Feb 16, 2017 Dave King
Succeeding in today's consumer lending industry entails building an infrastructure designed to support digital products and services. CMOs and CFOs must collaborate with their technically minded colleagues to determine how the latest technologies can enable new services.
Blockchain could provide financial institutions with the resources they require to develop new, innovative services. At the same time, the technology presents several challenges. How will blockchain impact the way FIs execute consumer lending relationships?
Blockchain: A guide for lenders
The World Economic Forum explained that blockchain is a "digital ledger" distributed throughout an entire network of computers. It's what the CTO would refer to as a decentralized database. Blockchain allows two parties to exchange money without going through a third party, such as a bank or payment processor. Here's how it works:
- Ellen wants to send $50 to Ryan.
- A "block" represents the transaction, and is broadcast to every machine in the blockchain network.
- The machines within the network confirm that the transaction is valid.
- The block is added to the chain, which keeps a record of the transactions.
- The transaction completes, and Ryan receives $50.
One of the chief advantages of blockchain is that it's decentralized database receives continuous updates. In a traditional database, only one person can apply changes at a time, meaning only one transaction can occur. With blockchain, parties can execute multiple transactions. The video from IBM below provides further explanation of how blockchain can impact enterprise operations:
How could consumer lenders utilize blockchain?
According to a study from IBM, 79 percent of "trailblazing" banks - FIs who plan on utilizing blockchain technology in their commercial operations this year - intend to leverage the technology in their consumer lending operations. FIs that plan on implementing blockchain in a few years want to do so for the same purpose, but how?
Most banks who plan to or are currently using blockchain believe that it could help them save money by eliminating inefficient or time-consuming processes. Alan Morrison, senior manager at PricewaterhouseCoopers Center for Technology and Innovation, wrote that blockchain could automate much of the data validation loan officers, underwriters and other parties need to conduct in the loan approval process.
For example, blockchain technology is based on the principle of sharing a tamperproof ledger that denotes every step across a broader transaction. From a compliance officer's standpoint, this function is a dream come true.
"With blockchain, software agents will be a key component of loan validation."
As opposed to developing a separate report to the Consumer Financial Protection Bureau, for example, authorities could be automatically looped in on every step of the transaction. In addition, because it's impossible to tamper blocks once they've been added to the chain, auditors can trust each block's composition.
Morrison touched on an important concept associated with blockchain: Software agents will be a central component of loan validation. Legally, the system on which blockchain runs will replace the people behind data verification tasks. These core features enable banks to scale their recordkeeping to a level that's difficult to achieve under current conditions.
To be clear: Blockchain isn't a panacea for all lending ills. The technology itself comes with its own set of challenges, but FIs aren't backing down form them.