Category Archives: Fintech

How has RPA Helped Fintech Companies Become More Resilient?

Fintech, RPA, Software OutsourcingMindfire Solutions

Legacy financial services companies as well as budding start-ups are leveraging the power of cutting-edge technologies to stay ahead of the curve and transform themselves into core Fintech companies. At the center of driving this change and helping Fintech companies become more efficient and productive is robotic process automation or RPA. According to a study done by Mckinsey, RPA in Fintech can play a very definitive role. Research indicates that the implementation of RPA technology can easily cut down costs by 10-25%, and fully automate approximately 42% of finance activities.

In this blog, we have touched upon ways in which RPA is acting as a catalyst to make Fintech companies become more resilient and efficient.

RPA is a form of automation that uses software bots to perform repetitive and time-consuming tasks. These bots mimic human actions, such as copying and pasting data, filling out forms, and running applications. RPA software can work 24/7, with minimal supervision, and can handle a large volume of tasks with high accuracy and speed.

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Benefits of RPA in Fintech

Improved Productivity: RPA can automate tedious tasks such as data entry, reconciliation, and report generation. These tasks are time-consuming and require a high degree of accuracy. However, by automating these tasks, Fintech companies can reduce costs and improve operational efficiency.

Increased Scalability: Fintech companies with aggressive growth goals need to scale their operations to meet the demand and minimize their system downtime. RPA offers a better scalability solution. Bots can be quickly deployed and configured to handle the increased workloads, making RPA a flexible and adaptable technology.

Improved Compliance: Companies providing financial services operate in a highly regulated environment and are subject to strict compliance requirements. Integrating RPA can ensure that processes are consistent and auditable, thus improving compliance.

Improved Risk Management: Organizations are able to gain better visibility into their operations by using RPA to monitor and evaluate processes. This can help companies identify potential threats, allowing them to take proactive measures to mitigate risks.

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Use Cases of RPA in Fintech

Customer Onboarding: Customer onboarding is a long and tedious process that involves a number of steps such as collecting, verifying, and processing a large volume of data from customers. This is one of the areas where RPA is particularly effective. Automating this process with RPA can reduce the amount of manual work required and provide an improved customer experience as well as enhanced security.

Customer Service: RPA can automate customer service processes, such as responding to customer queries,  balance inquiries, providing information about products and services, etc. By automating these tasks, Fintech companies can reduce costs associated with these processes, freeing up customer service agents to focus on more complex issues.

Mortgage Lending: The process of mortgage lending is very time-consuming; thus, implementing RPA can help speed up the process. It can be used to automatically collect and analyze data, such as credit scores, income statements, employment information, etc., in order to accurately make loan approval decisions. This can help reduce the time taken for loan approvals, eliminate tedious manual processes associated with it, and also improve customer satisfaction.

Loan Underwriting: Loan underwriting is an exhaustive process. Here, RPA bots can be used to bring down the turnaround time for this process to 15 mins. They can also be used to automatically assess a borrower’s creditworthiness, evaluate loan documents and applications, identify potential risks associated with a loan, and assist in making decisions.

Automatically Track Transactions: RPA bots can reconcile thousands of transactions in seconds, whereas it may take several hours for a human to do the same task. This reduces the risk of errors and also improves the organization’s efficiency. It can also track the investment of customers and provide them with comprehensive transaction reports on their portfolio to help them maintain full traceability of their investment transactions.

Generate Reports: With the help of RPA technology, Fintech companies can automatically generate reports on customer data with actionable insights and distribute them to relevant stakeholders, such as regulators and investors, without any human intervention.

Anti-Money Laundering: An RPA bot can automatically flag transactions that require further investigation based on predefined rules and thresholds. This ensures that all transactions are reviewed in a timely and consistent manner, which provides greater security to the Fintech platforms.

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Conclusion

RPA is a game-changer for the Fintech industry. It offers numerous benefits, including cost savings, improved customer experience, increased scalability, and improved compliance and risk management. By adopting RPA, Fintech companies can become more resilient, efficient, and competitive in a rapidly changing industry.

Mindfire Solutions can assist in leveraging the power of robotic process automation to drive growth for Fintech companies. Our industry experts can develop tailor-made solutions to create a frictionless digital experience for your customers.

Contact Mindfire Solutions to learn more about how we can help you get the most out of automation.

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How Is Embedded Finance Revolutionizing Financial Services?

Enterprise Application Development, Fintech, IT Outsourcing, , Mindfire Solutions

Embedded Finance Revolutionizing Financial ServicesEmbedded finance, often referred to as embedded banking, falls under the banking as a service (BaaS) segment. It refers to the integration of financial services such as insurance, loans, debit/credit cards, investments, etc. into the traditional, non-financial sector. Simply put, it is the process of non-financial entities integrating financial services or products into their own platform, using APIs.

As per a study, the embedded finance market would approximately be valued at over $138 billion by 2026. The market is estimated to grow at a CAGR of 16.4% between 2022-32.
It is, therefore, a tool that promises to revolutionize the future of banking.

E-commerce and online marketplaces are all examples of embedded finance. For instance, you shop online to buy electronics, trousers, accessories, etc.; or book a cab home. When you reach the payment option, you are led through a payment gateway to make the payment through your selected mode of payment. That is nothing but embedded finance where you don’t need to leave the app or portal to make your purchase.
Here’s how traditional, non-finance entities can benefit from embedded finance:

Benefits

Enhances Customer Experience

Embedded finance makes customers’ digital experience more convenient because they don’t really feel the “pinch” of making payments. With digital payments gaining prominence, it makes purchasing experience easy and accessible, as it is important for businesses to close a transaction in the most seamless manner.

Enables Customization Of Financing Offering

The current trend in digital purchasing experience is now centered on providing a more personalized experience to users. Due to a lot of competition from companies offering similar products at similar prices, making the right offer to the right customer becomes more important for your business to grow at a fast pace.

This can be achieved by collecting and analyzing your customers’/ visitors’ data. And this is where embedded finance can help gain visibility over your customers’ transactions, and let you understand your customers’ real requirements.

A great example is the rewards apps that gather insights into customer purchases, where generating and managing personalized offers and discounts for customers becomes easier.

