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Banking On The Blockchain - How Lenders Use Blockchain Technology To Prevent Fraud?
Blockchain technology has brought about a sea of change and transformation across the wide range of industries, none more so than banking and finance.
22:53 14 April 2023
Blockchain technology has brought about a sea of change and transformation across the wide range of industries, none more so than banking and finance.
For an industry that spends millions of man hours, and loses billions of dollars in opportunity costs each year due to fraud, and preventing fraud, blockchain offers a seamless way to unlock substantial value to institutions, consumers, and the broader economy.
While there is still a tug-of-war between the enthusiasts and the naysayers, one segment of this industry that is going all-out in favor of blockchain, is the loans and lending departments, and its not not hard to see why.
What Is Blockchain Technology?
At its core, blockchain is a distributed ledger technology that records transactions, and stores them in a decentralized, immutable, and transparent manner. The ledger is then maintained by a network of nodes, are grouped into blocks, and linked to form a chain, and thus the name, blockchain.
As a result of its immutability and transparency, lenders can access records of transactions that are tamper-free, and unalterable, reducing instances of fraud substantially. This further extends to ID verification, qualifications, and more, all of which will be undoubtable, when on the blockchain.
How Lenders Use Blockchain Technology To Prevent Fraud?
There are a number of applications of blockchain technology for lenders, particularly when it comes to preventing fraud. While all of them still remain in trial stages, there is no doubt that they will dominate this industry in just a few short years.
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Identity Verification
One of the most common types of fraud that most lenders fall victim to, is identity theft. Not only does this result in losses for the lender, it also creates 1,000s of hapless victims each year.
With blockchain tech, however, this problem can be nipped in the bud for good. Using sophisticated cryptography, users can be set up with a unique digital identity on the blockchain, that is linked with their other personal information such as date of birth, social security, and more.
Lenders can then verify the identity of applicants, in a way that is absolutely free from tampering, or duplication.
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Smart Contracts
The next big thing in the world of blockchain, smart contracts are essentially lines of code that are executed when certain conditions are met.
When lenders and borrowers agree on the terms of a transaction, the same can be converted into code on the blockchain, to be executed without the need for any arbiters or intermediaries.
The range of possibilities when it comes to smart contracts are essentially limitless, from the verification and approval of loans, to repayments, penalties, and collections, everything can be turned into a seamless, self-executing code, removing the need for middlemen, and substantially reducing instances of fraud and non-payment of debt.
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Decentralized Finance (DeFi)
One of the most disruptive forces in the business of lending today is the rise of decentralized finance, or DeFi.
Far removed from the archaic regulations and protectionist policies that traditional banks and financial institutions face, DeFi operates free from it all, with the potential to fundamentally alter our banking and financial systems.
DeFi essentially turns millions of people across the world into a peer-to-peer bank in their own right, with the ability to borrow, invest, and lend, with little-to-no restrictions holding them back.
Imagine mortgaging your home, but instead of going to your local bank, you take up an offer from a trusted HELOC lender available on the blockchain, from across the world, with a digitized, paperless process. That is the future we stand to attain with blockchain technology.
Final Words
Blockchain technology has proven the naysayers wrong, time and time again, and will continue doing so in the years to come.
The savings, efficiencies, and security offered by this technology will soon make it indispensable in the banking system, and the above mentioned use cases are just a start. All in all, these are undeniably exciting times for blockchain, crypto, and the banking and financial services industry.