The Blockchain Revolution and the Future of Fintech

By: Michael Thorne, CTO

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Blockchain technology may be the most revolutionary concept in the already groundbreaking fintech field. Blockchain and distributed ledger systems offer sophisticated ways to automate, secure, and audit transactions of tangible and intangible assets.

As people and companies increasingly use apps, wire transfers, and other digital methods to exchange money, blockchain technology will facilitate transactions through fast verification algorithms. Instead of waiting for weeks to see whether a multimillion-dollar deal goes through, companies can receive near-instant confirmation of their exchanges.

Blockchain is a key component of the fintech revolution occurring before our eyes. While it was once solely the domain of cryptocurrency fanatics, it’s now poised to become an integral part of how we live our daily financial lives.

Blockchain in Practice

Most people associate blockchain with the cryptocurrency bitcoin. That’s where the technology got its claim to fame, but most people don’t understand exactly how bitcoin or blockchain systems work.

All bitcoin transactions are recorded in a distributed ledger that’s shared by more than 7,000 nodes across the world. Those nodes act as computing centers that maintain the records of verified block exchanges, and they use Bitcoin’s protocols to validate blocks as they enter the system. Each set of transactions refers to the previous block, and the distributed nature of the “master” ledger ensures that the chain cannot be tampered with, modified, or broken.

Bitcoin’s system is based on algorithms that allow for efficient encryption and verification. Because everything is automated, verifications can happen much faster than they would with human oversight. Users can also look up every exchange that’s occurred since Bitcoin’s inception, increasing transparency.

Blockchain’s influence is spreading beyond cryptocurrency as well. Banks and financial institutions are becoming more aware of how the technology can improve their processes, with a 2015 Santander report estimating that blockchain could save such companies $20 billion a year in financial infrastructure costs.

Traditional finance organizations might use blockchain to bypass clunky international payment networks without sacrificing security and regulatory compliance. This would allow them to work more efficiently and to provide their clients with faster, easier, and more cost-effective solutions.

The Future of Finance

Widespread adoption of blockchain isn’t the only trend we’ll see in the next several years. A host of tech advancements have spurred business creation, simplified banking, and empowered consumers to take control of their own security concerns. The revolution is already underway, and here’s the proof:

1. Lower Barriers to Entry

Cloud computing profoundly affected consumer finance by lowering the barrier of entry to the marketplace. It enabled small, scrappy startups to serve niches that corporate banks have been unwilling or unable to address.

Rather than purchase costly in-house hardware, companies can rent server space through Rackspace, Amazon (AMZN) AWS, andGoogle (GOOG). They can adjust their servers and bandwidth contracts based on their business’s evolving needs and usage, which is extremely valuable to early-stage organizations. Small companies that don’t have venture capitalist backing can gain market share by building a simple product and launching it quickly. You can hardly throw a bitcoin these days without hitting a consumer finance startup that allows you to exchange or manage money through an app.

2. Improved Accessibility

Mobile computing has fundamentally changed our expectations about how quickly business transactions should happen. Devices such as smartphones and wearables satisfy people’s demands for better, faster, and more immediate services. They enable us to pay for groceries, rent bowling shoes, and buy cups of coffee without reaching for our credit cards or (gasp) cash. Most importantly, these payment methods provide us with secure ways to pay for goods and services without worrying as much about fraud and identity theft.

3. Increased Security

Fraud protection and identity verification will continue to be hot topics as lending and borrowing across platforms grows in popularity. Even though customers demand security and convenience in their financial transactions — and government regulation often lags behind on legislation and best practices in this area — security remains an area ripe for further innovation. In the meantime, consumers will have to take more responsibility for their own security through difficult password strings and biometric technologies as they become available.

As these shifts take hold, we’ll see fewer uses of traditional forms of finance. Businesses and individuals will move toward subscription- and lease-based models, and funding and verification will occur on paperless platforms. Expect underwriting standards and regulations to change as companies rely on broad consumer data to make credit decisions and the Consumer Financial Protection Bureau implements new rules for protecting the public.

Banks and other financial institutions that refuse to adapt will suffer the same fate Blockbuster did at the hands of Netflix (NFLX). Blockchain is revolutionizing the fintech industry, but it’s only the beginning. The financial transactions of the future will bear little resemblance to those we know today.