Cryptocurrencies have captured the imaginations of individuals and emerging businesses as alternative stores of value, to reduce transaction costs by eliminating intermediaries, and―most notably in popular culture and media―to provide eye-catching opportunities for speculative investing.
Much less appreciated and often overlooked is the business potential for the distributed-ledger, or blockchain, architecture that makes cryptocurrencies possible.
Distributed-ledger systems present enormous opportunities for businesses to operate more efficiently and mitigate risks. The financial-services industry in particular stands to gain from the adoption of blockchain technology due to the significant variation and complexity of products, business processes, and relationships among industry participants.
A conventional blockchain is publicly accessible and operated and maintained by numerous unrelated actors working independently from one another. However, the same framework can be used to record and hold information in what is called a permissioned blockchain, which limits access to approved participants, or even within a single organization by various departments or business units.
Blockchain in auto finance
In the future, individuals’ personal information may reside on a blockchain database that is updated regularly as they interact with other parties. This raises consumer-privacy issues that policymakers will have to work through as distributed-ledger technology becomes more widespread.
A credit applicant could consent to allow potential lenders to access his or her unique blockchain record reflecting employment history, rental history, utility billing or cell-phone/data-plan billing history, income information, and various other data.
While this opens up the potential for further use of non-traditional credit scoring to expand credit access, it also raises the potential misuse of information to deny applications in violation of the US Equal Credit Opportunity Act and Regulation B if safeguards are not included within the framework.
Credit Bureau Reporting
As noted above, various parties with whom a person interacts could provide data onto a personal blockchain feed to which creditors and potential creditors are granted access by the borrower.
This in effect would create a new credit-reporting system. Data furnishers would report information to the chain and pull information from the chain, potentially eliminating the need for an intermediary to serve the function currently served by the big three credit bureaus.
This could result in a shakeout in the credit-reporting industry, or perhaps they will co-opt this model and find a way to continue to draw revenue from credit reporting. Compliance with Fair Credit Reporting Act requirements could be simplified in such a world, as complexity will be reduced, and we might see a large decrease in identity-theft claims and a quicker resolution of those that are asserted.
Dealer Inventory Identification and Tracking
Distributed-ledger technology shows great promise for tracking items through a supply chain. Auto-finance companies could leverage this use to track the origin of new and used-car inventory to confirm that vehicles have the features that the dealer represents and thereby avoid potential manipulation of information to fraudulently inflate loan-to-value calculations.
Floor-plan lenders in particular could utilize blockchain to track lot sales and trigger smart contracts that automatically result in payments from dealer to lender as vehicle purchases are completed.
The above applications would also benefit an auto-leasing company, which could leverage distributed-ledger technology to monitor vehicle status in real time. This would create opportunities to implement smart-contract processes to increase fees appropriately as vehicle mileage is exceeded or wear and tear increases. It also would allow lessors to calculate residual value with greater accuracy.
Account histories and origination and servicing information
Auto lenders could implement their own private databases that leverage distributed-ledger architecture to allow various units or departments within their organizations to provide data they create or acquire to a centralized repository and to access and read that information for business purposes.
All account “touches” could be recorded on the private blockchain, including receipt of payments and communications to or from a borrower, and the organization could create its own automated processes based upon smart-contract methodology. For example, the lender could automatically trigger its lien-release process upon receipt of an account payoff.
Loss Mitigation and Recovery
In the future, recovery vendors may utilize data from distributed ledgers to locate borrowers and vehicles, to confirm account status immediately prior to a repossession event, and to transmit repossession information to the lender so that required notices are generated and account information is updated. The notices could be created and issued using smart-contract methodology that occurs automatically upon recording of the repossession by the recovery vendor. Vigorous sampling will be needed in this high-legal-risk part of the business, but blockchain would likely reduce errors from the breakdowns that can occur in loss-mitigation processes from time to time.
Innovate, but don’t reinvent the wheel
Distributed-ledger technology offers remarkable potential benefits to financial-services firms and the businesses that support them: reduced transaction costs, greater efficiency, increased speed, and fewer errors. But organizations would be well served to realistically assess their current capabilities to ensure that they are solving an identifiable problem or obtaining a benefit that will truly move the needle for them before spending tech resources on adoption for a particular use. If your servicing platform works for your organization, for example, don’t change it―at least not yet.
Kyle A Owens and Erin F Fonte are attorneys at Dykema Gossett PLLC which has 13 offices throughout the US.