The financial services sector is in the nascent stage of digital disruption. Though the traditional functions remain the same today as they used to be yesterday – for instance, saving, investing, financing, insurance against risks and exchange of money – yet the way in which these are being delivered is changing constantly. Modern technologies are delivering convenience, volume and speed at much higher levels and have made financial transactions easier, cheaper and more convenient.
This new demand for the use of blockchain in the financial services industry is underscored by rising levels of internet penetration, increasing literate, urban population, rapid adoption of technology and the lack of traditional banking solutions to properly serve consumers and micro, small and medium-sized enterprises (MSMEs)
Financial Services and Blockchain: A Convergence or Collision?
The potential benefits that fintech innovation through blockchain can bring is huge, but will require commitment and collaboration. Banks, industry leaders, fintech companies and regulators have to continue to collaborate to create an ecosystem to drive greater access to financial services in the economy. There is no doubt that digital transformation is an imperative for the financial services industry to remain competitive and achieve longevity in the market. The survival of financial institutions is connected with the adoption of innovation, and in embracing digital transformation, to radically improve efficiency and performance within the organization.
Digital transformation and new technology adoption have changed the way of doing business and channels that offer banking and financial products and services are more intuitive and trustworthy. These new ways may be very different from the past and have resulted in reshaping the existing models of businesses and the creation of new innovative ones. The key drivers for the emerging FinTech and digital currency innovation are to provide services that are secure, frictionless and almost free, in real time, anywhere. The efficiencies that these technologies alone offer are incentive enough for every traditional financial services provider to sit up and take notice.
However, what will drive the adoption of the overlapping technologies and the efficiencies and disruptive business opportunities? As per World Economic Forum (WEF), customer friction and large profit pools remain major factors. Customers, consumers, and users are becoming the new co-creators of value.
Thus, will the adoption of newer blockchain technologies in financial services industry be a natural convergence or a collision? What are the implications, opportunities, and challenges for FinTech start-ups, entrepreneurs, investors, and established legacy players alike?
Offerings in Financial Services Industry
There has been a huge storm of financial innovation from the customers’ perspective, enabled by rising customer expectations for more personalized and digital experiences, enhanced access to venture capital funding and reduction in the barriers to entry as well as astonishing developments in technology. Some of the offerings blockchain can provide in the financial services sector include:
1. Payments Industry
Payments from a historical perspective have purely been utility products; basically, transactional and tactical in nature and volume-driven. Digital payments can be defined as noncash transactions processed through digital channels and include digital commerce, mobile payments and peer-to peer (P2P) money transfers.
The payments industry today is in a state of continuous change, underlying several cutting-edge economic, technological, and demographic factors across the length and breadth of the value chain. The industry is witnessing rapid development in innovations across the value chain, thus making it more splintered.
New entrants called nonbanking payment systems in the form of fintech companies and established big tech giants have caused major disruptions and have nullified the traditional intermediation in major parts of banking and the payments landscape. The first and most effective symbol of the fintech revolution can be perceived within the payments services industry.
Cloud computing, open source software, big data and analytics, developers on demand, social media, open app stores for distribution, and blockchain can, or will, enable rapid technology adoption and deployment in the financial services industry especially in the fintech sector and in particular, the payments industry. These technologies could leapfrog antiquated payments mechanisms and systems in several areas such as cross border payments.
2. Crowdfunding and P2P Lending
P2P lending (or peer to peer lending), widely referred as lending of money to businesses/individuals by matching borrowers directly with lenders, has picked up attention very recently and has been growing immensely ever since.
It’s interesting to note that the potentially high returns, simplified application process and quick lending decisions arising from blockchain have resulted in a lot of innovation in financial services industry, but these are linked with high risks because of limited guarantee of the amount repaid. The opportunities that P2P lending offers may have a huge impact on the financial services industry. This use case of blockchain can also assist in providing loans/advances to entrepreneurs and small and medium-sized enterprises (SMEs) who cannot get loans from regulated financial institutions such as banks. The P2P marketplace lending has witnessed a growth of a whopping 51% average per year.
Crowdfunding, on the other hand, is a term that refers to a practice of generating funds or capital investments for a reasonable cause, project, or enterprise by getting funds from many individuals or organizations. Crowdfunding is adopted when an innovative and new idea that has the potential to generate revenue and create jobs demands financial support to become a reality. It mostly takes place on crowdfunding platforms (CFPs), that is, internet-based platforms that connect fundraisers to funders with the objective of funding a particular campaign from typically many individuals.
The emergence of neo-banks is considered as a paradigm shift in the financial services industry. Referred as digital only banks or app only start-up banks and challenger banks, it is not merely the distribution of data through the internet but aims to reach customers through digital omni-channels and provide the services to them and through the channel of their choice. Neo-banks do not have a separate digital team for digital-based projects; rather they have digital integration in their core. Neo-banks offer banking services in a much simpler way and with a cost edge as compared to traditional financial services products.
These banks are attracting customers in real time with their cheaper and better offerings to the tech savvy generation of this digital era. Neo banks are, indeed, a very promising avenue for reaching more and more customers through innovative business models and digital channels.
4. Asset under Management
It is no doubt that a high level of disruption by financial innovation has already started to reshape the nature of payment and lending practices; and a new wave of disruption is making its way into asset management.
Blockchain can be leveraged to build a client profile in a much more efficient way. Storing client profile data on blockchain allows for data points – profile data, preferences, net worth, account information, social media profiles etc. to be shared as needed, with the information being stored safely with a permissioned access as required. Also, a decentralized ledger technology allows the distribution of trusted value transfer and execution, allowing the disintermediation of authorities and resulting in the network becomes the intermediary. In this scenario, master ledgers held within clearing houses and banks, for instance, might be replaced by distributed ledgers with no intermediaries.
InsurTech is yet another one of the segments of financial innovation addressing existing insurance opportunities, potentials, and challenges. Deploying smart contracts powered by blockchain, customers and insurers can manage claims in a more transparent, responsive, and irrefutable manner.
Start-ups such as Everledger, Blockstream and Tierion are already working in this direction, while several other companies such as insPeer, Peercover, Friendsurance and Lemonade are effectively using social media to improve their business and connect with customers.
InsurTechs, with the help of IoT, are equipped to offer relevant packages based on real use and behavior rather than averaged statistics. For instance, Domotoz is an IoT solution for the connected home that offers a platform for home insurers to rate risk and manage claims.
Blockchain technologies will impact nearly every form and manner of financial services. It also forces us to rethink the role of traditional institutions- banks and intermediaries. The potential of blockchain is barreling down the entrenched and regulated infrastructure of modern finance. Adaptation to new technologies like blockchain is the only option that remains for firms to be successful.