Makes Financing Processes More Secure

The banking and finance industry has long been battling with security concerns. Embedded finance plays a vital role in a customer’s decision-making process to invest, borrow, or lend money. It helps create a safe financial environment for users through the implementation of real-time monitoring platforms. And also makes the integration of credit products into a traditional, non-financial system a seamless one. Thus, it adds an added security layer by integrating various security measures.

Seamless Integration of Various Payment Options

Embedded finance also enables the inclusion of additional services to the overall buying experience. Integration of options to buy now, pay later; or pay the EMI amount and buy the whole product, offered by the embedded finance system makes the buying process less tedious for the users.

For example, e-commerce platforms such as Amazon not only offer customers the option to pay for their selected products entirely, but also recommend paying in installments. Upon selecting the installments option, the users are then seamlessly transferred to the EMI or insurer’s offer. It thus makes the whole purchase process faster, easier, and more secure.

Increase Customer Acquisition

Embedded finance’s main benefit is offering convenience to customers. When used tactfully during the customer onboarding stage, it makes it easier and more convenient to increase customer acquisition. The solutions and services offered through embedded finance enable your users to have an end-to-end interaction with your firm through their smartphones and devices.

Let’s look at the top players of embedded finance:

Key Players of Embedded Finance Culture

Digital Platforms

These are non-fintech firms that are focused on developing customer-centric digital platforms such as mobile apps, desktop applications, or websites. They offer customized financial solutions to customers based on their research and understanding of target audience segments, by ’embedding’ those services within their platform.

Financial Institutions

This category includes banks, small finance banks, NBFCs, and all institutions dealing with finance. The role of financial institutions in the embedded ecosystem can be categorized as follows:

  • Embedded payments:

These include firms offering an electronic wallet system with balance management and payment options. They enable online firms that sell goods and services online to directly integrate payment service features on their platform. Some firms may even launch their own payment solution, too. Examples include companies such as Square and Razorpay.

  • Embedded lending:

A non-financial firm offering one or several loan options to clients which allow them to purchase a product/service falls under this category. Although many marketplace platforms provide deferred payments and loans to their end customers, some of them also offer business loans to their merchants or suppliers.

  • Embedded banking:

Includes various banking services like saving accounts, transaction management, services like credit/debit cards, and more. The embedded banking process becomes similar to vertical banking when non-financial companies cater to a specific customer group.

  • Embedded insurance:

Embedded insurance is a boon for online retailers and marketplaces. It enables them to offer protection to the products they’re selling to their customers, against any damage. And this is also a priority for the customers. For instance, Amazon already offers insurance for its products.

  • Embedded investments:

Here, investors not only do stock trading, buy mutual funds, retirement plans, etc., but also receive the latest updates and market news on the same platform. This segment has insurers and investors as service providers behind them, often connected via API (application programming interface). It is to be noted that these firms aren’t licensed insurance or investment firms, similar to embedded banks.

Embedded FinTech Companies

FinTech companies are tasked with creating end-to-end software tools (APIs and SDKs), which help connect financial institutions to digital platforms. The SDKs (software development kits) enable importing functionalities within a mobile or a web app seamlessly with easy integrations. Examples include firms such as Google Pay, Paytm, etc.

Final Notes

Embedded finance enables financial firms to understand their customers better, and build meaningful relationships with them. It can thus definitely be called an underrated but promising tool to bolster the mainstream payments industry’s growth. At the end of the day, all the parties involved in a transaction profit from embedded finance: the provider, the suppliers, and the end customer.

Mindfire Solution has assembled a team with extensive experience in delivering products for disruptive FinTech startups, payment service providers, online lending platforms, insurance companies, and players in digital banking.

If you are looking to adopt the technology into your application development mix, visit Mindfire Solution.

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Best Practices for Designing and Developing Fintech Apps Using Blockchain Technology

Blockchain Technology, Custom Application Development, Fintech, Software Product Development, , Mindfire Solutions

fintech apps using blockchain technologyFinancial technology or fintech is a burgeoning industry that seeks to make financial systems more efficient and accessible for all users. With the increased demand for faster transactions and greater security, leading-edge technologies like blockchain are gaining fast adoption. Through the use of decentralized networks, blockchain-based fintech apps, also known as decentralized finance or (DeFi) apps, are providing a secure and efficient platform for users to transact.

At present, the fintech blockchain market is valued at $6.2 billion and is projected to reach a value of $36 billion by 2028.

In this blog post, we will look into different types of fintech apps that can be developed with blockchain technology and some best practices to follow while designing and developing them.

Types of Fintech Apps Developed with Blockchain Technology

  • DeFi Banking Apps

Decentralized finance (DeFi) banking apps offer users the ability to access a variety of financial services without the need of traditional banking institutions. These apps enable users to store their money in digital wallets, transfer funds between accounts, purchase insurance, and much more.

  • Lending/Borrowing Apps

Blockchain-based lending and borrowing apps allow users to access credit by providing collateral in the form of cryptocurrencies. They also offer a secure platform for peer-to-peer lending, enabling people to borrow money from other individuals without the need for a middleman or credit agency.

  • NFTs Marketplace

Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership of a particular item. NFTs can be used in fintech apps for everything– from trading crypto-collectibles to managing online portfolios. NFT marketplaces enable users to buy and sell these tokens in a secure and transparent manner.

  • Crowdfunding Platforms

Decentralized finance (DeFi) crowdfunding platforms provide a secure way for people to invest in projects they believe in. These apps make it easy for users to participate in fundraising activities without the need for a middleman or expensive transaction fees.

  • Decentralized Crypto Exchange Platform

Decentralized crypto exchange platforms allow users to buy and sell cryptocurrencies without the need for a third-party intermediary. These platforms offer secure transaction processing, low fees, and fast settlement times, making them ideal for fintech applications.

Best Practices for Developing Blockchain-Based Fintech App

  • Choose the Type of DeFi App

Before beginning development on a fintech app using blockchain technology, it is important to identify the type and functions of the application required for your business. Conduct diligent market research to understand your competitors, and features trending among DeFi users, and identify features that align with your business. This will help you determine the most suitable blockchain technology stack for your project and minimize future technical debt.

  • Decide Tokenomics

It’s important to consider the tokenomics model of your app before you start developing, as they are an essential part of DeFi applications. Tokenomics is the design principle behind token-based economies. It includes considerations such as incentivizing early adopters of your product, maintaining liquidity in the market, and aligning user motivations with growth.

