Igor Stevanovic/123RF

Blockchain In Lending: 6 Possible Use Cases

  • 7 November 2018
  • Sam Mire

The lending industry has several flaws, not least among them the concentration of power in a few of the most powerful hands. In the U.S., the top 50 lenders account for approximately 85% of the revenue raked in. Lending has also experienced something of a dip in one of the most telling, massive categories: mortgages. In 2006, approximately $3 trillion in new mortgage originations were put on the books. The Great Recession a couple years later played a drastic role in suppressing that figure, but even years after, credit remains difficult to acquire for many. In 2016, $2.065 trillion in new mortgages were originated, nearly $1 trillion less than the 2006 figure. Lending is also an industry subject to exorbitant levels of fraud. Synthetic fraud in the credit card market continued to rise to over $290 million in the last quarter of 2017, while mortgage application fraud risk continues to rise by nearly 17% year-over-year.

These statistics seem daunting, and certain aspects of the lending process will never be overcome. But the blockchain offers a fresh opportunity to provide more complete information to lenders so that they may make more informed decisions while having a greater tool to combat fraud attempts. Automation using smart contracts could also accelerate the speed of transactions, lowering costs and liabilities across the industry and, in turn, providing more flexibility to extend credit to those currently boxed out by sky-high lending standards.

Blockchain in lending - Possible use cases

Competitive Lending Rates

The United States’ lending industry remains in a mindset that made sense immediately post-foreclosure crisis, but now seems archaic. An overview of conventional loan requirements in 2017 shows that a borrower requires a FICO score of at least 640 to be approved. However, in 2017 the median credit score for new mortgages was 754, a long shot from the 640 minimum. And this represents an easing of requirements, as the median credit score for approved borrowers in Q1 2012 was 781.

This tightening in lending standards in the prolonged wake of the Great Recession has hurt many a dream of homeownership. In 2004, 69% of Americans owned homes. Today, that figure is only 63.4%, and while factors such as lower rates of home ownership among millennials are also to blame, lack of access to home financing is the more obvious culprit. While rates are finally easing back, with a 6.4% increase in total new lending in Q2 2018, the time it has taken to ease those lending standards dictates the need for more flexible financing alternatives — and we’re not talking payday loans.

An interconnected web of lenders and prospective buyers could also foster a system of uniformity and fairness in lending standards. As it stands, somebody applying for a mortgage in Argentina may face higher rates than somebody in Arkansas, despite the Argentinean having more valuable assets, a higher income, and greater financial security. As is often the case in life, the Argentinean borrower is a victim of circumstance. Startups are already working on launching blockchain-enabled platforms aimed at widening the net of lenders and borrowers to provide more competitive rates in a transparent, efficient environment with fewer fees and intermediaries.

Companies Trying to Solve This Problem

  • Celsius Network – Competitive interest rates and banking services on the blockchain.
  • Unchained Capital Offering competitive rates based on the success of various cryptocurrencies. 

Replacing Credit Bureaus

Currently, there are three major credit bureaus that maintain information about individuals’ credit history and share it with lenders, TransUnion, Equifax, and Experian. These unions maintain their data centrally, making them vulnerable to hacks. In 2015, this was proven when as many as 15 million Experian customers were informed that their information had been compromised. And Experian is not alone; Equifax suffered the same fate. In 2017, the company announced that hackers had penetrated their systems, potentially acquiring information about 143 million customers, including Social Security and driver’s license numbers. It was Equifax’s third major cybersecurity incident since 2015, which should come as no surprise considering that centralized credit bureaus represent some of the most desirable gold mines for hackers seeking to thieve identities.

These services also tend to push costly, unnecessary services on consumers through what are often deceptive practices, and don’t serve as an adequate measure for 1 in 5 Americans, who either don’t have a credit score at all or have credit bureau reports that are “too thin.” All of these issues beg for a technological reformation of the centralized credit bureau.

A few startups have made blockchain-based credit services their bread and butter. Whether that means better security for credit-related information, inexpensive cost of operation, easier cross-border credit checks, or the incorporation of new services that wouldn’t be possible off the blockchain, these new blockchain-based services will offer benefits that their traditional credit scoring and processing services cannot. 

Companies Trying to Solve This Problem

  • RCN – Decentralized credit scores and offering.
  • Lumenous  Using blockchain to create B2B credit profiles. 

Faster Mortgages

The mortgage lending process is highly inefficient, but projections show that blockchain adoption could reduce the total transaction time it takes to complete the mortgage value chain by 25%. A process that routinely takes about 40 days on average and often much longer would be reduced to 30 days, saving the equivalent of $177 million on a $97.7 billion book for the mortgage lender. Some estimates are even more optimistic with regard both to how little time it will take to complete loan origination processes and the savings that will arise from greater efficiency. The blockchain would catalyze the streamlining of mortgage origination by serving as a single, decentralized point of document access on which signatures can be compiled, cutting out the time and financial costs of paper-reliant legacy systems. As a uniform record of financial records, the blockchain also promises to simplify the loan vetting and approval process. 

