The next generation of innovation in finance is dawning, and the open finance revolution has the potential to transform operations throughout many sectors.
Facilitating transactions on a global scale, enhancing customer experiences, delivering advanced financial services, and building consumer trust can all carry major ramifications for the performance of businesses within increasingly competitive landscapes.
It’s for this reason that blockchain technology is fast becoming an essential tool in leveraging transformation beyond open banking, and into the realm of open finance.
But how will blockchain deliver meaningful change in the financial services ecosystem? Let’s take a deeper look at how the emerging technology is preparing to change our relationship with finance for good:
Blockchain’s Role in Open Finance
Before we look at the ways in which blockchain can deliver open finance, let’s explore the technology itself.
Blockchains are distributed digital ledgers that are comprised of blocks, chains, nodes, and master nodes. These nodes control the blocks on the network, and each chain consists of interconnected blocks holding its own transaction records and data.
In establishing data-rich interconnected chains, blockchains have the power to not only track monetary transactions like those involving cryptocurrencies, but can also securely store information in a way that’s impossible to manipulate, alter, or hack into.
This security stems from blockchains requiring a consensus to be reached throughout the distributed network in order to add new blocks. Should hackers attempt to break into a blockchain, they would have to gain control of the majority of nodes positioned around the world.
The technical capabilities of blockchain technology make it an excellent tool in the world of open finance and helps to implement a degree of transparency that can boost efficiency and compliance throughout a number of processes.
Because open finance thrives through sharing financial data through trusted third parties, blockchain technology is ideal for leveraging more focused products and digital services that can be actively tailored to the needs of each user.
Metrics like investment transactions, insurance coverage, policy information, savings portfolio insights, and pension data can all be incorporated into a personalized open finance system that offers transformative levels of convenience. With so much private data controlled by different institutions at play, blockchain can be essential in keeping customers safe throughout this brave new financial frontier.
Transforming Credit
When it comes to lending, blockchain offers a more secure way of delivering personal loans to a far larger volume of customers in an efficient and cost-saving manner.
While traditional finance lets banks and lenders underwrite loans based on a system of credit reporting, blockchain has the power to leverage peer-to-peer (P2P) loans and lending services based on complex metrics that can ultimately change the structure of loan agreements and mortgages.
This innovation boils down to risk management. While traditional institutions will lean on credit reports provided by third parties like Experian, Equifax, and TransUnion, many capable consumers can struggle to shake off subprime credit ratings that prevent their access to affordable loans.
Additionally, this process is far from secure. In September 2017, an Equifax hack exposed the credit information of almost 150 million consumers in the United States.
This is where blockchain can excel. Blockchain can offer cheaper, more efficient, and secure personal loan services to a far greater pool of consumers. Lending is cryptographically encrypted, and data is stored in a decentralized chain with a clear history of payments that can support users applying for loans based on a global credit score.
Through the use of smart contracts, which are automatically designed to execute based on pre-determined terms and conditions, loans and repayments can be largely automated based on factors like specific repayment dates or loanee cash inflows.
P2P loans may still be new to the world of open finance, but use cases are cropping up all the time. There’s even a growing industry supporting blockchain mortgages, and as the space matures, we’re likely to see a more sophisticated user experience emerge to deliver true democratization throughout the lending landscape.
True Personalization
In ensuring the safe flow of information between different institutions, blockchain can help open finance to deliver a more personalized experience for consumers on a single platform.
Immutable digital ledgers can securely record a user’s open finance transactions to establish a more holistic view of their needs based on behavior, spending history, and investment decisions. This helps to leverage more actionable advice through spending insights and paves the way for open finance tools to actively reduce the risk of defaults by anticipating outgoings.
Open finance services could also offer personalized insights in helping consumers to make their desired purchases by offering tailored saving plans and timelines to reach their financial goals.
Advanced Cybersecurity
Another great perk of blockchain technology is its ability to offer unprecedented levels of security in the world of finance.
Traditional finance has always been the target of cybercriminals and fraudsters online, but blockchain’s decentralized and immutable ledger means that transactions are considerably more secure and transparent.
This can help open finance platforms to combine blockchains and artificial intelligence to analyze patterns and rapidly detect anomalies through a user’s financial transaction history. If the AI determines that fraudulent activity is at play, it can automatically raise the alarm and prompt the customer to securely confirm their identity and the validity of a suspicious transaction.
Powering the Age of Open Finance
One excellent facet of blockchain technology is its interoperability between different blockchains. This means that it can pave the way for truly frictionless transactions across many different parties and through a vast range of currencies.
Because this is a seamless process without third parties having to physically intervene to carry out open finance services like leverage transactions, take out loans, or manage pensions, blockchains can lower the costs associated with more traditional financial practices.
Traditional banking has long been in need of digital transformation to keep up with the increasingly global focus of consumers. Blockchain serves as a leading option to facilitate true open finance in a secure and frictionless manner and is set to become the cornerstone of a brave new world in the financial ecosystem.
