IBM Hosts a Hotseat Overview of How Blockchain Can Be Used to Disrupt Financial Services
Financial cooperatives, also known as credit unions, are abundant – there are about 85,000 of them. Such financial institutions are formed to serve members and given their non-profit quality, they collaborate to achieve a common goal, which is often quality service. This type of standard also works to promote a credit union service organization, also known as CUSO. This type of organization is formed by the credit union and it works to provide those within the industry with a specific product or service.
CUSOs enable credit unions to collaborate and to compete on a larger scale. It also makes it easier for them to give new technologies a chance and to determine whether the technologies work to improve their members’ experience. One of the most prominent technologies that many credit unions are working to implement through CUSOs is blockchain.
Blockchain and its underlying distributed ledger technology have been adopted in many industries. In particular, the financial industry seems to be a stellar option. Many credit unions have adopted the technology to adopt self-sovereign identity (SSI), which is a decentralized and member-owned system that is developed on the distributed ledger. There are a number of advantages that credit unions can experience due to SSI. Here are a few of those advantages:
Confirming Member Identity
First, the system operates by providing member identification features. This requirement, also known as Know Your Customer, means that the customer must provide information about themselves. A few of the qualifiers include the address, last four digits of the social security number, and transaction history belonging to the member.
Now, with distributed ledger technology, there seems to be a better and faster way to confirm member identity. Members can use the SSI to prove their identity in usually under five seconds. The identification is digital. With such digital identification features, credit unions can ensure that their members can use the system at any time and from anywhere. Further, additional applications can be developed on the DLT.
Auto loans and other types of loans are a form of indirect lending provided by credit unions, but usually through a dealership. Credit unions are usually preferred for these types of loans due to their low-interest rates and due to these low-interest rates, credit unions are able to grow their membership.
Another advantage of the direct lending system is the DLT, which is recognized for its ability to enhance the lending process by reducing fraud. Those who receive a loan can establish their digital identity and they can also use the smart contracts that are available.
With the smart contracts, users can experience a streamlined process and lower processing times for their loans, which means that they receive the necessary funds faster too. During the process, credit unions use the SSI, and through that, members share and verify their digital credentials with the union and the recipient of the loan, such as the dealership.
Payments Across The Border
Distributed ledger technology can also be used by credit unions to disrupt the traditional cross-border payment system, which is often slow, expensive, and inconvenient for users. It usually takes a few days for such payments to process, which is a hassle as well. Worse yet, the fees can be high as well – in some instances it can be over 10 percent of the amount sent.
The good news is that distributed ledger technology may be able to remedy the slow and costly transfer process by enhancing transaction speed and reducing cost. The technology can help enable transfers to be conducted almost immediate. Further, the security features are a benefit as well, as they mitigate the risk associated with such transfers.
More Transparency Concerning Loans
There are dozens of issues associated with loans – they are difficult, complex, and they are burdened by regulations that make the process challenging. Those who participate in the loan process, such as the dealership, become the ones benefiting from the loan, while the credit union is more of a passive investor. As a result, credit unions do the bulk of the work, while enjoying less of the profits.
However, distributed ledger technology may be able to change this by enabling credit unions to become more active participants in the process. This can lead to less risk as well.
Overall, distributed ledger technology may be a prime solution for credit unions. It will be interesting to see how the technology evolves over time and how credit unions and other financial institutions use it.