Blockchain Use Cases in the Fintech Industry

Cross-Border Payments

International money transfers have always been one of the major pain points in fintech. Traditional systems such as SWIFT often take days (if they ever settle at all) to settle a payment and come with high transaction costs.

With blockchain, you can now settle near-instant cross-border payments, inexpensively. Blockchain Networks such as Ripple (XRP) and Stellar (XLM) are already allowing banks and fintech firms to settle billions of dollars in international money transfers. Individuals can now send money to family abroad in seconds and with almost no cost.

Businesses can not only manage cash flow for international trade but also facilitate trade payments between buyers and sellers in seconds.

There are no longer middlemen and face the benefits of a shared, decentralized, immutable ledger for a global transaction that is both fast and transparent.

Fraud Prevention & Security

As we have moved towards a digital-first economy, we face heightened fraud and cybercrime. Traditional financial systems are premised on centralised databases that are susceptible to hacking and manipulation.

With an immutable ledger of transactions, blockchain technology offers an ideal way to mitigate this concern. When each transaction is cryptographically secured, entered onto the public blockchain cannot change. It is with this potential that fintech companies can offer services that leverage the use of blockchain, such as:

• Prevent identity theft
• Detect fraudulent activity in real time.
• Reduce the risk of double-spending or chargeback fraud.

For example, banks are exploring blockchain-based tools for fraud detection to reduce their security exposure. This protects customer funds while also promoting trust in banking institutions.

Smart Contracts in Lending and Insurance

Smart contracts are also possible because they are built on top of the chain and execute automatically when conditions benefit all parties. Smart contracts can have powerful effects in the fintech landscape, especially in the lending and insurance sectors.

Smart contracts can provide a means to automatically assess collateral, approve loans, and disburse cash without any human touch. In insurance, many insurers can speed up the settlement process for a claim. Claims can be processed almost immediately once the conditions are verified on-chain, creating less wait time and opportunity for miscommunication.

Decentralized finance (DeFi) platforms like Aave and Compound are already using smart contracts to facilitate instantaneous crypto lending and borrowing. Fintech companies are looking at ways to utilize these same mechanisms for previously established principles of banking, saving time and money.

Tokenization of Assets

One of the most captivating blockchain applications in fintech is tokenization, where an asset, whether physical or financial (e.g., real estate, stocks, commodities, or even art), is converted into a digital token operating on a blockchain.

The phenomenon of fractional ownership becomes a reality through this format. An investor may not want to buy an entire property, but they can certainly buy a token that represents a piece of it. Investors can now access properties they wouldn’t have been able to before, increasing access for investors and creating more liquidity in markets that are typically illiquid.

Some of the larger firms, like tZERO and Polymath, are already working on tokenized securities platforms. This opens up product and revenue opportunities, and also moves fintech to an investment ecosystem that expands access to investment products.

Identity Verification (KYC/AML)

KYC and AML processes in fintech are critically important, but they are also expensive for firms and inconvenient for customers. When it comes to verifying identity, customers have likely gone through the KYC process at several different institutions, and are required to go through the KYC process again, or at least provide documents again (e.g., bank statement, credit statement, utility bill).

Now with blockchain, unbundled to bring decentralized identity systems that are capable of verifying a user's identity, and can securely store that information. Users can create a verified digital identity that is stored in a blockchain, has all relevant data, and is secure and tamper-proof.

When a user decides to open an account with another company, they are still required to KYC; however, they will not have to go through the entire process. The user can access their digital ID, for example, and provide identifying information to the third party, saving time and frustration.

This added value of verification using blockchain also reduces costs to comply with government regulations for financial institutions, while at the same time enhancing the user onboarding experience.

Real-Time Settlement of Securities and Trading

Traditionally, securities trading has many different intermediaries, including brokers, clearinghouses, and custodians. Settlement periods have been known to go to T+2 or T+3 days, exposing both parties to counterparty risk and locking up capital unnecessarily.

Blockchain-based platforms can enable T+0 settlement of trades by removing the need for clearing the transaction using third parties and reconciling, by using distributed ledgers to claim ownership and transaction history in real-time. Blockchain allows for the exchange of assets, including stocks, bonds, and derivatives, almost instantaneously.

Projects such as Project Helvetia by the Swiss National Bank and DTCC's Project Ion are currently piloting blockchain for real-time settlement. Lowering systemic risks, increasing capital efficiency, and enabling more nimble fintech-based trading platforms.

Regulatory Compliance and Auditing

The qualities of blockchain that promote democracy, transparency, and immutability can be beneficial for compliance and regulatory reporting. The fintech industry has been experiencing pressure to meet an increasingly strict set of regulatory requirements (transaction monitoring, anti-money laundering (AML), and more local reporting requirements).

With a blockchain, individual users can allow regulators and auditors real-time access to financial information, providing an "audit trail" that is verifiable and immutable. This could:

• Automate compliance checks to be built into smart contracts
• Reduce the cost and complexity of regulatory reporting
• Continuous (real-time) auditing replaces periodic audits

OpenZeppelin Defender and Chainalysis KYT (Know Your Transaction) projects help fintech industries utilize blockchain-based compliance in real time. Regulators, too, are beginning to evaluate RegTech tools that can be built on blockchain for transparency and multi-party oversight.

Loyalty and Rewards Programs

Loyalty programs often exist in multiple locations, are poorly managed, and offer limited redemption of loyalty points. Blockchain allows for the tokenization of loyalty points, meaning interoperable, transparent, secure, and verifiable reward systems.

Fintechs can issue branded tokens as rewards, which customers can then:

1. Trade or exchange on various platforms
2. Use with partner merchants
3. Hold in wallets for future use

Tokenized loyalty programs offer better user engagement while providing fintechs with better analytics related to user engagement. With the use of blockchain technology, problems such as fraud or double-spending, which plagued legacy points processing, are non-factors.

Start-ups such as Loyyal and Qiibee are enabling fintechs and banks to modernize loyalty systems using blockchain to provide better, seamless, and lower-cost alternatives to legacy loyalty platforms.