Blockchain technology has revolutionized the technology world. It has made an impact on almost all sectors, like real estate, healthcare, and finance. It is a transformative technology that offers tamper-proof security to all businesses.
The transactions between two or more parties have never been so secure as with Blockchain technology. That’s why most FinTechs are implementing this technology to make their business processes more efficient.
The financial technology sector has taken up a big share of the Blockchain sector, due to many reasons. One of which is, it offers a separate digital identity to FinTech and makes operating more secure.
But, the implementation and the use of Blockchain in FinTech is not easy and it is full of challenges. If you’ve just decided to adopt Blockchain technology for your FinTech business, it’s important to acquaint yourself with the challenges.
Challenges With Blockchain Technology In The Financial Sector
Surely, Blockchain offers secrecy to transactions and keeps a continuous record of them. But the following challenges may limit the use of blockchain across the financial sector. Listed below are challenges, and some of the primary reasons why bankers are worried about blockchain:
The cost is a significant factor in implementing any new technology. If you are a small FinTech start-up, you might want to second-guess if you are deciding to implement the system.
Implementing the Blockchain system requires huge investments and large inputs. Small banks, investment companies, etc., might not be able to meet this cost.
In such a case, Blockchain technology is nothing but a burden for these companies. Apart from the implementation costs, there are costs associated with the maintenance. Businesses need to spare funds to maintain the Blockchain system. Further, developing and integrating Blockchain into existing FinTech systems can be very complex.
2. No Privacy
Using the Blockchain system in FinTech does not offer well-defined boundaries for everyday transactions. So, implementing this system might interfere with the privacy of your transactions.
It’s impossible for any organization to function without privacy. After all, a customer trust a FinTech with sensitive information. Blockchain stores all the transactions in the public ledger systems. So, these transactions are never really secure or private.
In the traditional financial systems, individuals had consent over what they wanted to share. However, in Blockchain-based FinTech applications, data is often shared among multiple participants in a decentralized network. It can be objectionable for customers who rely on your finance company for their sensitive information.
3. Literacy Requirements
Blockchain technology implementation requires a brief knowledge of technology. Undoubtedly, almost everyone is well-versed in technology these days. But using and maintaining this system requires some additional expertise. It might not be easy to operate this system within your FinTech.
Apart from the implementation costs, there are added costs for hiring expert staff. You would need to hire efficient employees who know the process of recording transactions in the Blockchain system.
Of course, there’s an alternative to equip your current staff with adequate knowledge to operate Blockchain. But then again, it would be a time-consuming task.
4. Change In Data
In the banking and FinTech sector, there are changes in data every now and then. Multiple transactions take place within a day. Even one single transaction can undergo many changes. It becomes a complex task to keep track of such changes in data.
So, making continuous modifications to data is a huge concern for FinTech thinking of adopting this system.
It becomes a major problem, especially when an employee has made an error in recording the transactions. Modifications to correct these errors are nearly impossible. It impacts the overall trust in Blockchain technology.
5. Regulatory Compliance
The lack of regulatory compliance is the biggest challenge in Blockchain technology for FinTech. A financial technology company that uses this technology can have a hard time gaining the customer’s trust.
In traditional financial systems, customers felt more secure with their funds and investments. In case of any fraud, customers could always reach out to the regulator. But in Blockchain technology, consumer protection can be a great challenge.
There is a lack of proper verification processes in this system. It promotes wrongdoings such as money laundering. Also, making cross-border transactions is a big concern as there are different regulatory compliances in different countries.
6. Heavy Dependence On Technology
It is yet another challenge that Blockchain technology brings with itself. To record the business transactions seamlessly, a FinTech would need to stay connected with the technology 24×7. Any disruption in technology can affect the whole operation. This situation might also affect the customer experience.
Additionally, there are other risks that come with dependence on technology. For instance, there are greater risks of cyberattacks. Even though Blockchain claims to offer a secure system for transactions, it’s not entirely free of cybersecurity risks. Hackers are constantly working on their skills.
So, data breaches can be a major concern for implementing this technology.
Overcoming The Challenges
Overcoming these challenges can be tough but not impossible. Here’s what FinTech can do.
- Implement a robust and comprehensive risk management framework.
- Conduct regular risk assessments to determine any challenges.
- Avoid relying on a single stack or a vendor. Diversify your dependence on technology.
- Leverage in-house and external resources for the implementation of this technology.
- Focus on talent management. Attract and retain top technology talent.
- Collaborate with other FinTech companies and regulatory authorities to minimise challenges.
- Prioritise constant innovation and stay ahead of technological advancements.
The challenges posed by Blockchain technology in FinTech are significant but manageable. FinTech companies can overcome these challenges by implementing the right strategies and robust risk management practices.
FinTech companies can leverage technology to drive innovation, improve financial services, and meet the evolving needs of consumers and businesses.
Once companies learn how to overcome these challenges, they can run business processes more efficiently. Blockchain technology can enhance the trust of customers by promoting transparency.
Also, it makes operations more efficient and streamlined. It ensures that there are faster settlement times and lower transaction costs. By harnessing the capabilities of Blockchain technology, FinTech companies can revolutionise financial services.
While these challenges remain, the potential for Blockchain to transform FinTech is significant. It can offer leading and innovative solutions that benefit both businesses and consumers.
However, blockchain has applications far beyond Fintech, for example it has been revolutionising customer portals by offering robust data security and enhanced privacy control.