How Blockchain is Changing the Consumer Lending Space

When it first hit the scene, it was all about tech, Bitcoin, and other related cryptocurrencies. However, it’s now clear that blockchain has greater far-reaching effects than what was initially thought. When blockchain was still new, many people dismissed it, calling the technology a scam that would not stand the test of time.For others, blockchain was bound to a game-changer, not only in the tech industry but also in other industries including finance.

How it Works

Before analyzing how blockchain will affect consumer lending, it’s important to understand how this technology works. Blockchain works in the same principle as backups in servers work. It’s a distributed type of ledger, meaning data is stored in multiple locations (nodes) instead of a single centralized database.These nodes or computers are connected to a network that may contain as many computers as possible. The information stored in these nodes is done so in the form of blocks and each block has a unique hash number. The hashed blocks are then chained using cryptography, which is where the name “blockchain” comes from.

At this point, you must be asking yourself, “what’s all the fuss about this new technology?”

Why Blockchain Technology is Revolutionary

1. Security

This is one of the main reasons this technology is a game-changer. It’s hack-proof. There’s no such thing as a sole owner of the data. Therefore, you cannot change the data after it has been stored. To add more security, there’s another layer where everyone has a unique key,they can use to access the data.

If you attempt to change the content of the block without authorization, the attempt will be rejected. In fact, the hash will change for every user. This means that a hacker will have to invest a lot of resources to recalculate all hashes to effect any change.

2. Cost

Legal processes are expensive and cumbersome, and this is what blockchain gets rid of. There’s also the issue of middlemen where you need to go through a bank to send or receive money, not to mention the overhead and fees involved.Keep in mind, there are fees you’ll have to pay for this service.

According to Ripple, one of the currency exchange platforms, transaction costs fell by 40 to 70% among businesses that use XRapid.

3. Speed

Again, because this technology eliminates the middleman, transactions are much faster than before. Banks act as middlemen during transactions and often, the entire process will take up to a week before becomingfinal. With blockchain technology, there’s no need for a bank and this means reduced transaction costs and time.

How Blockchain Technology is Impacting Consumer Lending

With this technology, there’ll be increased transparency and efficiency. According to KPMG, blockchain technology has eliminated unsynchronized files and redundancies. All data is stored on a blockchain. This means anyone who wants to access the data needs to have a cryptographic key. Therefore, every department has the same set of data to work with, thus reducing miscommunication or errors.

Know Your Customer protocols (KYC) continue to be a huge cost for financial companies. One, because the standards haven’t been clear. Up to 53% of firms expect their compliance budgets to go up. This includes more expenses on their senior personnel. according to a survey done by Thomson Reuters.

Credit reporting is also a key factor in consumer lending. To get favorable rates from your lender, you need to have a good credit score and report. However, numerous flaws surround the entire credit reporting process

In fact, chances are you are a victim of erroneous reporting. Other flaws include data insecurity arising from having all customer data in a centralized database, making it easy for hackers to acquire sensitive information. One of the most recent examples is the security breach at Equifax in 2017. Hackers were able to acquire sensitive data including credit card numbers belonging to 209,000 cardholders. This is just one example of how vulnerable the current scoring system is.

Apart from that, there are other inaccuracies associated with credit reporting. They include:

  • Record omission, where consumers find missing details or reported in a different file, or mixed in another consumer’s report.
  • Inaccurate information,where what is in the report conflicts with the account’s true activities and credit lines.
  • Mixed records, where a report comes with someone else’s data rather than who the report was supposed to have.

Visibility and Control for Consumers

While consumers can access their credit reports at any time, lenders will only see the score they need to, depending on their interests. According to, One lender will see your score differently when you apply for a mortgage, while another will see it differently when you apply for a personal loan.

Blockchain steps in to solve this issue. It’ll be easy to get accurate customer credit data, thanks to how this technology works. In addition, lenders will upgrade their KYC measures by using identity verification offered by blockchain.

Further, you’ll have control over who can access your data. This means you’ll see all activity associated with your name. Lenders will also be able to perform credit checks during credit evaluation. Lending involves signing terms and conditions, which means there’ll be a contract. Blockchain offers smart contracts that allow both parties to agree on what should happen and when.

Here are some of the areas in lending that blockchain has already provided overwhelming support to:

  • Home equity loans
  • Personal loans
  • Education financing
  • Mortgage lending

What this Means for Other Markets

Blockchain offers outstanding security, therebygaining the trust of consumers and lenders as well; this trust will improve loan portfolio liquidity and should cause ripple effects on other markets likeresidential mortgages and consumer loans.

For instance, if there’s a change in asset ownership, this transaction will be recorded and stored permanently. What’s more, both parties, the seller and the buyer, will have no worries about the security and accuracy of their data.

Bottom Line

Similar to other forms of technology, a huge percentage of blockchain’s operation happens in the background. In fact, the ordinary consumer doesn’t understand the details of how this technology works and they really don’t care.They care more about the services they receive from their lenders. Are they convenient, fast, and secure? If the lender can provide this, then the consumer is satisfied. Nevertheless, results matter a lot to the consumer even if they don’t want to know the details behind the technology.

Lenders must, therefore, strive to offer cheaper, secure, and faster products to consumers. Those that embrace technology to improve their lending services will have an edge over competitors because customer experience comes first.

Blockchain may still be new to people’s ears, however, its effects are far-reaching. This is all courtesy of the security it offers, customer satisfaction, and cost reduction in lending.

Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.


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