Smart Contracts are the Future of Fintech

Smart contracts are self-executing protocols governed by explicit rules and conditions. Their appeal lies in their automated nature and zero room for bias or inaccuracy, thus serving as an improvement from traditional contracts. Smart contracts also streamline complex processes while eliminating the need for third parties, thus providing both efficiency and money saving opportunities.

Fintech giants are well aware of the potential of blockchain and the vast majority of them are already looking for ways to leverage this revolutionary technology. PayPal recently launched a crypto "Super App" which utilizes blockchain and its smart contracts to help improve application transactions. Stripe, Kraken, and Robinhood—three of the biggest fintech companies in the world—are also reported to be working on projects that will incorporate smart contracts to improve user experience.

The Many Benefits of Smart Contracts

Although smart contracts are not yet widely adopted, their many benefits are impossible to ignore. Let’s talk about five major benefits of utilizing smart contracts.

1. Improved Safety

Because blockchain transactions are encrypted, they are incredibly difficult to hack. What's more, the immutable, distributed ledger transactions are stored on would require a hacker to revise the entire chain in order to alter just one record. The chances of safety issues occurring are far less than in a traditional transactional agreement.

2. More Privacy

Due to the nature of blockchain technology, smart contracts provide more privacy to everyone. Everything goes through crypto wallets and seed phrases. No one is required to share their personal details. One important privacy caveat is that the contract execution process operates with full transparency and is documented permanently on the blockchain, posing significant privacy risks. However, several solutions have been proposed to solve this issue by hiding sensitive data from non-participants.¹

3. Standardization

Reaching an agreement involves negotiations, which can be time consuming and laborious in the world of fintech. Smart contracts standardize code and execution to reduce the time and money spent on negotiations. They cut down the number of manual processes in a transactional agreement, which decrease counterparty risk and settlement risk. They also solve the issue of trust in conditional transactions, which makes them more appealing than traditional transaction processes.

4. Faster Speed and Less Uncertainty

Speed, efficiency, and quality are huge advantages with smart contracts. According to the latest studies, smart contracts improve both the execution time of transactions and total volume of transactions. Another report suggests that blockchain smart contracts improve overall data quality by 50%.³ This serves to reduce uncertainty and allow participating parties to feel more comfortable with their financial agreements.

5. Innovation

Smart contracts will automate the flow of digital assets and payments. This in turn can pave the way for new products and business models which may be exactly what the fintech industry needs right now. To give you an example of what kind of changes we’re talking about, smart contracts can create agreements that enable daily payments rather than weekly or monthly—which are the norm in the fintech industry today.

The Bottom Line

Smart contracts stand to revolutionize the fintech industry. This form of automated technology safeguards data and transactions in unprecedented ways. Payment processing, trade finance, settlement of financial instruments, and regulatory technology all stand to benefit greatly from the use of smart contracts. With it, the fintech sector has the opportunity to ensure cheaper, smoother, and easier transactions for everyone worldwide.