Blockchain could potentially change the way banks deal with credit data. So, how is it happening in reality and can blockchain make credit agencies obsolete?
Blockchain technology could potentially change the way we deal with data, making data management more transparent, as the optimists say. Some go as far as claiming that the technology might drive financial inclusion, attracting consumers who are excluded from mainstream financial services. Considering some other problems and inefficiencies like the lack of data security, blockchain technology could emerge as a much-needed solution. So, how is it happening in reality?
Verifying the data
If we take the business of credit agencies into account, it is worthwhile to note that borrower`s financial discipline and credit capability require verification and evaluation. This is indeed a time consuming and expensive process. Also, some countries like Russia, Spain, and Brazil have many credit bureaus, which makes the procedures even more costly.
The situation is complex because data is not shared among the credit agencies. Thus, it is necessary to engage with all of the providers to a assess the borrower`s financial health.
Centralized credit facilities are expensive
Banks and other financial institutions are paying fees to centralized credit facilities like Experian, Equifax, TransUnion, and FICO so that they could make an assessment to the credit histories of their customers.
In other words, customers are paying a high price for having a centralized credit history facility. The problem is that these facilities may experience data breaches. Long story short, the process is quite out-dated, as Fintech Weekly wrote in a recent article on the subject. Here is where blockchain comes into the picture. Could distributed ledger technology be one of the possible solutions to these problems?
Can blockchain drive value in lending?
Blockchain technology could disrupt the way credit agencies work at the moment. As we know, the technology is a ledger spread across different computers that claims to have data integrity, traceability, and certain cost advantages despite its decentralization. So, storing the data on the blockchain ledger and respectively in the blockchain network could eliminate errors and data breaches. In this case, there is no central authority that can make a mistake. The intermediaries are also missing, meaning that costs of lending could decrease.
“While it may be too soon to predict the exact impact of blockchain in lending, what is apparent is that the traditional centralized approach of the credit industry isn’t working.“, as Fintech Weekly wrote.
Time can show how and whether the technology will transform the sector for the better. The promise seems to be huge, but the results are to follow in the future, if at all.