Up until 2008 when the blockchain technology was introduced, banks had the monopoly on all forms of exchange of values. With blockchain technology, decentralized cryptocurrencies like the rapidly growing Bitcoin have been created and are rapidly changing the way business as we know it is conducted.
Simply put, blockchain technology is a medium through which you can carry out transactions without having to involve intermediaries. The theoretical idea behind blockchain technology is to eradicate banks’ monopolized power over the control of everything related to fiat currencies, from their creation to loaning services. With the growing acceptance of blockchain technology, it’s natural to start wondering what impacts it will have on the commercial finance industry.
Generally, the commercial finance industry is focused on institutions which offer commercial business loans. Businesses can take up a loan to get started or to boost their production level. To take a loan, businesses and individuals must have assets they can collateralize to lenders. Some small businesses might have to depend on the Small Business Administration (SBA) or other institutions to qualify for some loans.
However, with the introduction of blockchain technology, there are now blockchain lending services that allow individuals to access peer-to-peer lending opportunities which are more efficient, more secure and provide better interest rates. This means that as an individual who wants to take out a loan, you do not have to deal with the usual credit service gatekeepers if you want to access really low-interest rates. This in itself makes for an enticing prospect and could mean more people leaning towards blockchain technology rather than traditional commercial finance services.
When you fill out an application for a loan with a traditional bank or lender, they have to carry out a risk analysis on you in the event that you are unable to pay the money back. This means that they will have to gain access to your credit records which are provided to them by the credit agencies. They use this information to analyze the effects any payment defaults would have on them. This system is centralized and is often hostile to loan consumers. It also means that any material errors in your record could negatively impact your chances of getting your loan, with very little chance of you being able to have the error corrected.
On the other hand, because blockchain technology is decentralized, loan seekers have increased chances of securing loans based on a global credit score. In a few years, this will reduce significantly the rate at which consumers turn to traditional commercial finance service providers for loans.
For those institutions which don’t embrace blockchain technology, it may well mean extinction because there will no longer be any need for their services. People will choose a medium that offers them easy, secure and convenient transactions, over a system that uses various prohibitive intermediaries in its processes.
Blockchain offers a decentralized system that eliminates the need to use gatekeepers and intermediaries. You do not need to have assets that are equivalent in value to the loan in order to be given the loan. Your business simply has to meet a global credit score that is favorable to everyone, particularly small start-up businesses.
Some start-up businesses that have been predicted to be successful within a couple of years don’t flourish as expected, meaning they are incapable of meeting the deadline of their loan payment. The lower interest rates provided by blockchain technology make it less likely for businesses to have this problem. Apart from lower interest rates, blockchain technology allows for lenders to take tokens as collaterals and any time the default payment date is missed, the borrower doesn’t have to worry about being foreclosed.
Fraud is a big problem for commercial finance companies. However, by adopting blockchain technology, they will have found a means by which they can avoid fraud.
The transition of commercial banking to online has resulted in more opportunities for fraud. However, Blockchain ensures that identities can be kept secure and has at its heart a core feature of decentralization. Because it is not centralized, it does not have a single point of weakness. The majority of fraudulent activities that take place are as a result of various intermediary processes that are involved in transacting with commercial finance institutions. This is missing in Blockchain.
Blockchain has the potential to eliminate many common frauds.
Will Blockchain Overtake Traditional Commercial Finance?
Despite the shortcomings of blockchain technology such as the fact that it is slower to process because there are a limited number of transactions, a block can take at once, more and more experts are openly voicing their opinion that blockchain will gradually overtake the commercial finance industry. It has become a widely accepted view across the board that if the commercial finance industry does not begin to embrace and incorporate Blockchain, it will be swallowed by it and cease to be relevant.
Frankly, banks and financial institutions who have not found a way to make blockchain technology work for them are going to have to fight to keep standing still in a matter of a few years. Blockchain technology and cryptocurrencies offer people services that are more secure and cheaper than any traditional financial institutions have been able to offer. This makes it an irresistible offer to many.
Blockchain technology alongside the cryptocurrencies it has given birth to are still in their infancy and may not have much of an obvious wider effect for now. However, the interoperation of both traditional commercial finance and blockchain technology will result in them becoming beneficial to both.
Banks will better be able to fix their shortcomings. The banks, in turn, will undoubtedly go on to develop a means to eradicate the shortcomings of the blockchain technology that currently exist so they can effectively harvest and maximize its benefits. The potential impacts of blockchain will be felt for many years to come.