Transforming Fintech with Blockchain: Benefits & Use Cases
Blockchain-based technologies introduce a wealth of possibilities for the financial industry. With blockchain, fintech companies can reduce expenses, automate operations, improve reach, and make data more transparent. And that’s just the tip of the iceberg.
This article explores how the combination of fintech and blockchain is reshaping the financial sector for both businesses and individuals. We’ll also show you how blockchain-based technologies can solve industry-specific challenges and improve processes. Finally, we’ll look at whether the technology is mature enough for widespread adoption.
But first, let’s see how blockchain fits into fintech.
What is the place of blockchain in fintech?
Blockchain is a decentralized peer-to-peer (P2P) ledger that records transactions on a tamper-proof and publicly available computer network.
The technology has been around for over a decade, and in finance, it's been popular for at least 6 years. Implementing blockchain for fintech has led to the creation of a new model for financial operations: decentralized finance (DeFi).
DeFi refers to technologies that enable distributed financial transactions on blockchain networks. By combining fintech and blockchain, DeFi makes financial services more accessible, transparent, and secure. It also helps businesses and individuals exchange assets without third-party intermediaries.
- The global blockchain in the fintech market, valued at $10.02 billion in 2022, is set to grow at a compound annual growth rate of 87.7% up to 2030.
- At the same time, the DeFi market was worth $13.61 billion in 2022 and is expected to develop with a CAGR of 46% till the same year.
What’s more, venture capitalists invested over $133 billion in fintech startups in 2021, nearly tripling their investment from the previous year.
Summing up, it’s clear that financial companies recognize the value of distributed ledger technologies. To understand why, let’s see how it can bridge the gaps in traditional financial services.
Solving the challenges of the fintech industry with blockchain
Traditional financial systems aren’t perfect. Companies often have to deal with slow transaction times, high fees, and a lack of transparency. Integrating blockchain in fintech solves many of these problems.
High operational costs
Blockchain in the fintech industry can reduce transaction costs. In a traditional system, even a straightforward credit card transaction involves several parties: it travels between the merchant, bank, and credit card network. Each entity charges a fee for its services.
This problem is compounded for cross-border payments and foreign exchanges, as they involve a bigger network of financial institutions. A client may be charged a conversion, intermediary, correspondent, and receiving bank fees for a single transfer.
Blockchain uses P2P transactions and decentralized protocols to eliminate third-party middlemen from banking operations. This improves processing times and reduces transaction costs for both fintech companies and their clients.
Limited service availability
Access to fintech services can be limited in certain situations. For example, regulatory restrictions or a company’s technical capabilities may limit access to an app when a user is traveling. A company may also lack physical branches or remote support staff.
With blockchain, fintech companies can operate without the restrictions of traditional financial systems. Decentralized applications, cryptocurrency, and smart contracts allow clients to conduct operations wherever they want from any location. In other words, financial services can be available globally 24/7.
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One major challenge in fintech is ensuring data security across systems while protecting customer privacy. Security threats can be both external (like cyber attacks and fraud) and internal (vulnerabilities associated with weak access controls, a lack of cybersecurity awareness among employees, and rapid cloud adoption without proper security measures).
In fact, the financial sector remains the most vulnerable to cybercrime when compared to other sectors. With 2,527 reported incidents in 2021 alone, securing digital assets and confidential data is a key concern for fintech developers.
Blockchain reduces cybersecurity risks and fraud through three key characteristics:
- Decentralization. Blockchain is a decentralized technology, which makes it more resistant to security breaches as there’s no single point of failure. Each transaction is encrypted and validated by a network of nodes.
- Encryption. Blockchain networks use cryptographic algorithms and hashing to transmit data between participants. The encrypted transactions are then added between other blocks in the network.
- Immutability. Nodes in a blockchain ledger work together to validate transactions. Modifying a single operation is only possible with the consensus of other nodes, making the data more tamper-resistant.
By adopting blockchain, fintech companies can improve their security posture and lessen the risk of cyber attacks.
Lack of traceability
Traditional financial systems create traceability problems for fintech companies. As we’ve already pointed out, even simple operations involve multiple intermediaries, which complicates tracking and verification. What’s more, traditional systems are highly centralized, and this creates transparency problems and additional tampering risks.
Blockchain technology uses a distributed, decentralized, and publicly available ledger that provides unparalleled traceability. Complex algorithms and consensus protocols record and verify every transaction. As a result, users can inspect any transaction on the network, and auditors can easily verify fintech activities.
