Blockchain has gained significant popularity and trust in several traits. Financial matters are significantly associated with the blockchain as it has been used in financial transactions since its advent. Blockchain-based coin, BitCoin, is the most precious currency. Blockchain technology is powerful enough to revolutionize any industry. Financial facilities are also being transformed with its power now. The traditional lending system turned out to need to be updated in the fast era of digital operations. To understand the power of blockchain in transforming financial services, especially lending, let’s explore the challenges of traditional lending.
Traditional lending and key challenges
Lending is familiar to us, but procedures may differ in some aspects. The traditional lending system faces multiple challenges in this digital era because of its old practices. During the COVID-19 period, the demand for digitalization of processes grew stronger. Furthermore, AI also has the potential for considerable changes in workflows and reducing procedures’ costs in terms of time and money. Fastercapital has published numerous articles discussing the key challenges. Keeping all this in mind and observing the traditional lending system and users’ feedback, I can say that the following challenges are significant and demand to be addressed.
- Rapidity in the lending process
- Streamlining the procedure
- Diversity of Regulations
- Cost of Procedure
- Customer expectations
- Risk assessment & Credit Scoring
- Interest rate and financial cycles
Role of blockchain in financial services: Lending
Since its advent, blockchain has been associated with financial services. Later, this technology spread its wings to all fields and proved its significance. Lending often requires lots of verifications and securities before issuing a loan. All this consumes a good deal of time and resources. This delay is also a big concern for borrowers. Blockchain technology has the potential to speed up and streamline all the procedures. Authentications through blockchain technology are easier than manual or traditional methods and are also more valid. Blockchain also helps considerably eliminate fraud and money laundering. Additional security, transparency, cutting down on costs, and almost no tempering are the gifts of blockchain. A rapid acceptance of blockchain solutions in lending initiated a boost to its market from $1.4 billion to an estimated $43.1 billion by 2030. It’ll greatly help in improving the existing services and also discovering new ones.
Blockchain Use Cases in Lending
Blockchain technology in lending has multiple uses and will transform the entire procedure. Here is a brief overview.
- Blockchain is suitable for making financial services faster, more economical, and secure in all terms. The time frame of days or months is reduced to hours and days. All the procedures are complete with improved transparency.
- Lending against multiple assets calls for collateral management that requires commodity tracking and tracing. With the use of blockchain technology, the entire procedure has become faster and more reliable, and all is done in real-time.
- Assets’ tokenization is another helpful point that allows for the factorization of ownership or proprietary rights. In this way, the owners can use fractions of their assets as collateral for lending purposes.
- Invoice factoring is another essential scenario in lending when companies apply for loans against due invoices. Using blockchain technology, the assessment and tracking of such cases have become easy, fast, and cost-effective. The legitimacy and evaluation of receivable accounts become more authentic.
- In lending procedures, credit prediction and credit scoring are incredibly significant. Banks or lending authorities have to check and track the credit history of every borrower and predict their loan scoring. Blockchain technology makes it easier and more authentic.
Benefits of Blockchain in Lending
Blockchain-based solutions are most effective in lending processes and in resolving challenges in the field. According to Forbes, a number of benefits, including payment streamlining and asset management, are allied with blockchain solutions in lending. Significant blockchain benefits in lending processes include the following:
- Loan endorsing
- Loan pricing
- Mortgage close
- Loan servicing
- Debt recovery
- Loan trading
- Lending payments
- P2P lending
- Fraud detection
- Regulatory compliance
Lending companies also reap the benefits of blockchain technology. Banks and companies involved in lending services started incorporating blockchain technology and boosted their services to a large extent. It enabled them to conduct faster and more transparent processing, which is quite good for the existing banks and new lending startups.
Blockchain Lending Solutions and Their Cost
The blockchain-based solution proved vital and generated a bundle of benefits for the organizations or banks implementing it. Numerous companies offer blockchain solutions with customized features according to the client’s requirements. However, each blockchain-based software includes some functions that provide comprehensive performance. The key features include:
- Automated data input
- Automated KYC/ AML verification
- Transaction e-signing
- Automatic lending through smart contracts
- Validation of lending transactions through consensus
- Automated recordkeeping
- Lending data tracking and tracing
- Loan payment processing
- Entire audit trail of credit documents
- Security
All these features ensure transparency and speed, which boosts the services. Multiple technologies are part of this procedure. These include blockchain frameworks, cloud services, smart contract languages and development, front-end and back-end development, and much more.
Software providers quote different costs for their services and it varies depending upon the user requirements. As per a gross survey of costs for blockchain lending solutions different ranges of costs come in the line. For example, ScienceSoft offers a cost ranging from $150,000 to $250,000 if developed using any existing blockchain network. This cost rises if the solution requires a customized blockchain network with other specific features. In this scenario, this cost raises many folds; as per an estimate, this range grows from $500,000 to $1,500,000.
Organizations or companies in Lithuania and Latvia can visit physical offices to get customized quotes according to their required features and facilities.
Challenges and Risks of Blockchain in Lending
Although blockchain technology provides a good deal of progressive features and enhancement in services, there are still challenges. Let’s explore:
Low Quality of Lending Data
In blockchain solutions, once the block is generated, it becomes immutable. It provides security against tempering, but at the same time, it harms if inaccurate data enters the system. Furthermore, in multi-currency loans, fluctuation of currency exchange rates may also be affected. AI-powered data verification and decentralized oracles help to overcome it.
Cyber Threat Vulnerability
Tight security is associated with blockchain technology. However, it can also be vulnerable to cyber threats like code exploitation, phishing routing attacks, etc. It demands some extra effort and standards to avoid such situations.
Uncertainty of Regulations
Regulations about the use of blockchain technology in finance vary in different regions of the world. It becomes a barrier to its adoption beyond borders. This uncertainty is a significant deterrent to investment and novelty. A comprehensive collaboration with regulators can help define standard regulations and universally adopt blockchain technology in financial services.
Interoperability
Existing banking systems and platforms are highly complex for the sake of security. There is a chance that these may not be compatible with blockchain technology, which raises interoperability issues. This reduces progress and speed, increasing costs in terms of time and money. This challenge can be addressed with the help of standardized protocols and APIs to enhance interoperability.
Privacy Concerns
Transparency and immutability are prominent features of blockchains. On the other hand, banks prefer data security and privacy. They do not open data to any irrelevant person or company. This contradiction may raise problems. It can be addressed by using permissioned blockchain networks.
Scalability
Scalability is another primary requirement of banks or financial systems. When transactions increase, the system's efficiency is greatly affected. The hybrid blockchain networks can handle this concern effectively.
Final Words
Blockchain technology has a transformative effect in every field. The financial sector, especially lending services, has transformed with its magical speed and power. Many existing and new startups that have adopted blockchain are reaping the benefits and conquering new horizons. This is the right time to innovate and revolutionize financial services.
Author
Stacy joined ScienceSoft in 2020, bringing in her expertise in large-scale digital transformation projects and practical knowledge of the finance domain. Stacy frames ScienceSoft’s service offerings and technology guides in corporate finance, BFSI, DeFi, and blockchain. She works side by side with business analysts, software architects, and developers to help create innovative solutions that bring unique client value. Stacy continuously monitors customer expectations and technology trends in the BFSI market and explores the newly-emerging fintech and blockchain products.
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