Blockchain is being used across industries to enable better operational efficiency and security. Blockchain has use cases in healthcare, manufacturing, insurance, and many other industries, but the financial services sector was among the earliest adopters of blockchain, and a chief application of the technology continues to be the modernization and improvement of financial services.
In this article we’re covering the ways blockchain improves data security, and what this means for the future of fintech.
A primer on Blockchain
First, a refresher on blockchain. Blockchain was invented in 2008 by Satoshi Nakamoto, a pseudonym used by the person or group of people (no one knows for sure!) who created the cryptocurrency, Bitcoin. Blockchain was invented to serve as the public ledger of Bitcoin.
Commonly, blockchain is defined as a distributed, decentralized, public ledger. In layman’s terms it is a public database of digital information. What makes it unique -- and powerful -- is that it’s an especially secure method of storing data.
How blockchain enhances data security
Each block in the chain has a unique hash. Think of it as a fingerprint. Each new block carries the hash of the prior, which links all the blocks together.
You can’t make a change to any of the blocks in the chain without impacting the rest of the chain, which requires network consensus. When any change is made to a block, the hash is also changed. Because the subsequent block in the chain contains the original hash of the first block, it won’t match with the altered first block. Someone wanting to make a change (i.e.; a hacker) would have to update the hashes of every single block in the chain in order to evade detection, which is nigh on impossible. This is how blockchain creates an immutable record of transactions.
Furthermore, blockchain is a decentralized system, meaning that data is not stored in a single, central location vulnerable to attack. Instead, data is stored across a network of computers and this type of peer-to-peer system reduces the risks associated with storing data in a central location.
Other benefits of blockchain technology
Security is the most obvious benefit that blockchain technology brings to bear for fintech, but there are other significant benefits to note.
Blockchain can help speed up these types of transactions. According to Accenture, when implemented correctly blockchain can “enable banks to process payments more quickly and more accurately while reducing transaction processing costs and the requirement for exceptions.”
Established financial institutions enjoy a measure of built-in consumer trust because they’re well-regulated and are mainstays of our economy. Even though some legacy institution practices like hidden fees can erode consumer trust, and big banks have been frequent targets of cyber attacks, consumers are still more likely to entrust their funds to an established player than a little-heard-of upstart.
As newcomers, fintech startups have to work very hard to replicate the same level of trust. Blockchain helps build a picture of fintechs as stable and reliable because it is highly secure by design. This trustworthiness is essential to wooing new customers and earning their loyalty.
The financial services sector is ripe for disruption, and that’s why fintech startups worldwide garnered $53 billion in financing in 2019 alone. Blockchain is helping to power some of this disruption because it provides a secure, fast alternative to many traditional banking and financial products. Look for blockchain to power fintech startups in the areas of payments, lending, and wealth management in the near future.