Settlement times can range from several hours to several days in traditional fintech systems. This is due to the need for manual processing and the involvement of multiple intermediaries and clearinghouses.
Blockchain is designed to be fast. It cuts down the time needed to process transactions and confirm payments, and it lets companies simplify verification and authorization procedures, which reduces settlement time.
For customers, it means quicker and less costly financial operations. Banks, too, can process payments almost instantly and reduce the overheads of multiple departments and expensive infrastructure.
In summary, blockchain offers the ability to process financial transactions fast and securely, making it ideal for solving the main challenges of the financial sector.
Let’s see how the general benefits of fintech blockchain solutions become specific wins for financial companies and institutions.
How can financial companies benefit from blockchain?
From improving immutability to providing better transaction transparency, here are some of the biggest benefits of combining fintech and blockchain.
- Restorability. A DeFi network is distributed across nodes (computing devices) that can maintain a copy of the entire ledger. This allows companies to restore their blockchain network in the event of incidents such as database corruption, a server wipe, or a ransomware attack.
- Fewer fees. By removing unnecessary intermediaries with blockchain, fintech companies can reduce the costs of their services. And even while there are still costs associated with transactions (gas fees), these are still lower than costs in traditional financial systems. For remittance alone, blockchain can reduce about 80% of extra costs.
- Automated processes. Fintech companies automate services via a self-executing smart contract layer. This lets them scale operations that require several employees, such as loan approvals and yield payments. Blockchain also reduces the number of third parties, which further simplifies transactions.
- Reduced settlement time. According to Deloitte’s 2022 DeFi deciphered report, blockchain technology and DeFi apps drastically decrease settlement waiting times. Transfers that traditionally take over three business days can be cleared in seconds.
- Improved reach. Reduced costs of services and affordable cross-border payments can make a fintech company more competitive. Fintech blockchain companies can also lower the entry barriers to traditional financial systems (such as bank account requirements and legislation), which allows them to reach customers in foreign markets.
- Data uniformity. Consensus protocols and smart contracts ensure that all nodes and transactions adhere to the same rules. In other words, transaction data remains uniform and unalterable.
This list is just a taste of the possibilities that DeFi is opening up. Let’s look at how fintech companies are applying this technology today.
Top blockchain use cases in fintech
In recent years, we’ve seen many companies exploring how to use blockchain to create better financial services or improve existing ones. There are many applications of blockchain in finance, including:
- Digital payments
- Asset management
- Digital identity management
Let’s dive deeper into common blockchain fintech applications in these service areas.
This means that fintech companies will be using blockchain increasingly to provide services such as:
- Domestic wholesale and securities settlements
- Tokenized fiat, stablecoin, and cryptocurrency trading
- Cross-border payments and remittances with reduced fees
Many platforms allow users to freely buy, aggregate, and transfer digital assets. Coinbase is a popular blockchain-based platform that allows businesses to integrate cryptocurrencies for payments.
If you want to build a similar blockchain-based solution for digital payments, our team can help. At TechMagic, we offer a full range of web and mobile app development services, from product discovery to deployment (to the App Store and Play Market). We can combine expertise in blockchain, fintech, and mobile development to help you get the most out of these technologies.
With DeFi, trading is no longer confined to centralized exchanges. The result is a growing ecosystem of decentralized exchanges (DEXs) that use smart contracts to facilitate peer-to-peer trading without intermediaries. The advanced algorithms make sure the pricing accurately reflects the supply and demand of the traded assets.
Some applications of DeFi in trading include:
- Decentralized exchanges. These exchanges eliminate intermediaries and allow users to trade directly with one another. The trading process is secure, transparent, and permissionless.
- Decentralized derivatives. DeFi platforms let users access a range of financial instruments (options and futures) and trade with others using smart contracts.
- Decentralized margin trading. DeFi has made margin trading accessible to a broader audience, allowing users to trade assets and earn interest by providing liquidity to the pool.
Additionally, TechMagic provides custom trading software development services from idea to realization.
Uniswap is a good example of a decentralized exchange. The technologies described above allow users to connect Ethereum wallets and trade securities independently.
Another interesting project is Pax Gold — a blockchain startup that backs cryptocurrency tokens with physical gold. In this way, users can buy fractions (ounces) of gold, which makes gold investment more accessible to the general public.
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Digital identity management
Fintech companies must follow Know Your Customer (KYC) policies. These help verify user identity and authenticate transactions, significantly reducing the risks of fraud, money laundering, and other illicit activities.
Traditional fintech collects verified data through government-issued ID, proof of address, and other personal information. This process is cumbersome and time-consuming, requiring multiple documents and verification steps. However, blockchain approaches this differently with an emphasis on privacy.
