Looking at the possibilities and needs of a rapidly developing digital economy, the are smart contracts are now the game-changers. They are very much altering various sectors in general but are most apparent in the financial and banking industries. Loan origination and processing is one of the critical areas where we badly need more efficiency, security and transparency. Ok, let’s come directly to the specs of how smart contracts are affecting and transforming loan origination, processing and funding.
Smart contracts are contracts characterized by automated execution without the need for a third party’s intervention. Conditions that have been embedded in the code will immediately enforce and execute the set requirements. Based on certain parameters, once they self-execute they do not require any intervention of the middlemen. This cuts off chances of human factor errors being made in the financial processes. Smart contracts are based on the blockchain technology platform and eliminates the aspects of altering, falsifying, and hacking and are highly secure and transparent in nature.
When it comes to the processing of conventional loans, there are various steps which are involved. Starting from the stage of application submission till credit assessment, approval, documentation and processing and subsequent disbursement.
Nonetheless, the conventional loan procedure is lengthy and cumbersome and marked by errors, fraud, and paperwork.
Goodbye to the old conventional loan processing due to the rise of blockchain technology in banking and financial sectors. Unlike averagely employing manual paperwork and consistent back and forths in loan processing, smart contracts make it even smarter. Here’s how:
Efficiency and Speed
A way that is helpful to loan origination because smart contracts automate several of the procedures. For instance, upon the submission of an application by a borrower, the smart contract can cross-check the borrower’s details against the stipulated conditions such as credit scores and income.
Transparency and Confidence
Blockchain technology ensures that all the transactions are recorded and irreversible on the ‘blockchain.’ The contract terms together with the execution progress are available to both borrowers and lenders in real time thus enhancing confidence and reducing conflict.
Reduction of Costs
With the help of connected smart contracts, there is a possibility to eliminate and cut a great number of costs linked with loan origination and processing as well as getting rid of the intermediaries and decreasing manual work. This can make the fees more affordable to the borrowers while at the same making the business more profitable for the lenders.
It must be noted that two major issues namely security and prevention of fraud are vital in any organisation. The execution of smart contracts occurs on a distributed network, and this means that they are quite safe from interference. Through the use of technology, blockchain records act as a unalterable ledger hence reducing the instance of fraud.
Automated Execution and Adherence
As is clear, smart contracts ensure the execution of the provisions of the loan agreement without the need for the parties’ interference. For instance, it can make decisions in cases where a borrower has failed to make a payment or trigger penalties and the process of recovering assets as defined in the agreement. This ensures that the agreed terms are complied with automatically without the need for someone to follow and ensure compliance has been made.
Despite the numerous advantages of smart contracts, there are specific challenges to take into account:
Technical Complexity
The use of smart contracts requires technical skills in one’s ability to code and an understanding of the legal frameworks. Alternatively, an organization may require sufficient capital to invest in training or work in partnership with technology companies to do the necessary training.
Regulatory Compliance
Blockchain and smart contracts are still in their legal grey area. To that end, financial institutions need to pay adequate attention to possible regulatory compliance issues with respect to smart contract implementations in their local or global operative environment.
Interoperability
Smart contracts when introduced into an organization’s financial structures and procedures can pose some complexities. Organization interaction interfaces facilitate the flowing convergence requirements, of which interoperability standards and frameworks are critical.
Block Stack provides smart contract & blockchain solutions across different industries.
Legal Validity
Based on the characteristics of smart contracts, they possess the capacity to automate multiple aspects of loan origination despite the legal enforceability of these contracts being contingent on several factors. As a result, there must be critical actions taken to make smart contracts legal tenders that would be recognized by the court of law for them to gain general acceptance.
As for the adoption of smart contracts in the loan origination and processing business, this field remains rather unexplored at the moment, however, the opportunities here are huge. Smart contracts as a resulting innovation are predictable to remain in the financial sector as industry with blockchain technology grows and regulatory behaviors are created.
Financial entities and banks that have started implementing this technology in their daily operations will have the opportunity of offering better, safer and cheaper loan services compared to their counterparts. Additionally, smart contracts contribute to improving customers’ confidence in the agreed-upon contract terms and thus make customers loyal to the business.
