Blockchain or distributed ledger technologies offer exciting new possibilities: increased speed of transaction, elimination of reliance on individual proprietary systems for security, creating an absolute system of record and more. Every day there’s a new example: American Express has introduced instant blockchain-based payments using Ripple for U.S. corporate customers sending funds to UK-based businesses that bank with Santander. In Illinois, everything from land and birth records to healthcare data is increasingly stored using blockchain technology. The world’s largest insurers, including SwissRe, Allianz, Liberty Mutual, Zurich Insurance, XL Catlin and more have created B3i, a consortium exploring an industry-standard blockchain.
Financial services are amongst the fastest adopters of distributed ledger technologies. Northern Trust records transactions and documentation associated with private equity deals using blockchain; it went from idea to implementation in six months.
Where are the examples for credit and collection? Here are three ways lending and collections could soon benefit from blockchain technologies:
Secure and Accurate Data
Currently banks, credit card companies, loyalty card retailers and other lenders store personal customer information in their privately owned databases. This includes everything from addresses and phone numbers to lists of purchases and repayments. The databases have no transparency, are vulnerable to hacking, and difficult to correct when things go wrong. Consumer trust in these systems has been eroded by repeated cases of massive personal data breaches.
In contrast, blockchain technologies are decentralised and globally distributed digital ledgers. Altering or tampering with blockchain records is extremely complex, prohibitively expensive, and would require the collusion of the majority of its members. This makes them highly secure and could reestablish trust and transparency for customers. Blockchains are an indisputable way of keeping track of what is true: for example who has paid what, who has signed what.
Storing information in blockchain records would greatly benefit creditors, collection agencies and borrowers in arrears, who are often locked in disputes over transactions, contract terms and payment records. Time and costs on all sides would be saved by the elimination of the protracted paperwork and communications needed to establish the basic facts of a case.
Identity and Dispute Management
The secure and tamperproof nature of blockchain technology also supports the strict requirements of anti-money laundering and Know Your Customer regulations. These processes — mandatory for all lenders to verify the identity of customers — are highly susceptible to fraud, costing companies an estimated U.S. $1-2 trillion annually. Storing a customer’s digital identity on the blockchain would reduce the $60 million of resources used for identification, and improve the customer experience by cutting onboarding times.
At the other end of the credit lifecycle, contract- and information-intensive arrears and collections management would be streamlined and simplified. This would reduce credit losses for lenders and help rehabilitate borrowers who might otherwise see credit ratings adversely affected over a long period.
The Power of Choice
Blockchain technology is also changing the way creditors are doing business. Customers have more choice than ever before in where they obtain credit and how it is funded. One example is peer to peer lending, the recent practice of extending credit to individuals or businesses through online services that match lenders with borrowers. Companies such as Celsius are taking this one step further, putting credit scores and legacy data on the blockchain and providing users with their own digital identity. The goal is to create a digital, peer to peer community with lower loss factors and higher on-time payments, enabling greater credit limits at lower interest rates. A win-win for borrowers and lenders.
As Wharton legal studies and business ethics professor Kevin Werbach describes it, blockchain is creating a “new architecture of trust”. This isn’t just about time, speed and eliminating middle men. Large corporations may utilise blockchain technology for process efficiency, the real potential here though is the opportunity to focus on human centred lending practices and investing in companies and individuals for the long term. Credit will always need collections and vice versa, the opportunity is to use blockchain technology to maximise the credit cycle’s contribution to people and businesses.