“Blockchain’s Impact on Lending”

 

The purpose of ‘decentralized finance’ (DeFi) is to remove the middlemen from the equation. In other words, erase any third-party involvement from the world’s financial system. While that seems impossible, cryptocurrencies and blockchain technology are working hard to make it a reality.

 

Blockchain technology has a lot to offer the industry of financial services. With that said, various challenges need to be overcome if banks want to harness blockchain’s full potential. However, what will happen when the technology does overcome those challenges? What will it mean for the future of lending? For that matter, will it disrupt traditional banking?

 

Changes in loans

 

For the past several years, there has been a surge in loans underwritten by fintechs (financial technologies) or other lending platforms. This is largely thanks to the new industry participants’ ability to innovate due to their agile startup-like tactics. Similarly, the less complex regulatory restrictions they face. When it comes to lending, these newcomers are utilizing the latest in blockchain and data analytics to quickly manufacture their products. Moreover, to make them more transparent and easier to access.

 

With non-bank lending garnering more steam, blockchain lending platforms are making more appearances and fintechs are offering a much more diverse product selection. Because of this, banks need new ways to keep up. The response from many of them was to strengthen their digital capabilities. On its own, this isn’t enough. Banks need to cut down on operating costs, chase partnerships, and technologically revamp lending procedures.

 

Breaking tradition?

 

Blockchain technology offers untrusted parties a way to agree on the state of a database without needing to include a middleman. By having a ledger that has no one administering it, a blockchain could provide specific types of financial services, such as payments or securitization, without needing a bank.

 

Furthermore, blockchain permits the use of tools similar to smart contracts, which are self-executing contracts based on the blockchain. These have the potential to automate manual processes from agreement and claims processing to the distribution of the will’s contents.

 

When it comes to use cases that do not require a high level of decentralization — but could still benefit from improved coordination — distributed ledger technology (DLT) could assist corporates in establishing better governance and standards pertaining to collaboration and sharing data.

 

Both blockchain technology and DLT have a chance to totally disrupt the banking industry as a whole. It can accomplish this by disintermediating the primary services that banks provide, some of which include:

 

  • Payments
  • Loans & Credit
  • Clearance and systems of settlement
  • Securities
  • Fundraising
  • Customer KYC and fraud prevention
  • Trade finance

 

Conclusion

 

It is true that blockchain could be the solution to many lending issues that banks often face. However, the practicalities are a little more nuanced. For instance, the technology requires a unique level of organizational coherency. Companies have to agree on technical, functional, and legal approaches. This, as you can probably tell, is not easy.