Blockchain technology is changing lives, not only from the speculative nature of cryptocurrencies but in the consumer finance industry. This distributed ledger technology provides a way for untrusted parties to interact without going through a financial intermediary. While it may have started with Bitcoin as the hallmark, the use cases of blockchain have evolved significantly within the past decade.
Today, blockchain is being used in various industries, including gaming, entertainment, logistics and healthcare. However, the most advanced integration has been with existing financial market ecosystems. Blockchain’s fundamentals present a strong use case in the consumer finance industry, which comprises payments, credit facilities, international remittances and financial securities.
Unlike centralized financial services, blockchain technology introduces an ecosystem governed through Decentralized Autonomous Organizations (DAOs). With blockchain in the picture, anyone seeking financial services can now acquire decentralized digital identities and access the financial services offered across several DeFi platforms.
That said, let’s take a deep dive into some of the consumer finance niches where blockchain has made a significant impact.
1. Payments
The current world is heavily interconnected through financial ecosystems, with banking taking the lion’s share of the revenues. Trillions of dollars are sent every year through the disintegrated banking ecosystems, both locally and abroad. While banks appear to be serving their purpose, the underlying costs and transaction time are a huge challenge for most people globally. In some cases, it can cost up to 7% in transaction fees with an average delivery period of 3 days.
Thanks to blockchain, the world is exposed to faster payment channels such as the Bitcoin and Ethereum networks. These two blockchain ecosystems are decentralized, which means that users send money through Peer-to-Peer infrastructures. The transaction finality on Bitcoin’s network is roughly 15 minutes, way lower than the delivery period by traditional banks. Additionally, it only costs a few dollars depending on the network activity at any point.
Besides the pioneer P2P networks, blockchain-focused companies such as Bitpay have gone a notch higher to integrate development tools that allow merchants and buyers to transact in crypto. Essentially, this crypto payment service provider enables users to buy from e-commerce shops such as WooCommerce and Shopify while making seamless payments.
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2. Credit & Loans
The credit market is currently dominated by banks that operate on a centralized model. As such, many people are limited when it comes to accessing loans or other forms of financing. Blockchain changes this narrative through its decentralized architecture, allowing anyone to borrow or lend funds through pooled markets. This credit financing model is becoming more popular with the debut of decentralized finance (DeFi) innovations.
With DeFi making in-roads into the consumer finance market, some projects are developing trust score solutions to improve the lending and borrowing markets. Avarta, a Web 3.0 DeFi-oriented platform, is one of the examples. The project features a multi-chain decentralized identification solution that allows users to interact with multiple DeFi markets.
Avarta users can leverage their transaction history to prove they are a reliable borrower, lender or investor based on their trust score. This approach opens up more opportunities for prospects to access credit from DeFi protocols. Notably, users can also opt not to display their trust scores or remain anonymous throughout the process.
3. International Remittances
International remittances make up a big part of the capital movement globally. According to the latest World Bank report, remittances to low and middle-income countries stood at $540 billion in 2020 despite the strains caused by the Covid pandemic. The figure is expected to rise by 2.6% this year to hit $553 billion.
While this money flow is a source of livelihood for many, the current SWIFT infrastructure used by banks and money transmitters is quite frustrating. It can take up to a week to send money through service providers like Western Union. Well, thanks to blockchain, companies like Ripple have introduced faster settlement channels.
Ripple provides enterprise blockchain services through its features, including xCurrent and xRapid. Unlike SWIFT, xCurrent is a two-way communication protocol supporting real-time messaging and settlement. On the other hand, the xRapid feature allows Ripple’s users to settle cross-border transactions without changing their base currency. Ideally, one can send money from a Mexican bank to a US bank without converting their pesos to US dollars.
4. Financial Securities
Despite the advancement of the equity market since the early 1920s, it is still a big challenge for investors to access securities listed on traditional exchanges. Mostly because of regulatory and capital hurdles that often favor big-time players over small investors. Blockchain levels the playing field through its decentralized architecture, providing investors with an opportunity to partake in global markets.
One of the notable advancements in this niche has been in security tokenization. The concept involves representing a real-world/off-chain asset on the blockchain, giving traders access to securities that would have been otherwise cumbersome to acquire. Crypto exchanges such as FTX are now offering tokenized stocks of Fortune 500 companies, including BioNTech and Tesla.
According to a Forbes interview with FTX CEO Sam Bankman-Fried, there is a lot of potential in the tokenization of securities and other real-world assets. The crypto billionaire said:
"Accessing equities markets is spotty country by country. It would be really powerful to be able to freely move tokenized stocks on the blockchain."
Conclusion
Blockchain technology in its current state might still be a complex concept for many, but that does not take away its fundamental value in the consumer finance market. Going by the adoption rate, it is a no-brainer that the future of finance is slowly gravitating towards decentralized ecosystems.
While banks will likely continue to be the dominant financial service providers, they also need to implement blockchain infrastructure to improve the current settlement frameworks. This will harmonize the operations in the centralized consumer finance industry as the world prepares for the paradigm shift to decentralized finance (DeFi).