Blockchain For FinTech Startups - Why It Matters

Blockchain technology has been on the minds of startup companies and venture capitalists for some time.

The big financial players have yet to explore the possibilities that the technology can offer, and totally ignoring the opportunities that this technology brings to businesses is a risky move.

Blockchain technology enables businesses and individuals to securely transfer digital assets among themselves and between businesses. With digital assets we’re not necessarily referring to cryptocurrencies: also data and any kind of digitized or tokenized asset can be transferred and monitored thanks to this distributed technology.

If you hire a developer to create a custom app for you to make contact management a reality, then you are using digital assets as a form of data storage.

Any business that does not use digital assets for digital communication will be left behind in the digital age.

This is even more true when it comes to fintech startups: being fintech a relatively new sector, businesses that want to start their journey in this field may face more problems than traditional businesses.

Fintech startups’ main challenges

The fintech sector has mainly one goal: to facilitate people’s lives. Even if this can open a wide range of business opportunities, it becomes harder to find a market segment that can solve a common problem without being in a highly competitive field.

In fact, when it comes to fintech, it’s pretty natural to think about a solution that lies within one of the many segments of the financial industry. Most solutions have to do with the management of personal finances, an improved easiness of cross-border transactions and more payment opportunities for businesses and customers.

But many are the businesses born to solve these issues, and the experiences of fintech firms like Stripe and Chime show us that many times, aided by the hype around financial technology, companies might be overvalued at the begging and may be guilty of overhiring – and then being forced to layoff dramatic percentages of their workforces.

As pointed out by CB Insights, the top reason why startups fail is actually no market need, and among the top 5 reasons why these businesses fail, we find that they run out of cash and get out-competed.

So, it might be the right time, for fintech startups, to make a further step.

Why fintech startups should use blockchain technology

Blockchain technology can be this step for fintech startups, precisely because it can make them handle some of the top challenges they face.

1. Blockchain can save you money

To recap our previous article on why blockchain can help your finances, let’s see some of the different ways blockchain technology can save you money:

*   You can create your custom economy, according to the needs of your startup. In case you want to benefit also from the help of cryptocurrencies, you can really reach a high level of autonomy when it comes to fundraising. 
*   You don’t necessarily need intermediaries: one of the best pros of blockchain technology is that you can rely on a peer-to-peer system and the power of smart contracts. 
*   You can improve the scalability of your business. 

2. Investors are looking for blockchain-based solutions

According to data published by Statista, investments in blockchain and cryptocurrencies grew by six times in 2021 – compared to 2020 data.

This analysis takes into account not only the investments made by everyday traders and investors, but also private equities, venture capital, mergers and acquisitions.

Investments amounted to $32 billion in 2021, and the same Research Department predicts that spending in sectors that want to implement blockchain-related solutions could reach $19 billion by 2024.

Among the characteristics of blockchain that most attract investments we can find:

*   A higher level of security – compared to more traditional technologies, 
*   Higher levels of transparency – especially in the case of public blockchains,
*   Extreme levels of automation and programmability – particularly thanks to smart contracts.

3. The banking industry attracts the largest blockchain market share

There are a few reasons why we’re mentioning this point, but let’s start with a simple definition of fintech – as per the one provided by the Collins dictionary:

FinTech – or fintech – is a “digital technology used to support banking and financial services”.

We want to make two considerations:

*   Despite the close connection between fintech and banking, the two sectors are often in competition – mainly for two reasons, as we often point out in our fintech newsletter: after the rising of fintech companies, and thanks to their focus on people, customers – especially those with particular difficulties with their credit scores – started preferring fintech firms to manage their finances; fintech firms can often face troubles when it comes to national regulations that still require fintechs to work just as supporting tools of banks. 
*   Fintech – as the name suggests – mixes finance and technology: financial services and payment solutions for businesses are two core elements of this industry. Blockchain, among its benefits, allows for faster and more seamless cross-border transactions. Hence, the advantages that fintech startups – and businesses in general – can have by using this technology are straightforward. 

The strength of fintech makes it always harder to consider it as a simple supporting sector for banking – this is one of the reasons why we chose to provide you with a more complex definition of fintech. This strength shows that data related to banking and blockchain, which see top players like JP Morgan, HSBC and Goldman Sachs heavily investing in blockchain solutions, can become even more relevant from a fintech perspective.

Curiosity

JP Morgan Chase is the organization behind the creation of Quorum in 2016. Born as a fork from Ethereum and now owned by ConsenSys, Quorum is today one of the top projects able to offer private blockchain solutions for businesses.

Final thoughts

Blockchain technology can allow fintech startups to find still untapped sectors, especially in the DeFi space. Moreover, blockchain can help fintech startups to enhance their focus on people, offering solutions that don’t require intermediaries, high fees, or positive credit scores, and that fasten all those operations related to payments and management of people and businesses finances.