Tradle helps create a digital identity to help fintech companies comply with KYC and anti-money laundering. Users can control their identity data and choose how much to disclose. Another solution, Civic, allows users to share the minimum amount of information required for specific transactions.
With its multiple benefits and practical use cases, DeFi is opening the door to a new wave of financial services. Yet, while blockchain is already making a mark on fintech, it’s important to understand the challenges we must address before it can transform how businesses and people handle money.
Fintech blockchain solutions make loans more accessible to both lenders and borrowers. A company can establish a crypto pool and get funding from other investors. They can then provide loans to borrowers who use digital assets as collateral. Smart contracts govern the terms (loan proceeds, yield, and conditions) and execute collateral selloffs if necessary.
To put this benefit in context, it traditionally takes from 30 to 90 days to secure a business loan or mortgage. With DeFi, advanced algorithms streamline most processes, which means that companies can approve credit in less than 48 hours.
SALT Lending allows borrowers to obtain loans using their cryptocurrency as collateral. There are no excessive credit checks or hidden fees, and the loan has no impact on a borrower’s credit score.
Beyond traditional lending, fintech blockchain also enables P2P lending, where investors can directly lend to borrowers without intermediaries. For instance, Upstart provides alternatives to credit cards and offers car refinance loans replacing current loans from another lender. They also help lenders grow their customer loan portfolio and get accurate risk-based pricing.
Capital markets, private equity companies, and real estate funds are under increasing pressure to manage liability risks, make more dynamic decisions, and keep up with ever-changing regulations. As well, TechMagic specializes in providing asset management product development services. Blockchain fintech solutions can effectively streamline asset and stakeholder management processes, for example, by:
- Launching automated funds
- Engaging stakeholders through digitized assets and services
- Digitizing portfolios and holdings for wider market access and liquidity
- Applying customizable in-built privacy settings for transactions
- Programming voting and other shareholder rights and obligations into digital assets, eliminating human error
A good example of a blockchain-powered asset management solution is Bankex. They offer innovative solutions to bridge the gap between traditional financial markets and the world of cryptocurrencies and blockchain. Bankex specializes in tokenizing real-world assets, such as commodities, real estate, and securities, allowing for fractional ownership and increased liquidity.
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Wrapping-up: Is blockchain revamping the fintech industry?
While it's true that blockchain in the fintech industry has the potential to revolutionize how we handle money, the technology is still in its early stages. Fintech companies are already benefiting from the increased security and transparency provided by blockchain, but there are still challenges to overcome.
Scalability is one of them. Current blockchain technology is unable to handle large data volumes — a major obstacle to its adoption in fintech. Regulatory issues and interoperability issues (between blockchain networks and existing financial systems) are also hindering development.
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These and other hurdles mean that it’s too early to say that blockchain is revamping the fintech industry. The technology certainly has potential in finance, but it needs to mature before it’s ready for widespread adoption. As technology evolves and overcomes problems such as scalability and regulation, we’ll likely see more awe-inspiring use cases.
At TechMagic, we understand the importance of keeping up with the ever-changing landscape of the fintech industry. Are you looking to explore the exciting new territory of DeFi, blockchain, and smart contracts? Contact us for expert advice, technical skills, or fintech app development services.
What’s the difference between fintech and blockchain?
Fintech and blockchain are distinct concepts. Fintech (financial technology) is an umbrella term for technologies and innovations in the financial industry that enhance financial services. Blockchain refers to an immutable ledger that allows users to conduct peer-to-peer transactions with automated algorithms (smart contracts) and without a central authority, like banks. Many fintech companies use blockchain to improve their services, secure and speed up payments, or create decentralized financial applications. A blockchain ledger, smart contracts, and decentralized apps (dApps) are the key components of the new and innovative services made possible by fintech and blockchain.
What are the four types of blockchain?
There are four types of blockchain, based on permission level in the public, private, consortium, and hybrid networks. The public blockchain (Ethereum) is decentralized and open to anyone who wants to join the network. The private blockchain is more centralized and developed inside organizations. A consortium blockchain is similar to a private one but operated by a group of organizations. Finally, hybrid solutions combine the elements of these networks.
Do you offer blockchain development services?
Yes! At TechMagic, we provide comprehensive blockchain development services tailored to the needs of your organization. Our team can help you build a secure digital infrastructure for recording transactions and creating smart contracts, NFTs, dApps, and more. We have ample experience developing private blockchain networks for secure data sharing and asset management.