loss is considered the biggest loss in today’s technology dependent world and hence it creates a negative impact about Blockchain in the mind of people.

Policies and Regulations Limit

Since, there are no proper regulatory frameworks established regarding the use of Blockchain. So, it won’t be possible for banks and financial firms to use it at present. Government and financial firms are also confused about its regulations and policies as yet they have not reached to any final decision regarding its implementation.

The Way Forward

Although, Blockchain has been adopted by many industries across the world for making work easier and safer, still there is a need to work on some of its potholes before implementing it in banking and financial services firms. Also, it’s important for regulators and policy makers to look for a different approach towards this emerging technology because of its decentralized structure. No matter how many hurdles are there on the way, the Blockchain powered financial services future is inevitable.