To offer features such as staking, decentralized exchanges, and liquidity pooling, you will have to introduce crypto tokens along with the mechanism to apply them through your fintech app. For creating an effective token economy, you can leverage tools like OpenZeppelin to ensure the implementation of standard tokens such as ERC721 and ERC20

  • Implement Optimized Development Processes

Developing a successful fintech app requires following a set of best practices for the development process. This includes adapting agile methodologies, test-driven development, continuous integration/delivery, and automated testing. These processes will help ensure that your app is bug-free, meets quality standards, and is ready to deploy.

  • Prioritize Security

While developing a fintech application, security must be the top priority. This means incorporating robust authentication with multi-factor authentication (MFA) and access control measures to protect user data from unauthorized access.

Additionally, developers should utilize encryption for any sensitive information and implement smart contracts for secure transactions. Your developers must be well-versed with different cyber threats such as cross-site scripting, SQL injections, etc, and implement appropriate solutions to mitigate them.

  • Focus on Enriching User Experience

When designing the UX/UI of a fintech app, it is important to keep usability principles in mind in order to create an intuitive and enjoyable experience for users. These principles include things such as simplicity, consistency, visibility, feedback, task orientation, and accessibility. Keeping these principles in mind will help ensure that your app is easy to use while also providing all the features necessary for effective financial management.

  • Develop Scalability Strategies

Building an application with scalability in mind from the outset is key to ensuring its long-term success. Utilizing the right technology stack, understanding capacity planning needs, and implementing performance optimization techniques can all help ensure your app has the capacity to grow over time with minimal downtime.

  • Follow Regulatory Compliance

The financial sector is highly regulated and fintech apps must adhere to the prevailing laws and regulations to run operations smoothly. Developers should always research legal requirements before launching an app and ensure all features comply with necessary standards. This includes considering licensing needs, consumer protection obligations, anti-money laundering and counter-terrorism financing measures, privacy policies, etc.

Conclusion

Developing a successful fintech application requires careful consideration of various aspects such as project scope, technology stack, user experience, scalability needs, and regulatory compliance. By following the right development processes, businesses can create an app that enables users to manage their finances in an intuitive and secure manner.

It’s important to keep in mind that blockchain-based fintech apps require specialized development expertise. At Mindfire Solutions, we have a team of experienced blockchain developers who are well-versed in cutting-edge technologies like blockchain. From creating smart contracts to testing your blockchain-based applications, our end-to-end solution can help you design and develop a top-notch fintech application from the ground up.

Visit Mindfire Solutions to learn more about our services.

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Machine Learning In Banking

Utilizing Machine Learning In Banking To Prevent Fraud

Fintech, Machine Learning, Mindfire Solutions .mindfiresolutions.com

Machine Learning (ML) is a vital tool for fraud detection in banks. It can spot potential fraud by examining patterns in transactions and comparing them with known fraudulent activity. It uses algorithms to identify these patterns, which are then used to predict whether or not a transaction is fraudulent. These algorithms are trained using historical data, so they can only identify patterns in existing data and cannot learn new ways as they occur. 

This means that companies must constantly update their machine learning models with further information for continuing to use machine learning in Banking to prevent fraud.

How Does Machine Learning Overcome The Traditional Security Techniques Used By Banks?

Machine learning pushes the boundaries of what can be done with security. A traditional security strategy is to make the system as difficult to access as possible, stopping the bad guys before they get in. Banks often use biometrics and key cards to access their accounts, which are more challenging to hack than a username/password combination. 

But machine learning in banking prevents fraud even when it’s not done by someone trying to access an account. It can also be used to flag suspicious behavior so that humans can investigate it and decide whether or not it’s worth taking action on.

Machine learning algorithms can analyze data from all sources—customer transactions, social media posts, etc.—and find patterns that indicate fraudulent activity or other risks. These algorithms are trained on examples of fraud so that they know what to look for when new transactions occur.

What Are The Benefits of Machine Learning In Fraud Detection?

Machine learning has been the buzzword in the tech industry for some time. From self-driving cars to automated customer engagement, machine learning is everywhere.

But what does it mean? Let’s look at some of the benefits of using machine learning in Banking to prevent fraud.

  • Speed

Machine learning can help improve the speed of fraud detection by reducing the time it takes to detect and flag suspicious activity. Machine learning algorithms can be trained to automatically flag transactions with a high risk of fraud. This can significantly improve your ability to identify fraudulent transactions quickly so you can act on them before they become too costly to remediate.

  • Efficiency 

Machine learning also improves efficiency by automating many manual tasks that waste time and effort. For example, machine learning in banking to prevent fraud can identify known bad actors who are likely to commit fraud in the future, so you can block their access to your business immediately without having to review every transaction they make manually. 

  • Scalability 

Machine learning allows you to scale up or down your fraud detection capabilities as needed. This is important because fraud patterns change over time as criminals adapt their approach or new types of fraud emerge. Machine learning algorithms are designed with built-in flexibility to adapt quickly when new threats emerge or old threats change tactics. 

  • Accuracy 

Finally, machine learning offers increased accuracy over traditional methods because it uses data from all available sources—including humans—to learn what normal behavior looks like and spot anomalies that indicate potential problems.

What Are Some Of The Ways Machine Learning Can Be Used To Detect And Block Fraud?

There are many different techniques to detect and block suspicious cases. Some of them include the following – 

  • Classification

Classification assigns a label to an observation based on a set of observed values used as predictors. The predictors are inserted into the algorithms, which use training data to learn what labels to give. These predictions can then be used for fraud detection. This is done by identifying fraudulent transactions or users by classifying them as fraudulent or not fraudulent.

  • Regression

Regression is a supervised learning method that predicts future outcomes based on historical data. The regression algorithms can be used in fraud detection to predict the likelihood that a transaction will be fraudulent based on historical data about previous transactions that were labeled as fraudulent or not fraudulent by humans.

  • Clustering And Anomaly Detection

Clustering and anomaly detection are unsupervised learning methods that can be used for fraud detection by identifying patterns within your data that suggest fraud may occur, such as many small withdrawals from an account or many large purchases made at one store over time.

  • Anomaly Detection

Machine learning algorithms search for patterns in existing data that are not typical of what you would expect. If a new transaction is entered into your system and doesn’t fit the pattern of existing transactions, it could be an anomaly.

