Lending and Borrowing on the Blockchain – Should Banks be scared? – Alok Mittal

In Blockchain, Columns

Most technologies conform to a hype cycle, but blockchain is no ordinary technology. Since gaining prominence with the rise of cryptocurrencies barely a decade ago, it has broken through the hype cycle at an extraordinary pace and is gaining rapid adoption across industries and verticals. From logistics and entertainment to healthcare and legal services, every industry is mulling over the potential disruption that blockchain use-cases can unleash.

And there is no industry paying keener attention to developments in the field of blockchain than the banking, financial services, and insurance industry. This holds particularly true in emerging economies such as India, which are fast moving towards a more digital mode of operations even as they struggle to eliminate traditional operational bottlenecks while managing new challenges.

What is blockchain, and how can it optimize banking and financial functions

Operating on a distributed, decentralized public ledger-based approach, blockchain utilizes shared digital databases and cryptography to enable multiple parties to transact simultaneously. Once stored on the ‘block’, the information cannot be altered by unauthorized parties.

How? Any changes made are stored on a new hash within the block and reference the original information. Copies of each transactional block are also stored across hundreds of thousands of systems linked to the network; any changes made to the original block will also need to be altered on each of the copies. Editing all these blocks requires supermassive computational power, making it almost impossible to ‘hack’ a blockchain-based transaction.

This makes transactions taking place on the chain inviolable and tamper-proof, even in the absence of a third-party entity to authenticate them. Details pertaining to the transaction can also be viewed publically to ensure complete transparency and minimize the probability of a fraudulent transaction.

It is no secret that the Indian BFSI sector is struggling to curb the rise in the number of financial frauds and cybercrimes. According to the RBI, banks across India lost more than INR 41,000 crore to frauds during the 2017-18 fiscal – a sharp year-on-year increase of 72%. Even more alarming is the growth of finance-related cybercrime during this period; almost INR 110 crore was lost to digital frauds and hacks in FY18 alone. This does not include the recent security incident at Pune-based Cosmos Bank, which saw a total of around INR 94 crore being siphoned off by cyber criminals. Blockchain comes as a much-needed technological intervention that can help in ensuring better security and enabling real-time transparency for BFSI players, so that such unfortunate incidents aren’t repeated.

But financial frauds alone are not the only area where blockchain can have an impact. Solutions based on the technology can be applied across a diverse range of functions to bring down costs and overheads, streamline and automate processes, increase the speed of transactions, and facilitate greater transparency and more reliable operations. Here are a few instances of how blockchain can help the Indian BFSI sector:

Streamlining the KYC process

Know Your Customer, or KYC as it is more commonly known, has become an integral component of the banking process. Before conducting any financial transaction on behalf of their customers, banks and NBFCs are required to verify customer credentials.

The problem with this approach is that each bank needs to do its own due diligence. Not only does this inconvenience the end-user, but also increases the time taken for and cost of the customer on-boarding process. The introduction of blockchain-based KYC verification can address this need-gap by creating a common customer database. Once authenticated, the customer’s identity and KYC documentation can be stored on the industry-wide BFSI blockchain. This information can then be leveraged by other BFSI service providers to swiftly verify their customers’ identity and begin providing banking facilities to them.

Making payments more secure and cost-effective

As mentioned above, blockchain does not require a third-party authority to approve transactions; the chain authenticates the identity of transacting parties, amount, and date of transaction before storing it securely on a block. The elimination of the intermediary from the digital transaction process can help in alleviating the transaction fee that is currently charged to the end-users. This can help in driving the digital adoption in countries such as India, where a large number of merchants in rural and semi-urban geographies are still hesitant to adopt digital payments due to the costs involved with each transaction.

Moreover, since blockchain-based payments are more secure, the chances of a digital fraud – another major obstacle in the adoption of digital payments in the country – is also significantly reduced, thus increasing trust amongst consumers. With the heavy fees associated with cross-border remittances also done away with, small Indian merchants will be able to expand their online operational footprint to international markets and accelerate their business growth.

Enabling more seamless and secure financial trading

At present, most financial trading processes are dependent on physical paperwork, such as bills and letters of credit. These documents need to be managed and sent to their intended recipients physically. Not only does this increase the risk of tampering and theft, but also introduces an avoidable level of delay in the entire process.

With trading systems designed on blockchain, the process of financial trading can be made swifter, more seamless, and more secure, as the transaction will be handled digitally through immutable ledgers. Moreover, since assets can be exchanged without the involvement of centralized trusts or intermediaries, the costs of transaction will also be greatly reduced.

Extending loans and credit to the deserving underserved

One of the most disruptive uses of blockchain in the BFSI sector is facilitating access to credit to unserved and underserved demographics, such as first-time borrowers, MSMEs, students etc. Blockchain-based, AI-powered algorithms can be used to verify the identity and the creditworthiness of prospective borrowers through decentralized ledger systems. Since records of transactions and customer profiles will already be saved on the chain by any BFSI company that has previously served such customers, financial history becomes more accessible to make underwriting more seamless.

Another way that blockchain can help in fulfilling the borrower’s credit demand is by facilitating peer-to-peer (P2P) lending. This mode of lending has already gained significant traction in India, with the RBI recently recognizing it as a separate market segment. Blockchain can further streamline the loan process by connecting borrowers to individuals or groups with surplus capital. This increased access to credit will stimulate economic activity across multiple regional markets within India by providing financing opportunities to Indian MSMEs, thus driving long-term growth.

Identifying that a problem exists is half the solution, and the Indian BFSI sector is now beginning to identify the scale of the challenge that it currently faces. Integrating cutting-edge technologies such as blockchain can help it in addressing the other half of the problem – the implementation – to optimize processes and functions. Given the differentiation it can deliver, players operating in the domain, be it traditional banks or new-age NBFCs, will look to adopt the latest technology advancements including blockchain and gain access to the massive business opportunity that looms just beyond the horizon.

(The author is the CEO and Co-founder of Indifi Technologies – a leading online lending platform providing online business loans in India to small businesses including Travel, Retail and Restaurant.)

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