Companies Trying to Solve This Problem

  • Synechron  Accelerator for blockchain based mortgage platforms.
  • Real  Blockchain powered brokerage. 

Accurate and Transparent Credit Profiles

Companies like Experian and Equifax have proven that credit reports are big business. With respective market caps of $21.6 billion and $13.8 billion, selling information back to the credit card holder that they should theoretically have ample access to is a lucrative racket. With the average credit card debt per household averaging $5,700 and the nation’s collective credit card-related financial burden surpassing $1 trillion earlier this year, anxiety about our credit status and how it translates into a single, potentially life-altering credit score is understandable.

The incorporation of blockchain technology in forming and granting access to credit profiles may lower the cost of accessing one’s own report, while also granting more autonomy to the user. Proposed blockchain solutions allow the user to grant passkeys and permissions for certain information, as well as collect a financial credit when their information is accessed by a third party, among other benefits.

Companies Trying to Solve This Problem

  • Bloom –Decentralized credit scoring.
  • BanqU – Digital identity to help unbanked communities join the global market.
  • RCN –Decentralized global credit alternative. 

Crypto-Backed Fiat Loans

Blockchain use cases in the lending industry - Crypto-Backed Fiat Loans

It’s impossible to know precisely how many individuals have invested in cryptocurrencies, but with over 34 million Bitcoin wallets currently in existence, and more than $41 billion invested in Bitcoin alone, it’s fair to say that the amount of people with money tied up in crypto markets is sizeable. And, despite some dips in the market, a 2018 Capgemini World Wealth Report found that 29% of surveyed millionaires expressed high interest in cryptocurrencies, while 27% had a general interest.

These investments become far more enticing when they can be used as collateral to attain a fiat loan at any given time without losing out on potential rises in crypto market prices. With the wealthiest crypto investors sporting net worths of over $1 billion in some cases, many see it as imperative that investors be able to chase those funds while remaining liquid, which means the ability to back fiat loans with crypto portfolios, as is possible with stocks and other assets.

While there are some hurdles that vary on a lender-by-lender basis, such as the fluctuating nature of cryptocurrencies’ value, these crypto-backed fiat loans aim to provide liquidity for borrowers who don’t want to liquidate their crypto portfolios but need cash on hand. And they represent yet another step toward more widespread adoption of cryptocurrencies as a mainstream asset class. 

Companies Trying to Solve This Problem

  • Salt – Crypto backed fiat loans with significant market share.
  • Unchained Capital – Working to provide liquidity and other financial services for crypto assets. Check out our interview with the CEO in Episode 19 of Blockchain Disruption.
  • DrawBridge Lending  Providing crypto-backed fiat loans for the new crypto wealth class. Check out our interview with the CEO in Episode 14 of Blockchain Disruption.
  • Jibrel  Tokenizing any financial asset. 
  • ETHLend Leveraging the Ethereum blockchain for crypto lending. 

Reducing Mortgage Fraud

By any metric, mortgage fraud is a massive problem, and not one that is getting better. In Q1 2018, the national mortgage application fraud index rose for the seventh straight quarter. That spells a rate of mortgage fraud that is at its highest point in seven years, with one in every 109 mortgage applications showing signs of fraud. That’s up from Q2 2017, when a total of 13,404 mortgage applications were determined to be fraudulent.

Several factors, including a shift from a refinance-heavy market to a purchase market, are causing the rise in fraud, and ultimately more fraud means higher costs for lenders, brokers, and borrowers alike. The persistence of mortgage fraudsters is actually astounding, with a 12.4% rate of year-over-year growth in the mortgage fraud risk rate. Combating this issue is the top priority for the industry, but the current systems have obviously not worked in rooting out the problem. And with mortgage fraud costing $2.5 billion circa 2008, that burden on the industry is immensely higher now, which means an innovative solution may be in order.

Startups have proposed a solution: a blockchain-enabled platform that brings together lenders, brokers, and borrowers on a secure digital platform. With hosts procuring financial documents such as pay stubs and tax histories from verified sources, the risk of fraud becomes drastically reduced. These blockchain mortgage marketplaces will come in many different stylistic formats and layouts, but all will seek to make the mortgage lending process more straightforward, cost-effective, and risk-averse than legacy alternatives.

Companies Trying to Solve This Problem

  • Meridio Using blockchain to verify asset ownership and reduce fraud. Check out our interview with Meridio on Episode 17 of Blockchain Disruption.
  • Block66 Building data solutions on the blockchain to end mortgage fraud.
About Sam Mire

Sam is a Market Research Analyst at Disruptor Daily. He's a trained journalist with experience in the field of disruptive technology. He’s versed in the impact that blockchain technology is having on industries of today, from healthcare to cannabis. He’s written extensively on the individuals and companies shaping the future of tech, working directly with many of them to advance their vision. Sam is known for writing work that brings value to industry professionals and the generally curious – as well as an occasional smile to the face.