  • Decision Trees

A decision tree is a tree-like diagram that shows all possible paths that can take place in a decision process. A decision tree algorithm takes in data and tests each piece of information against all possible outcomes to determine if they’re true or false. If any single piece of information leads to an inaccurate result, the entire transaction is flagged as fraudulent.

  • Neural Networks

Neural networks are used to detect fraud in several ways. They can be trained to recognize patterns that indicate fraudulent transactions, such as repeated requests for withdrawals from an ATM or many purchases at one store within a short period. 

Neural networks can also monitor customer behavior over time and flag suspicious activities like sudden changes in spending habits or changes in the type of purchases being made (from low-risk items like groceries to high-risk items like jewelry).

  • Natural Language Processing (NLP)

NLP refers to technologies that use machine learning algorithms to analyze text data and extract meaningful information. 

For example, NLP software might analyze customer statements and detect instances where someone has been using their bank account number on multiple credit card applications without having applied for those cards themselves. This could indicate that they have been victims of identity theft or another fraud scheme.

Summing It Up

If you’re looking to implement machine learning in banking to prevent fraud or other systems, Mindfire Solutions has got you covered. Our goal is to take the guesswork out of it and ensure you get the most out of your investment.

We have the experience and expertise to help you implement machine-learning algorithms for your security and other needs. Our team deeply understands this technology’s potential, and we can work with you to determine the best way to use it in your organization. Contact us today to see how we can help!

 

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UPI (Unified Payments Interface) – The Game Changer

Fintech, ThoughtsMindfire Solutions .mindfiresolutions.com

Phenomenal growth may be the exact term to describe the increased volume of digital payments in India in 2022. If you inspect the March data of the current year, it shows that this payment ecosystem grew by 216% compared to the same period in 2019. The Unified Payments Interface (UPI), an initiative of the National Payments Corporation of India (NPCI) has been a critical driver of cashless transactions since its launch in 2016. The idea behind introducing UPI was to enable fast, secure, and seamless digital payments with the Immediate Payment Service (IMPS) infrastructure.

The immense popularity of this system is evident from the fact that UPI transactions exceeded USD 110 billion in January 2022.

NPCI has launched several innovative payment systems for developing the digital payment space and tied up with foreign companies like Japan Credit Bureau, China Union Pay, Discover Financial Services, etc. The international coordination would provide support by payment acknowledgment through RuPay cards.

Starting with IMPS and NFS in 2010, there have been RuPay cards, NACH, Aadhaar Payments Bridge System (APBS), Aadhaar-enabled Payments System (AePS), NETC, BBPS, UPI, and the USSD based *99#.

What makes UPI the game changer in digital payments?

Convenience

For using debit or credit cards online, you need to enter several details related to the card holder’s name, card number, CVV, and expiry dates. For UPI, you just key in the UPI ID, login, and complete the payment after putting in the PIN.

If you are using net banking, you must first add the beneficiary to your bank account. You require the beneficiary’s name, bank account number, branch address, and IFSC code. The process takes time to get activated, and then you can make the payment. To make a UPI payment, you can transfer funds to a peer account even if they do not have UPI access.

Besides, there are advantages over other existing payment methods. For instance, UPI allows you to make payments directly from your bank account without any third-party wallet or a card. Thus, making it much more convenient and secure than using a debit or credit card for online payments.

Moreover, UPI transactions happen in real-time. There is no waiting period for the funds to be credited or debited from the user’s account. This feature makes UPI an ideal choice for digital payments.

Simple

UPI is also very simple to use. You just need a smartphone with an active internet connection. You can then download a UPI-enabled app from your bank’s website or the Google Play Store. After installing the app, simply link your bank account and start making payments.

Versatile

You can also use UPI to request money from others or to send money to them. All in all, UPI is a very convenient and secure way to make digital payments. It is fast and easy to use.

UPI is particularly beneficial as a non-cash payment instrument when it involves person-to-person (P2P) fund transfers and transactions related to small-value person-to-merchant (P2M) payments.

Interoperable

With interoperability technology between different payment systems and UPI, and more people using digital payments, the costs of transactions are expected to decrease further.

India’s most prominent technology firms like TCS, Infosys, Wipro, etc., and fintech companies in various fields like insurance, payment, agriculture, microloans, crowdfunding, and wealth management are some of the major factors behind the growth of UPI. The role of an open Application Programming Interface (API) is also worth mentioning. 

How does UPI’s rise affect the Indian economy?

All the above factors have pegged the volume of UPI transactions at approximately 9 times that of debit and credit card transactions in FY22. But this is just the initial phase. UPI is forecasted to grow manifold and comprise around 73% of the total volume of digital transactions by the financial year 2026.

UPI transactions beyond borders

The tie-up between NIPL (NPCI International Payments Limited) and others like Liquid Group – Singapore, Mashreq Bank – UAE, Lyra Network – France, and PayXpert – UK, are significant steps toward enabling QR-based UPI payments in countries across the globe. Nepal and Bhutan became the first countries to adopt UPI.

RBI’s latest move entails linking RuPay credit cards with UPI. The decision to implement such a change has come at the perfect hour since credit card transactions are rising. A Goldman Sachs report states that the volume of transactions was around $130 Bn in FY22. The forecast is that it may reach $285 Bn by FY26 while the UPI volume growth in August 2022 was more than Rs. 6500 Mn with 346 banks going live on the platform.

An important point is the MDR (merchant discount rate) on transactions by RuPay credit cards. Like other credit cards, the rate will likely be around 2%, as specified by the National Payments Corporation of India (NPCI).

What can be the impact of this MDR on BFSI?

Payment companies like PayU, Razorpay, Billdesk, etc., would be able to acquire more transactions as credit cards would be an additional payment instrument on the UPI platform.

The proposed MDR of 2% (1.5% for the issuing bank and 0.5% for the payment company) on credit cards for payments through the Unified Payments Interface (UPI), would generate a revenue stream for the payment companies.

Currently, the MDR on UPI merchant transactions is zero, which is a deterrent for the payment companies as there is no direct income available for them on UPI transactions. This MDR would help the payment companies to manage and maintain the infrastructure for UPI volume growth.

For smaller merchants, providing a subsidy for MDR will mean the payment companies would lose their revenue percentage by an amount equivalent to the subsidy amount. In that scenario, the Government can incentivize the payment companies to maintain their payment infrastructure (technology, etc.) and operating costs.

