What is Blockchain Technology? A Comprehensive Guide For Beginners

When Satoshi Nakamoto first created the cryptocurrency Bitcoin in 2008, it was viewed with immense distrust, still is to a considerable extent, with Central Banks and Regulatory Agencies remaining sceptical and refusing to adopt it. However, the underlying technology, blockchain has become one of the most talked about topics Worldwide. Nearly every major player in every industry is exploring the use of blockchain technology. It is finding use cases in several areas including financial services, retail, trading, legal, healthcare, and pretty much any business that involves record keeping and is also expected to unleash a new wave of financial products and services generating new avenues for greater revenue for banks.

Blockchain, also known as “distributed ledger technology” was originally created as a tracking database for Bitcoin transactions. It was designed to process transactions without the need for a central bank or intermediary, using complex algorithms and consensus among its peer-to-peer network to verify transactions. In the past couple of years, banks and financial institutions have been betting on blockchain to provide a reliable alternative to systems that depend on intermediaries and third-party validation of transactions. Their goal is to leverage blockchain distributed ledger approach to create a system that decentralizes trust to significantly reduce all types of transaction fees along with shorter processing timelines. The disruptive potential of this technology is widely claimed to equal that of the early commercial Internet. A crucial difference, however, is that while the Internet enables the exchange of data, this technology could enable the exchange of value; that is, it could enable users to carry out trade and commerce across the globe without the need for payment processors, custodians and settlement and reconciliation entities.

According to Forbes, blockchain technology is being viewed as a platform which could bring about stupendous changes in financial transactions, due to:

  1. As a public ledger system, blockchain records and validate each transaction made, which makes it secure and reliable.
  2. All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
  3. Blockchain technology discards the need for any third-party or central authority for peer-to-peer transactions.
  4. Decentralization of the technology.

Governments, world’s largest financial institutions, global banks and other financial organizations are investing in proof-of-concept projects internally, using trial and error deployments within limited parameters to create efficiencies. The full potential of blockchain can only unravel when institutions partner together to set industry standards and protocols that enable interoperability. The underlying principles of blockchain i.e. decentralization, consensus based system and use of unique digital signature will reinforce the financial system which was recently found to be increasingly vulnerable to online frauds. Startups, established financial institutions and fin-tech companies have found the below applications of blockchain technology and are investing in the development of application and products based on the same:

  1. Payments: Blockchain can transform the world of digital payments to near real-time transactions with real time settlements, without intermediaries. Development of new payments products, based on blockchain technology such as self-executing smart contracts are the next step.
  2. KYC/AML and Records Management: A decentralized, network-defined registry makes KYC processes streamlined and helps in AML checks and controls during client onboarding.
  3. Capital Markets: A distributed and consolidated data repository built on blockchain technology gives users a unified and real-time view of all trade-related information, thus reducing the scope for error or disagreement and accelerating the settlement process.
  4. Trade Finance: The complex network of players with manual processes and paper work is transformed into efficient and innovative trade finance services
  5. Syndicated Lending: Blockchain in syndicated lending envisages to reduce the settlement process on the sell-side and buy-side, thus saving time and cost worth millions.
  6. Regulatory reporting: Easy access to transaction reporting data for regulators will reduce cost of regulatory reporting of market participants.
Image Source: Mermelab

The use of blockchain, when applied to legacy processes of the banking and financial services firms, has potentially transformative effects in the space. However, it is essential to bolster the technology infrastructure even before banks start testing the waters. Blockchain has exceptionally high impact and it leads to:

  • Lower operational costs
  • Seamless global trade
  • Reduced risk in clearing
  • Increased trust
  • Distributed Identity

Spark10 has evolved

Startup accelerators, in their traditional avatar, are no longer relevant as the startups themselves have changed. When mainstream accelerators started in 2005, the startups of the day needed an intense mentorship program to build their business. Accordingly, programs were designed wherein the startups would co-locate with the accelerator for the entire duration. As the startups and startup ecosystem evolved with time, scaling up became a bigger challenge than building a business. That’s when the accelerators themselves transformed and built programs to scale up early stage companies. In 2017, especially in India, where accelerators are still following the conventional model, Spark10 has identified that the next generation of startups needs a program, that aligns to their needs and that causes minimal disruption to their normal operations. Our new accelerator program has been designed with the focus on business requirements of the next generation of startups.

