What is a “smart contract” and why should credit unions care?

Posted by Julie Esser on May 22, 2019 9:00:00 AM

Smart Contracts

By definition, a “smart contract” is a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract. This digital banking strategy allows for seamless authentication transactions without third parties.

Once a banking contract is initiated and executed, the contract most often sits on the shelf, which is usually a good thing because it generally means the contract is without issues. But there are other critical components to the contract, including performance factors and maintenance. Prior to smart contracts, which have management and alert protocols built-in, credit unions faced the challenge of determining how best to manage these contracts to ensure that the vendors were adhering to contractual terms.

While smart contracts are efficient in the management of vendor contracts and related maintenance and performance metrics, this digital authentication tool has untapped member-facing benefits that can enhance a credit union’s digital banking strategy.

Seamless Loan Authentication

When a credit union is determining how to enhance its digital banking strategy, smart contracts can play an important role. This is especially important when deciphering existing direct and indirect lending platforms and resulting loan participation rates.

If credit unions are operating on a shared network, the approach to lending can be greatly improved. If one credit union, for example, solidifies a loan with a member, but another credit union on the same network has excess liquidity, the second credit union may offer to take over some or all of that loan application without the need to verify the member’s credentials. In this use case scenario, the approach has less to do with the servicing of the loan, but rather, it addresses the financial origination of the loan.

Adopting a self-sovereign identity (SSI) solution, a highly secure method of digital identity, also plays a role in the seamless authentication of a loan application on a shared network by addressing all aspects of the member credentialing process.

For example, when a loan application is submitted, there are a lot of entities in that ecosystem, such as credit unions, credit bureaus and, of course, the member applicant. The use of a smart contract coupled with a SSI solution can streamline the application decision process in real-time opposed to waiting days or weeks.

As credit unions begin to think of their digital strategy for 2020 and beyond, joining a secure, shared data ecosystem can help develop a next-gen digital banking lending strategy. SSI-based smart contracts should be a top priority for credit unions looking to deploy seamless authentication of various banking initiatives, including loan applications.

 

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Topics: Smart Contracts

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