Conclusion

With the RBI’s decision to allow credit cards for payments through UPI, the central bank is enabling access to digital payments for those who do not have a debit card or a bank account. It would help to expand the reach of digital payments to a wide demographic besides bringing in higher revenue for the payment companies. If you are looking for a game changer in the digital payments space, UPI it is.

If you want to develop a mobile payment solution application that offers a top-notch user experience and data protection, team up with Mindfire Solutions.

Mindfire Solutions is a trusted software service provider that can assist you in developing robust and secure fintech products. With our two decades of experience, we have learned to leverage modern technologies to offer customized solutions for your business needs. To know more about us, visit Mindfire Solutions.

 

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DeFi

DeFi : The Future of Finance

FintechB.Vinoth Raj

The application of blockchain technology in the world of finance has created a new landscape called DeFi or decentralized finance. DeFi has manifested an astonishing growth in the year 2021 and it is still burgeoning. It has unleashed a wave of innovation.

What exactly is DeFi?

There is no standard definition for Decentralized Finance. Some say it is an alternative financial infrastructure, some say it is an umbrella term for peer-to-peer financial systems, some say it is a competitive marketplace of decentralized financial applications, and so on.

Decentralized Finance is an ecosystem of financial applications and protocols that runs on blockchain technology. Blockchain technology is inherently decentralized in nature. DeFi financial applications leverage this aspect and run without relying on intermediaries like banks, brokers or exchanges. Moreover, the backbone of all DeFi protocols and applications is smart contracts.

What problems does DeFi solve?

The biggest and the fundamental problem that DeFi solves is the removal of intermediaries in the financial system. Harvey et al. in their book Defi and the Future of Finance describe that DeFi solves five key problems of the current financial system: centralized control, limited access, inefficiency, lack of interoperability, and opacity.

Harvey et al. in their book Defi and the Future of Finance describe that DeFi solves five key problems of the current financial system: centralized control, limited access, inefficiency, lack of interoperability, and opacity.

The DeFi Market:

DeFi has manifested tremendous growth in the year of 2021. As of January 15, 2022, the total value locked in the DeFi space was approx $237 billion, growing by a staggering 1,266% from the January 1, 2021 figure of $18.71 billion.

Figure 1: Total value locked (TVL) in DeFi as of Jan 15, 2022 (Source DeFi Llama)

How can DeFi solve your problems?

DeFi solves the problem of lack of transparency in the traditional finance system through the open and contractual nature of agreements. Smart contracts helps to encode the agreements. Anyone can read the smart contracts codes thereby ensuring transparency. Moreover, all transactions are publicly visible.

Traditional financial system is trust based and dependent on centralized institutions. DeFi replaces some of these trust requirements with smart contracts. The decentralized blockchain network stores the smart contracts.

Before we delve into each problem, let’s look at the different layers of the DeFi stack.

Figure 2: DeFi Stack

The settlement layer (Layer 1) consists of the native protocol of the blockchain network (e.g., ETH, BTC, MATIC). These native tokens are specific to their blockchain network, i.e, ETH is on Ethereum network, BTC is on Bitcoin network, and so on.

The asset layer (Layer 2) consists of all the assets issued on top of the settlement layer. These assets are usually referred to as tokens (e.g., ERC-20 based DAI token in Ethereum). Developing smart contracts that follow EIP standards like ERC-20, ERC721, ERC1155 helps to create tokens.

The protocol layer (Layer 3) contains the smart contract-based protocol implementation for different use cases such as decentralized exchanges (DEX), lending, derivatives, on-chain asset management, and so forth.

The application layer (Layer 4) consists of end-user applications which are accessible via web browsers or mobile apps.

Layer 5 is the aggregation layer that combines several protocols and applications and provides services like rate comparison, trading strategies, and so forth (e.g., 1inch, Zapper, Zerion).

DeFi solves the problem of limited access by allowing the creation of an open and accessible financial system. It enables direct access to financial services for the globally unbanked population. As a result,  it allows access to all users irrespective of their wealth or geographic location.

DeFi in the current world:

Trading today is extremely centralized in the traditional finance world. Five exchanges control 50% of the volume of all stocks. In a traditional exchange like the New York Stock Exchange buyers and sellers offer up different prices until they come to an agreement on a sale price. Only a small subset of the traditional finance world has access to the full order book of prices, limiting price discovery for everyday users. However, there is a limit on the liquidity for certain securities. DeFi solves these problems with an innovation called automated market makers (AMM).

Decentralized Exchanges use an automated market maker (AMM) for automated trading. AMMs is essentially an exchange which helps to swap one cryptocurrency for another. The liquidity pool maintains a particular exchange rate, for example 10 ETH to 1 BTC. This is a pool with a variable exchange rate between two currencies. The AMM facilitates a price for transactions based on the supply, demand and liquidity in a pool. The investors in the pool put money into it to earn a yield. Some of the popular decentralized exchanges are Curve Finance, Uniswap, PancakeSwap, and SushiSwap.

Traditional finance institutions tend to work in silos and maintain their own ledgers. Hence one financial service may not be interoperable with another. DeFi is built on public blockchains and open standards. This allows for interoperability across different decentralized apps (or dapps). However, there is a limit on the interoperability to the same blockchain network. As a result, there are lots of initiatives in progress that focus on enabling cross-chain communication across different blockchain networks.

Final Thoughts:

FinTech has been trending over the past few years. Many FinTech startups have been harnessing innovation and using technology to improve the delivery of financial services. Fintech companies use technology to create better financial services to customers and other businesses. They include big data, AI/ML, automated CRM, robo advising, personal finance, insuretech, payments, lending platforms, and so on. However, one main difference between FinTech and DeFi is that most of the FinTech solutions are centralized; however all DeFi platforms are decentralized.

Defi not only addresses the drawbacks of the centralized finance systems but also has paved the way to many innovative financial instruments such as atomic swaps, autonomous liquidity pools, decentralized stablecoins, flash loans, among others. In short, DeFi has a lot of potential and can play a pivotal role in the future of finance.

Like other businesses, if you too are looking to develop IT Solutions in Financial Services industry, Mindfire Solutions can be your partner of choice. We have gained significant experience over the years working with Fintech Companies. We have a team of highly skilled and certified software professionals, who have developed many custom solutions for our global clients over the years.

Here are a few interesting projects we have done. Click here to know more:

Case study on e-Wallet mobile application.