Spark10’s accelerator program started in 2016 with a vision to be the “first investor” for idea stage or early stage startups. Since then we have had 2 cohorts with nine and four startups respectively. Both were fixed cohorts of 3 months each, and startups were required to co-locate with us for 3 months. We realized, that startups and the startup ecosystem are changing, as it rightly should. We concluded that 13 weeks weren’t quite enough to provide meaningful support. Startups based out of locations, far from our program location had trouble running their business remotely, while they were part of the program. Lastly, our team of mentors and investors felt the need to spend more time with founders to be able to guide them better.

Our new program is a rolling cohort, spanning over 6 months, where startups will be required to co-locate with us for only one week every month. To keep startups focused on their goal, there will be weekly reviews (remote and in-person) and ongoing mentorship sessions, workshops and talks along with the opportunity to network and connect with experts from your industry as well as investors will ensure you come up the curve faster. This unique program also allows us to work with the best founders, companies, and brains in the country. In a market where existing and new accelerator are still trying to make the traditional model work, our accelerator offers flexibility and extended support so we are with you at every step in the crucial stages of growth.

For entrepreneurs to be, who have just come up with their business idea, we offer mentorship, capital as well as exposure so you can translate it into a sustainable business. If you are a company with a Minimum Viable Product (MVP) or a prototype, funded already, our in-house mentors along with our community of industry experts will offer you mentorship so you can scale your business. For startups that do not require financing, we offer mentorship and guidance. All this for a small stake in their business – we take a small equity capped at 6% for up to a maximum investment amount of Rs. 20 lakhs.

Keep watching this space for an announcement of our next cohort. If you have any questions, please post them on our website, LinkedIn, Twitter handle or Facebook page and our team will respond asap.  If you or any of your contacts are working on building a business that can benefit from Spark10 or have any queries, please feel free to drop a line at hello@spark10.com

Moving Towards the Fintech Age

The Banking and Financial Services industry is witnessing a rapidly changing landscape, with the rise of fintech companies being the catalyst. Traditional banking products, services, and channels are losing relevance as customers, increasingly influenced by social media and technological advancements in other spheres. There is immense, and largely unfulfilled, demand for better customer experience and convergence in services. Mobile-internet based banking services are being rapidly adopted, resulting in bank queues shortening by the day. Service levels are no longer the differentiating factor. A customer experience that is efficient, convenient, personalized and streamlined at every touchpoint is what sets financial institutions apart. The changing regulatory environment and other macroeconomic indicators have also contributed to making this a never before opportunity for the rise of fintech start-ups and their disruptive digital banking solutions.

Digital banking has influenced world economy manifold. Alternative Lending is probably the greatest innovation by fintech companies if you were to ask millennials. The traditional banking system has extremely rigid norms and mandates a cut-off credit score to qualify for a loan of any kind. Young adults, the self-employed, and people who have moved cities/countries have little or no credit history if they have not taken a loan previously or do not have a credit card. Such people would have a zero FICO or CIBIL score. In emerging economies alone, individuals, as well as institutions, rely on cash nearly 90% of the time. This increases the cost of servicing customers for financial institutions while leaving little or no usable data to assess the creditworthiness of such businesses and individuals.

Fintech startups like the UK-based Aire; Kabbage and Lending Club in the US; Data signs, Capital Float, Rubique, Finomena, OptaCredit and the likes in India have recognized the need for democratizing the credit score. Consequently, they have leveraged the power of Big Data, machine learning and Artificial Intelligence (AI) to assess creditworthiness. App-based lending services have used these techniques to assess “intent to pay” rather than the conventional “ability to pay”. This has helped transform B2B and B2C lending for Micro, Small and Medium Enterprises (MSME) and individuals. Forbes estimates, the 1,000 fintech companies in the world have collectively raised US$105 billion in funding and are currently worth nearly US$870 billion. Investment in fintech firms has more than doubled between 2014 and 2015, with California and New York in the US, the UK and France being the global hubs. They are followed closely by India and China, primarily because of a large population and a fast-rising middle class. In India, experts predict, as people and jobs become more mobile, alternative lending – rather than staying on the fringes – will be the new ’normal’.

