October 16, 2018 / GuidesFor Team
Financial Technology, or Fintech, has been rising to popularity in recent years along with the developments in digital technology. This popularity can be attributed to the conveniences it brings to businesses and consumers such as the accessibility, mobility, and speed of financial services. It was not so long ago when Fintech used to cover only the back-end operations of financial institutions. Now, according to Investopedia, Fintech is about all technological innovations in the financial sector. One good example of an innovation is the cryptocurrencies.
Cryptocurrency started buzzing in 2009 when Bitcoin was introduced as the first of its kind. In simple terms, cryptocurrency is the digital currency that can be used very much like other previously known payment systems such as cash and credit cards. It can be used as a mode of payment for buying and selling goods and services online. The main difference though is it works without the services of a middleman. The middleman is central to the authentication and authorization of financial transactions across the globe. This means that there are transaction fees and processing days that go along with their service.
Without them, as in the case of cryptocurrencies, there is a significant reduction in costs and waiting period in the processing of transactions. In Bitcoin, for example, it takes around 10 minutes for a transaction to be verified and transferred from wallet to wallet whereas credit card transactions take a minimum of 2-3 days before they get cleared. Cryptocurrency makes transactions fast with minimal to zero-processing fees.
How then does cryptocurrency work without a middleman? Blockgeeks’ description encapsulates the answer to this question; cryptocurrency is a medium of exchange that uses encryption techniques in the creation of the digital monetary unit otherwise known as the coins.
The disruption in blockchain
It is the blockchain technology – where information on anything of value is shared and continually reconciled on a database hosted by a network of millions of computers – that powers the transactions made using cryptocurrency. As a result, information stored in the blockchain is public and verifiable. It is decentralized which also means that no single entity can gain full control of it and it has no single point of failure. It is a system essentially built to make information incorruptible.
The addition of cryptocurrency to a small business’ payment options can be very beneficial for a number of reasons. First, it can attract more customers who are already dealing with cryptocurrency. Second, all transactions are irreversible. All transactions, once verified, are final. There will be no risks on fraudulent payment schemes. And as mentioned above, cryptocurrency transactions are a lot faster, incorruptible, and don’t even incur processing fees. The coins can also be converted to cash but this process remains similar to regular bank transactions wherein the cash conversion or bank transfer requests take 2-3 days.
Since this payment system is relatively new, there are still no established regulations yet and this poses risks to both merchants and consumers. Fit Small Business explains that while it is legal, “sovereign governments and central banks are still unsure exactly what type of legislation they should pass surrounding cryptocurrency taxation.” Moreover, cryptocurrency has high price volatility. In just a matter of seconds, a “flash crash” can occur wherein the value of a coin can drop to an indefinite amount. This could result in a tremendous loss if the coins aren’t converted to cash before the crash, or if the coin’s value does not recover soon. The merchant might have to wait for the coin’s value to rise up again before doing cash conversion.
Needless to say, the fintech behind cryptocurrency is revolutionary. It has a great potential to re-shape the global payment system. Some countries plagued by economic sanctions, like Venezuela and North Korea, are considering cryptocurrency as a way-out. Venezuela has, in fact, launched an oil-backed cryptocurrency as an attempt to move the country out of a crippling inflation. In the long run, when this technology is more stabilized, we might be able to see world-wide improvement in the economy.