Test automation of digital payments.

Case study on Brokerage management system.

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Cloud first

Cloud first strategy: Driving innovation for credit unions

FintechMindfire Solutions

Cloud first strategy – The essentials:

Cloud services have transformed the way businesses operate across different sectors. This holds true, especially for the financial sector, where more and more financial service providers are making the transition. As per a recent survey by Celent, over 50% of the global financial institutions say that they expect their system to completely transition to the cloud within 5 years. Post the Covid 19 pandemic, cloud has paved the way for more remote operations within the financial industry, making its adoption more likely in the future.

As the name suggests, ‘Cloud first strategy’ is all about considering cloud-based technology solutions before any other. It allows businesses to save money on software and hardware infrastructure by subscribing to a service provider who can provide the same services at a cheaper cost, and at a premium quality.

As most people might know it, there are three kinds of cloud:

  1. Private cloud – operated solely for a credit union
  2. Public cloud – shared by several organizations and available to any paying customer
  3. Hybrid cloud – combining your private and public cloud functionality to find packages that best suit one’s needs.

IBM has referred to the public cloud phenomenon as “one of the most important shifts in the history of enterprise computing”. It is still a growing sector, as more organizations are becoming familiar with its increasing benefits.

Similarly, while there are credit unions who vouch for the benefits of the public cloud, others are unsure to bring about a complete cloud migration. CSI’s 2021 Banking Priorities Executive Report cites that over 60% bankers did not have the prerequisite information prior to investing in the public cloud. The next section talks in brief about some of the misconceptions associated with public cloud and how credit unions can benefit from the transition.

Misconceptions:

  1. The pace of transition: A popular misnomer about the public cloud is that the entire transition has to be made at once. Credit unions are creating a hybrid environment where some of the infrastructure remains on-premise.
  2. The fear of ‘all or nothing’ approach: Most bankings services are fearful of making the transition to putting everything on the cloud. The truth is most of their operations such as Office 365 and dropbox are already there.
  3. Security breaches: News of security breaches are often making the headlines nowadays. Many credit unions feel that being on the public cloud will make them vulnerable to data breaches. While such breaches do occur, they can be mitigated with proper security configurations.

With an increase in inclination towards adopting a cloud strategy by credit unions, it is important that proper security considerations are kept in mind while partnering with cloud providers. By carefully working with the right provider, businesses can look into the secure configuration of their environments. They can also maximise the cloud’s security and privacy benefits.

Benefits:

  1. Compliance – A strong cloud strategy provider ensures compliance with tight security measures, making audits much easier than ever before. Partnering with a public cloud provider entails outsourcing of important compliance related responsibilities. This allows credit unions to utilize a provider’s established framework. Many financial institutions have made large investments in cloud based compliance frameworks. These would have otherwise been highly unaffordable and unsustainable in an onsite infrastructure.
  2. Scalability – Physical servers are not compatible with scale. Credit unions therefore must take into account future needs and industry demands. By migrating to the cloud, institutions can bring about greater flexibility, agility and affordability. Migration to the cloud means more resources can be added to their environment while enjoying cost benefits from the process.
  3. Cost efficiencies – It is possible to buy only as much physical infrastructure. This leads to wastage and inadequate utilization. With the public cloud, a credit union can customise its purchases and expand its infrastructure only when needed. This leads to potential cost savings and allows credit unions to enjoy the benefits of a managed IT environment.
  4. Availability – The public cloud ensures a credit union with a resilient IT environment. It ensures a safety net during server malfunctions resulting in a smooth sailing of operations. It improves the overall day to day experience of both employees and customers, engaged in working with credit unions.
  5. Access – In the 21st century and especially in the post pandemic world, timely access to services is everything. Via cloud, credit unions can manage a remote workforce, use an increasing range of high-speed connectivity options, interact with a diverse range of modern cloud based resources and so on. With proper systems, the cloud strategy can transform financial institutions and their private networks.

Final thoughts:

The credit union industry has been slow on the uptake to adopt a cloud strategy due to analysis paralysis. With industry leaders paving the way, more and more people are opting for digital transformation through a secure cloud strategy.

With infrastructure reaching the end of its life, tech inventory mapping becoming challenging. Physical IT infrastructure becomes difficult to build, manage and maintain. With the increasing need to adopt resilient platforms such as Data Recovery, a cloud first strategy is imperative for credit unions.

A cloud strategy can bring down an organization’s costs by 30-50%, primarily by reducing dependency on infrastructure. It also offers an economy of scale by collaborating with cloud providers like AWS on security, compliance and new opportunities. This paves way for credit union IT systems to focus on forging new partnerships and boosting new applications, which they previously did not have the time to do.

Like other businesses, if you too are looking to develop IT Solutions in Financial Services industry, Mindfire Solutions can be your partner of choice. We have gained significant experience over the years working with Fintech Companies. We have a team of highly skilled and certified software professionals, who have developed many custom solutions for our global clients over the years.

Here are a few interesting projects we have done. Click here to know more:

Case study on e-Wallet mobile application.

Test automation of digital payments.

Case study on Smart card for pocket money.

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API

Capitalize on advances of API in Open Banking

FintechMindfire Solutions

Introduction:

While big data and its associated algorithms and analytics are a powerful step to gaining insight, a more fundamental building block for the data market is access. Most industries have started leveraging an easier access to data through API. The financial services industry considers it to be a priority too. Some of the global steps that have been taken to adopt data for public sector transparency and integrity include the G20’s Anti-Corruption Working Group and the European Union’s Payment Services Directive (PSD2).

Data sharing can be seamlessly accomplished through API or more popularly known as application programming interface. According to a Mckinsey report, API is an intelligent conduit that allows for data flow between systems in a controlled yet seamless fashion. APIs are in use in banking systems for years now. However, with the breakthroughs in advanced analytics and the positive market response to numerous non-banking fintech companies, APIs are once again in the limelight. Experts believe it has the potential to enhance the delivery of financial services across sectors, including retail and business.

Open banking with its benefits to consumers, banks and non-banks is expected to usher in a new financial services ecosystem where the roles of banks may undergo a marked shift. It also raises issues around compliance and data privacy. This is the reason why global markets have been leaning more towards increasing governance. There is a global momentum towards open banking models, leading to an overhaul in the blueprint based on which these systems have been previously operational. This requires banks and fintechs to position for success in a new environment while anticipating what its impact on customers could potentially be.

