Smart contracts are contracts with predefined rules that execute automatically when the set conditions are met. Smart contract development jumped to the front page when companies, especially those in finance, became interested in the blockchain. If your business is in any way related to the finance sector, you have probably already been investigating the technology to some degree. This overview explores the impact on the industry as a whole and various businesses within the sector.
How have smart contracts changed the finance industry?
With paperwork, mistakes happen more often. When money is concerned, mistakes cost more. Since the paper-based approach has proven unreliable on more than one occasion, many businesses in the finance industry are turning over a new leaf by creating finance apps based on smart contracts. Banking, retail, investment and insurance companies are burdened by intermediary fees, which often are too high or too complicated to handle for a digital business. Focusing on decentralization, removing intermediaries and lowering transaction costs are becoming priorities for finance companies.
As the technology continues to evolve, dApp developers are heavily invested in smart contract development projects, trying to solve problems related to distributed ledgers and setting the stage for smart contracts to enter the mainstream.
Benefits of Smart Contracts for Finance Apps
Contrary to popular belief, banks, insurance companies and investors were among the first to accept and test the new technologies. These industries are keeping up with the times, adopting smart contract solutions in order to upgrade customer service and gain an advantage over competitors.
What are the areas that may benefit the most from smart contracts?
Smart contracts are automatically executed, shortening the loan cycles for business clients. At the moment, corporate clients need to wait almost three weeks to get a syndicated loan approved. A finance app based on smart contract development principles can support loan approval deadlines that are seven to 10 days from initiation. In turn, shorter approval cycles lead to greater loan demand, resulting in subsequent growth in the investment banking sector.
DApps in retail banking can significantly change mortgage loans. Savings from including smart contracts in a mortgage dApp could reward consumers through lowered processing costs, as well as rewarding banks by cutting costs on their side.
Smart contracts in the insurance industry, especially for personal motor vehicle insurance, can contribute to cost savings on a broader scale while reducing processing overhead in handling claims. The final result of an insurance app based on a smart contract is a lower premium for customers, who will get a portion of the annual savings achieved by insurance companies.
Challenges of Smart Contracts for Finance Apps
Smart contract development is not without challenges: dApp developers and business stakeholders need to solve several technical, legal and organizational challenges before finance dApps can be widely adopted.
Security and Privacy
Data in smart contracts is stored in public blockchains and distributed permissioned ledgers, raising privacy and security concerns for users. As a general rule, new finance apps cannot be easily integrated into the same system with conventional dApps. The problem of scalability still persists, as dApp developers are exploring solutions to make smart contracts work for multiple transactions.
Regulations are a crucial obstacle for finance dApps. A number of local and international regulatory bodies are trying to catch up, putting restrictions on blockchain technology in some regions. Because of local regulations, the finance market is fragmented, and many legislators are trying to find a way to make smart contracts carry the same weight as paper-based finance solutions.
Blockchain is a new technology. Consequently, it’s more susceptible to mistakes. Although smart contract development is not a complicated skill per se, when put into context, it can create major headaches, as was revealed in the DAO debacle.
Current Stage of Smart Contract Development
What’s the current stage of smart contracts? Here are the basic capabilities of smart contracts in the finance industry:
- Completing automatic transactions between parties without the need for a central authority and infrastructure.
- Programmability and escrow (setting conditions for execution in advance with a third-party trustee).
- Changing the infrastructure of stock exchange markets.
- Improving supply-chain documentation, invoicing and payments in manufacturing and retail.
- Faster crowdfunding for startups and small businesses.
- Insurance innovations: peer-to-peer insurance and sharing economy insurance.
The above examples are only a small part of the new possibilities that will pop up on the horizon soon. Several software industry giants, as well as hundreds of independent startups, are engaged in smart contract development to revamp the finance industry and make it user-friendly by offering decentralized solutions and significantly reduced fees.