The financial services industry contributes around 20% to the global gross domestic product (GDP). The global financial system deals with trillions of dollars a day and serves billions of individuals, but the financial industry has certain challenges as well. Cost of multiple stakeholders, delays, excessive paperwork, and data breach are few of them. According to a PWC report, 45% of the financial intermediaries like stock exchanges, money transfer services, and payment networks face economic crimes every year.
Blockchain could be the possible solution to reduce transaction cost, overcome inefficiencies, eliminate intermediaries, and reduce economic crimes in the global financial system. Smart Contracts can help build a transparent and trusted system across participants in the network.
Let’s understand ten different use-cases of the blockchain in financial services.
1. Cross-Border Payments
Since banks charge additional cost for every transfer, the process of transfer of goods or payments across borders becomes expensive and slow.
For example, if someone has to transfer money from the USA to Russia, the transfer process has to go through one or more financial institutions before it reaches the receiver. Blockchain allows individuals to send and receive money with minimum involvement from different entities. As of now, the costs of remittance are between 5-20%.
But a study done by Deloitte says, blockchain could cut down the costs to 2-3% of the total amount by providing secure and real-time transactions across borders.
2. Lending Platforms
Before blockchain came into existence, people required middlemen to create trust and make a transaction happen. With the help of immutable smart contracts, borrowers can directly deal with the lenders on the rate of interest, installments, and duration of the transaction. Borrowers and lenders can negotiate terms on the smart contracts. If borrowers are not able to abide by the terms of the smart contracts, then smart contracts add late payment fees to the actual amount to be paid to the lender.
The reputed banks like ING and Credit Suisse have successfully swapped high-quality liquid assets of EUR 25 million with a blockchain-based lending application. Blockchain adds trust to the system without the need for an intermediary making the entire process seamless.
3. Credit Score
Banks and the Financial institutes require an applicant’s credit score before proceeding with a loan application. One limitation of the current credit management system is the lack of mobility of the credit ratings. The current credit score of a person does not remain valid in a different country. Therefore, a universal credit score is needed.
A hacking incident of the credit agency “Equifax”, which compromised sensitive information of 143 million American consumers, also demonstrates the need for an innovative change to the system. Managing credit score using blockchain could bring transparency to the system. Blockchain allows lenders to access the immutable records of financial transactions to understand the credit worthiness of a person. Smart contracts ensure the personal information of an applicant is never compromised or revealed.
4. Invoice Management and Billing Solution
Companies are adopting the electronic invoicing, but they lack the standards required to execute invoice backed financing in a streamlined manner.
Companies can upload the invoices into the Ethereum “Smart-Contract” blockchain. Information like payment due date, amount to be paid, and the client details can be saved on blockchain. Once the individual pays the bill, the smart contract updates the invoice status as “paid” and notifies the companies that the client has paid the invoices.
Using blockchain, it is also possible to make decision if the client is safe to trade with.
5. Fund Investment
Currently, investing in funds is time-consuming and expensive. The existing process involves manual processes using multiple databases.
Storing the user’s legal, personal, and public information on a blockchain could reduce the possibility of errors and frauds, bring transparency, and make the access to data easier. With an immutable smart contract, the fund investment companies can retrieve the user’s information quickly. If a user denies sharing the information, the access would not be granted. The users can also keep a track who uses the information and for what purpose.
So, blockchain can make the fund investment process more transparent. Currently, investing in funds is time-consuming and expensive. The existing process involves manual processes using multiple databases.
6. Government Expenses
Governments around the world are adopting digital methods to modernize legal processes and build good relations with citizens. Advancements in technologies have made it possible to increase the transparency of public financing to bring trust to the system.
Imagine citizens can track how many dollars are spent on the construction of the road. If the governments start using public blockchain to store the information related to expenses spent on the development of cities, the citizens can avoid fighting for the corruption.
Also, it would bring efficiency to the government system.
7. Political Funds
Capturing the information related to public funds received and paid by a political party on blockchain can offer transparency to voters. Using blockchain, voters can make better decisions about the political parties.
8. Financial Record-Keeping
Companies are planning to use blockchain to store the immutable records of finance-related information like financial history, MoM, profits earned, and dividend distribution.
The smart contract allows the different shareholders to get access to the relevant information. For example, shareholders should be able to access confidential information while interested parties should only get access to the public information.
Therefore, blockchain helps companies to bring transparency to the financial systems.
9. Stock Exchange
The current stock market involves entities like regulators, brokers, and stock exchange, adding more cost to the system. The decentralized approach to manage the stock exchange can bring efficiency to the system.
Blockchain can eliminate the need for third-party regulators as regulations can be built on the smart contracts.
10. Initial public offering (IPO)
High fees for the bureaucracy of venture capitalists, private investment firms, and banks make the entire IPO processes expensive.
Therefore, equity markets are planning to move towards decentralization. Blockchain allows the complete range of investor-company interaction to be carried out securely without involving the middlemen to cut down the cost.
Blockchain can help different financial institutions and government entities to improve trust, bring transparency and cut down cost. If you are looking out for a blockchain development company to build a blockchain-based finance solution, contact our experts and discuss your requirements.
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