What is open banking?

As per the same McKinsey report, open banking is a collaborative model in which banking data is shared through APIs between two or more unaffiliated parties to deliver enhanced capabilities to the marketplace. API has been popularly adopted for decades, particularly in the US. This helps to foster the growth of personal financial management software, show billing details on bank websites and connect platform developers to payment networks like Visa and Mastercard. However, API was primarily used to share information rather than to facilitate the transfer of monetary balances.

Benefits of open banking:

The benefits of open banking are substantial. They include improved customer experience, new and increased revenue streams and a service model that can cater to traditionally unexplored markets. Examples include Mint, Lending Club in the US to Lenddo in the Philippines.

However, these advances are not as easy as they sound. Research says that with the emergence of integrated digital ecosystems, these ecosystems collide threatening operating models and preventing business innovation. Additionally, most of the breakthroughs have happened outside the realm of financial services. This makes rich data and their associated data flows look more like a threat than an opportunity. The non-banking sector has demonstrated a more serious market traction so far. Hence, open banking is a model still in its nascent stages.

However for the banking sector, there are inherent risks in sharing data flows. This makes data security and matters of compliance and governance of utmost importance.  The real API value proposition lies in streamlining systems integration for data access. The aforementioned issues of privacy and security makes it a monumental infrastructure challenge.

Facilitation of a futuristic collaboration:

Open banking models can facilitate a series of services for all stakeholders in the financial services. For example Wechat has enabled e-commerce through their platforms. This model can evolve into a one-stop-shop platform integrated with personalized experiences and commerce centered apps. Other services like Trustly provide credit extensions at checkouts, where a purchase decision can be influenced.

Open banking also ensures financial inclusion. This helps banks and financial networks arrive at a more precise risk and credit analysis of members who have been potentially excluded from the financial system. For example – Angaza in Africa. This is a unique way of introducing and including more consumers to the formal financial system.  This has the possibility of expanding market opportunities in a particular geography. Incubators and venture capitalists from around the world have shown particular interest in newbies who are aspiring to incorporate nonfinancial data with transactions based on data insights.

While it is true that open banking will reduce control in traditional banks, the banking ecosystem will however gain from larger profit pools. It can also position itself to play a leading role in combining artificial intelligence and predictive analysis. This in turn will improve integration of banking services for customers and the enhancement of business offerings.

Challenges:

The challenges vary by geography, demographics and the ecosystem development in that particular country. Banks with larger global footprints expect to face challenges in the future regarding regulations and standards. By 2023-24, banks should leverage their incumbent advantages by doing the following:

1. Be a game changer by staying ahead of the curve, exploring data sharing with fintech and non-financial services.

2. Explore the value of APIs and how they can benefit the bank’s service model.

3. Fully understand data privacy mandates and determine if their institution has the appetite for a less conventional approach. Also examine how API could facilitate future customer messaging without incurring any damage.

Final thoughts:

Open banking and API banking are two terms that are becoming universally popular. They have the potential of radically transforming customer experiences and making banking experience a more personalised and less time-consuming process. It is important that banks, fintechs, investment houses and other payment service providers look into its potential and explore opportunities around it.

Change is rarely comfortable, but with the market evolving across countries, it is slowly coming across as inevitable. It will be better if banks start defining the trend rather than waging a futile battle to repel it.

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Like other businesses, if you too are looking to develop IT Solutions in Financial Services industry, Mindfire Solutions can be your partner of choice. We have gained significant experience over the years working with Fintech Companies. We have a team of highly skilled and certified software professionals, who have developed many custom solutions for our global clients over the years.

Here are a few interesting projects we have done with API in Fintech industry. Click here to know more:

Case study on Student loan approval system

Case study on Smart card for pocket money

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CREDIT UNIONS

Reimagining member experience for Credit Unions and Microfinance Banks

FintechMindfire Solutions

Introduction:

Consumers today are more inclined to turn to credit unions due to competitive product pricings and personalized services. Building on these strengths and showing commitment to local communities, is a strong way for credit unions and microfinance organizations to attract and sustain loyal members.

To reimagine member experiences for these organizations, it is important to build on member engagement, technology and personalization. An important part of attracting new members and retaining the existing ones is by knowing who they are and what they want. This information can be utilized to provide data that can be managed, assessed and analysed to exceed the member’s expectations.

What areas should credit unions focus on:

Personalization:

Having one-on-one and personal interactions with your members is an important part of increasing members. Adding a personalised and human touch in the times of digital connectivity makes an interesting experience to begin with. Some of the ways in which credit unions and microfinance banks can add a human touch to their experiences are by following the strategies below:

1. Creating a culture when members can speak and feel heard

2. Customer engagement through surveys and feedback taking processes.

3. Share member feedback with other office members and management, including staff meetings

4. Acceptance of constructive criticism.

5. Matching staff experts to member needs because a tele-caller or a customer service executive might not be the best person to solve all needs

6. Hassle-free contact and communication experience for the member.

For example – if someone has a question about buying a home, they should be paired with a home loan or mortgage expert. This helps quicker problem solving and a smoother transition for both the interested customer and the bank. Various softwares are available to manage bookings between members and staff. Without a doubt, technology plays a big role in streamlining affairs for both parties.

In times of the Covid-19 pandemic, it is important to focus on targeted communication to build member loyalty. Periodic newsletters from experts in your company to members can help bridge the gap in times of uncertainty. This is a small way in which members can feel confident and included post the pandemic.

Relationship Building:

Across a spectrum of consumers, credit unions and microfinance banks have a core set of interests. As per a 2019 study by Accenture, most consumers said the following:

1. They expressed interest in a one-stop-shop for checking accounts and all the different loans.

2. 1 out of 2 customers said that they preferred customized services based on their spending habits.

3. They were comfortable with sharing data as long as they saw benefits in it and customer experience improved.

4. Integration of physical and online channels for a more integrated experience.

The report additionally found that consumers generally fell into one out of the four categories of pioneers, pragmatists, skeptics and traditionalists. This information helps to pay closer attention to each audience type along with the background and the demographic they represent. Credit unions and banks need to therefore ensure that they are meeting customer expectations.  Also, they can come up with a range of products and services, revamped for the post Covid-19 era and beyond.