It wouldn’t be too far from the truth if one stated that Alternative Lending is the poster-boy of fintech industry. It is worth noting, however, that the young adults living in urban areas aren’t the only beneficiaries of digital banking. It has also started touching the lives of the rural population in emerging economies, which were, so far, unbanked. According to a McKinsey Global Institute study, 2 billion people globally do not have a bank account or access to credit., At least 200 million MSMEs in emerging economies have little or no access to credit, impeding their growth. This gap between demand for credit and its supply is estimated to be at US$2.2 trillion. For governments, the predominant use of cash leads to leakage (estimates peg it at one-third of cash payments), enabling corruption and affecting the efficiency of delivery of government aid and subsidy.

Access to a smartphone, connected to an ecosystem of thousands of mobile apps running securely over a cloud computing infrastructure, provides the much-needed basis for a suite of basic financial services. A digital wallet (linked to a traditional bank account) can be used for payments and remittances, wages and government subsidies, transacting at stores and paying utility bills and school fees. All this at a finger’s touch saves time, money and effort, that too at no risk and greater convenience. Fintech startups can partner with financial institutions to provide digital banking solutions, at costs 80% to 90% lower than the cost of building brick-and-mortar bank branches. Over time, based on the database created by transactions made through digital wallets, credit risk may be assessed for providing loans. As the use of digital payments and other digital products increases, the benefits to all users increase, creating network effects that can further accelerate adoption. According to studies, in Kenya, the use of M‑Pesa mobile money system grew from 0 to 40 percent in the first three years of its launch in 2007—and rose to 70 percent by 2015, much faster than traditional banking could ever hope to achieve.

Uniquely poised among the emerging economies is India with the third-largest smartphone market i.e. 314 million mobile web users as of 2017. Faced with the herculean task of delivering on its promise of financial inclusion and transparency, the Indian Government is relying on innovative digital solutions. Hundred million new mobile wallets have been created in India in the past one year by fintech start-ups that did not exist a decade ago. More than a billion citizens have been brought under the digital grid through India’s Unique Identification Program (UID) in five-and-a-half years, which is probably the fastest digital service growth in history. In a massive exercise, the government has also opened more than 200 million bank accounts linked to the UID to deliver government welfare funds including wages and pensions, aimed at reducing leakage.

The widespread use of digital finance can uplift the GDP of emerging economies by as much as 6%, or US$3.7 trillion, by 2025. Close to 1.6 billion unbanked people can gain access to formal financial services if the India example can be replicated by fintech start-ups in other countries. An additional US$2.1 trillion of loans can be provided to individuals and businesses. Governments can potentially save US$110 billion each year from leakage. Together, the resulting growth in aggregate demand could create 95 million new jobs.

The global economy witnessed a lackluster 2016. With uncertainties surrounding the policy stance of the new administrations in countries like US, UK, and France, 2017 is expected to be a year of moderate growth too. The huge opportunity created by fintech start-ups has the potential to jumpstart the global economy, creating a win-win situation for financial services businesses as well as emerging countries. The demand created by emerging markets, in turn, would be enough to fuel businesses worldwide. Traditional Banking and Financial Services firms are now beginning to take note of this. Investment Banking behemoth Goldman Sachs, for the first time in its 147-year history, has entered into the world of retail lending by building a technology infrastructure called Marcus by Goldman Sachs, a new online personal lending platform, where credit-worthy borrowers can apply for fixed rate, no fee personal loans up to US$ 30,000 for periods of two to six years.

While this is an unprecedented chance for the fintech start-up community to impact every life across the globe, there is also the risk of handling exponential amounts of sensitive personal and financial data pertaining to individuals and businesses. Especially when financial institutions and/or governments are involved, this may well turn out to be a double-edged sword. While competition may be tough, making margins wafer thin, investing in top-notch security infrastructure may eventually turn out to be a greater differentiator than innovativeness alone. Following established industry practices such as performing KYC, due diligence and AML checks along with fair interest rates will ensure healthy growth for this sector. Fintech startups must remain wary of going down the microfinance route, which started with great promise but faced issues due to lack of transparency, poor governance, coercive recovery practices and high lending rates. This opportunity can only turn into a remarkable success story if fintech startups stay close to their core competence: accessibility, ease of use, low cost and innovation.

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