17th century goldsmiths in London issued the paper notes that became banknotes in lieu of gold and silver stored in their safes by depositors. They also loaned out money and kept all underwriting records, on paper, in the same safes.
And although we’ve come a long way since then, to a certain extent, not much has changed.
Assets, loans, and other underwriting information are still kept in paper form in the vaulted bellies of banks, with some being scanned and stored digitally as PDF documents.
As securities are traded between financial institutions, they are literally moved around by couriers.
So when mortgages and other credit products were bundled together in the hundreds of thousands, assessed and assigned ratings, and then traded and speculated on, there was no way to reevaluate and reassess them in real time.
If the likelihood of default went up, financial institutions had no way of taking in such crucial information, and were unable to adjust course and avoid the eventual economical calamity of 2008. A good example: consumers are enticed into buying adjustable mortgages, where interest rates are raised after a number of years, but the fact that they are unable to keep up with payments is not factored in.
If the value of the housing market had continued to rise–as was ignorantly projected–then the disaster would have been averted. But the value stalled and fell, and without access to the right information, the economy followed suit.
OK, So Why We Haven’t We Changed the System Yet?
For one, it works. Sure, it might be clumsy, clunky, and inefficient, but it serves our needs and does so with a high enough degree of dependency and efficiency.
The problem with replacing it, even with a superior system, is the risk that something new and untested might have unforeseen consequences leading to its failure.
It would have to be proven as better and more reliable, and unfortunately, financial institutions and the industries that serve them have little incentive to put the time, money, and energy necessary to do so.
What’s more, they were bailed out during the crisis, make obscene amounts of money doing what they do, and have the kind of tight relationships that would discourage them from shaking up the status quo.
In short, they’ve got no motivation to innovate themselves out of the loop.
But Are All Of Them Really Shunning Blockchain?
No. Ripple is a blockchain-based real-time payment settlement, currency exchange, and remittance ecosystem that’s already being employed by various financial institutions around the world.
In 2017, Australia became the first country to adopt a blockchain-based stock exchange.
A blockchain-based solution for syndicated loans has been successfully trialed by seven international banks, including BNY Mellon, HSBC, and ING, and is now commercially available.
So it is happening, even if not as quickly as some of us would hope.
How Blockchain Can Change the Loan Market, from Rapid, Low-Cost SMB Loans to Mortgages
Most importantly, with transparency. Had the financial system been powered by blockchain before the 2008 crash, it simply wouldn’t have crashed.
Information regarding credit products, risk ratings, and borrowers would have been updated and available in real-time, informing financial decision makers.
And then there’s the matter of cost. With information stored physically or in an ineffective digital format (PDFs) and the associated expenses of moving it around and accessing it, the financial system favors lucrative credit products like 30-year mortgages.
Looking at a $100 loan, let alone a $10 loan, simply isn’t worthwhile.
But with a decentralized ledger and access to real-time up-to-date information, the amount of time it takes to review and approve a loan and the degree of human involvement can be minimized, making even small loans viable.
By the end of 2018, Qwil will have advanced $100M to freelancers around the world for amounts as low as several dollars at no interest and covering only a nominal processing fee with no recourse. Qwil just launched in 2016, and will begin to leverage blockchain soon in order to sustain its exponential growth.
Qwil has created a way of originating loans that includes all the necessary information as well as underwriting attributes, all with full transparency.
With an estimated contribution of $1.4T a year by freelancers in the U.S. and 47% of millenials already freelancing, and Qwil enjoying a 1,000% year-over-year growth, clearly, the market is more than ready for such an offering.
When Will Banks Start Using Such a System?
Within 5 years we should see banks increasingly relying on blockchain for everything from ID security (the Equifax debacle as a catalyzer) to credit products.
Qwil is living proof that markets that didn’t even exist until recently are opening up, and banks, as lumbering and bureaucratic as they might be, will not want to be left in the dust.
What’s more, the average customer profile for mortgages and other loans is not the same as it was in the 1970’s. People no longer enjoy the same job and/or income security but they still need credit to advance in life.
When banks realize that they’re missing out on a big enough piece of the pie, they’ll come around.They should, particularly with the new doors blockchain can open for them in the loan industry. Small business now accounts for a half of the US private GDP, and almost half of the nation’s workforce are employed by small businesses.
Indeed, they are the backbone of the economy. And yet, according to a recent survey, 82% of 10,000 small businesses were denied a loan.
This means that the opportunity gap is as wide as it gets. FinTech startups like Qwil are rising in to fill the space, and the more successful they are, the more the economy as a whole will benefit.
Guest Post written by:
Johnny Reinsch is co-founder and CEO of Qwil, which empowers freelancers to get paid on their terms, as well as help small businesses manage freelancer payments.