Blockchain Credit Risk & Lending
Digital currencies have been gaining momentum as secure ways to manage and move fiscal assets. Blockchain is emerging as a key solution in the lending and risk management space. Blockchain, which is central to bitcoin and similar currencies, gives organizations an opportunity to track and document how money moves in more intuitive ways than they have been able to in the past. This, in turn, simplifies regulatory and risk management processes, turning the traditional lending ecosystem on its head. Financial services firms that get ahead of this trend have an opportunity to use blockchain alongside other emerging technologies to implement alternative lending strategies into operations.
What is blockchain and how does it work?
A report from the Harvard Business Review described blockchain as a ledger that remains open to and distributed across stakeholders within a financial transaction. Within this functionality, the ledger can be used to automatically complete or launch transactions, making it much easier for lenders and the investors behind loans to stay up-to-date on every detail of the loan arrangement and maintain an accurate digital paper trail with ease.
“Blockchain is increasingly vital as the world moves at a digital pace.”
This is all accomplished through tokenization, a technology that gathers metadata about transactions within a digital ecosystem and stores that information in encrypted fashion so it can be securely shared between relevant parties.
Blockchain is increasingly vital as the world moves at a digital pace, but financial services firms are still stuck in regulatory and risk management gridlock, the HBR report explained.
What blockchain means for financial risk management & lending
To understand the potential impact of blockchain, look no further than emerging startups that are already disrupting alternative lending. In an interview with City A.M., John Pellew, founder and CEO of Othera, a blockchain and lending platform, explained that the emerging technology is effectively creating a new class of assets that can be incredibly attractive to lenders. In practice, blockchain is allowing organizations to break up digital loans into more pieces, with components owned by more varied investors, creating a highly liquid asset without adding to risk.
“The blockchain provides what I call ‘total asset provenance’ which means that every single interaction between the borrower and the lender is logged on it,” Pellew told the news source. “This fine-grain loan-level data and loan performance data can be shared by the lender on a permissioned basis to whoever requires it.”
Blockchain impact on financial services
Blockchain lays the groundwork for greater visibility into lending environments, and analytics tools give financial services firms the capabilities they need to turn that transparency into action decision-making. As a result, banks and credit unions are free to keep pace with alternative lending methodologies.Blockchain creates opportunities for traditional financial services firms to get more involved in alternative lending because it creates the visibility and traceability needed to comply with financial risk management regulations. However, these benefits are only available to organizations that are able to integrate this type of digital data into their risk management practices. Modern analytics solutions built for the financial services resolve this issue by bringing together data from a wider range of sources to allow risk managers to quickly analyze circumstances around a loan and make accurate decisions quickly.
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