Positive employee engagement:

Having a happy employee might not appear as an overt advantage, but an employee who is more comfortable at his workplace is bound to be more productive and build greater assets for the company. Flexibility in work schedules, a warm workplace and potential for growth are some of the parameters for employee well being.

The benefits of a positive employee experience include lower staff turnover, improved staff productivity, higher sales and better customer service. As per a latest study by MIT, company profitability can increase by 25% with high levels of employee experience. .

Thus, taking a proactive approach in recruitment, training and advancing staff skills means a better utilization of human resources who will be well equipped to local communities and a growing consumer base.

Technology Trends:

Majority of consumers prefer a superior digital experience over competitive rates and fees. While banks are investing billions to improve their mobile banking and overall digital experiences, credit unions and microfinance banks do not have the capital bandwidth to make that level of investment. But making some small changes can yield a huge impact for this sector. An easily navigable website for instance helps customers organize their time and queries better while avoiding long queues. It will also be helpful in guiding both potential and existing clients to find what they are looking for.

As per the 2020 Credit Union Innovation Index, only 11% of credit unions have innovated their data analytics in the past 3 years. Having 24/7 access to the credit union or microfinance bank through online chats is the easiest way to adopt digitization to ensure members feel supported and communicated with. Going digital is the best method of creating positive and accessible experiences for one and all. While digital strategies are associated with tech giants and industry leaders such as Amazon, Apple, Google and Microsoft, smaller organizations can adopt inexpensive and accessible strategies to improve overall customer experience.

How can Credit unions benefit from these trends:

There are online tools and digital channels that can not only prove to be an improved sales and marketing experience but useful for a personalized experience with your banking organization. This includes capturing big data to have a complete understanding of each community, geography and member.

One way in which one-on-one connections can be enhanced is by using appointment-setting software. Also, Dynamic queuing system can provide a quick and efficient way to cut to the chase for the customer.

CRM is also another important piece of the data analysis, an inexpensive medium to help track important members’ information such as birthdays and anniversaries. This can also help for further personalization efforts, spoken earlier in the article.

Credit unions and microfinances can improve their member experience by creating a data and digital driven strategy to strengthen employee engagement, embrace simple yet effective technology innovations and create a personalised experience for every member. Hence, CUs and microfinances can explore easy methods to drive member engagement.

In today’s tech dominated world, digital transformation cannot be overlooked by credit unions and microfinance banks. Attracting the younger, tech-savvy and smarter generations, will involve smarter products and services along with a higher trust quotient. This will in turn allow these institutions to be differentiated from the banking industry and not get lost amidst the growing competition of the post pandemic world.

Final thoughts:

Like other businesses, if you too are looking to develop IT Solutions in Financial Services industry, Mindfire Solutions can be your partner of choice. We have gained significant experience over the years working with Fintech Companies. We have a team of highly skilled and certified software professionals, who have developed many custom solutions for our global clients over the years.

Here are a few interesting projects we have done. Click here to know more:

Case study on e-Wallet mobile application.

Test automation of digital payments.

Case study on Smart card for pocket money.

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How Bitcoin Solves the Double-Spending Problem?

Fintech, Thoughts, , ,

Many of us probably already have heard of Bitcoin. We know what innovation it has brought into this world – the blockchain technology. As of this writing, it has been almost a decade since its inception and it has long thrived without any central control over the network.

Bitcoin, a peer-to-peer electronic cash system, has inspired many other projects and can be seen as a pioneer of the underpinning blockchain technology. That said, it would be worth exploring how Bitcoin solves the double-spending problem. Instead of delving into theoretical exposition we will experience a transaction process in this pioneering innovation. We will be making a transaction on a real network and analyzing what a Bitcoin transaction looks like. A transaction in the Bitcoin network is a bit complex than a conventional digital transaction.

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Comparison with Fiat Currency Transaction

In a transaction that involves currency notes, we can easily envisage two parties exchanging some goods or services in exchange for the money. One party receives the goods/services and the party pays in currency notes. Let us say the transaction was costing $50 and the payer has $100 currency note. The payer would pay $100 and would receive in change $50 (as shown below). Both the currency notes are legal tender that is supplied by a central bank. A Bitcoin transaction also involves paying and may too involve receiving back change and in this respect is quite similar to our day-to-day transaction.


Comparison with Conventional Digital Transaction

A conventional digital transaction, say the online transfer of money, involves two parties and a mediator (the bank). So, there is a “From address” (A/C No.), a “To address” (A/C No.) and the amount (value transfer). There is no concept of change in a conventional digital transaction. If you want to transfer $1050 then you can transfer the exact amount and this is a mere process of debiting from sender’s account and crediting to the receiver’s account with the help of the mediator who validates the transaction. However, a Bitcoin transaction may involve multiple From addresses and multiple To addresses without any mediator. We will explore how this is possible.

As it is with any traditional transaction, ours will have the following attributes: a “From entity”, a “To entity” and the value to transfer. Let us send an amount of 0.1 BTC to a Bitcoin user as follows:

From: n2FSwa6DsMsbJgNknB64ThR3pHPUQ79bxL
To: msqdPeF7KeEqcWUNAFMm8JQijVB3cnLi4N

Amount: 0.1 BTC

The transaction has been done and the transaction details can be seen here

Bitcoin Transaction

Now, what looks legitimate is the From address (left) and the one of the To addresses with 0.1 BTC sent. However, two things look contradictory. Firstly, we sent 0.1 BTC but it says 1.0 BTC being transferred. Secondly, there is one more To address to which some amount has been sent.

Is something wrong with this transaction? Not really! You can check the above transaction in block explorer and verify yourself that it is indeed the same transaction. But this is the way Bitcoin works. Let us explore.

What is a Bitcoin Transaction made up of?

A transaction in Bitcoin consists of inputs and outputs. The input is like a “From address” which is in Bitcoin terms an unspent transaction output. When you want to make a transaction you will always spend an unspent transaction output as a whole. That said, you end up paying the entire amount. However, you receive the remaining amount in a different address called change address. This change address is your own address where you collect the change, which in turn is an unspent transaction output. This is quite common in Bitcoin transactions. For instance, someone sent you 1.0 BTC. Now you want to send 0.5 BTC to your friend. You cannot break the 1.0 BTC but you will spend the entire 1.0 BTC in a transaction and get the change in your change address.

Transaction Fee

Back to our transaction. Now, let us verify that the amount in input and outputs are balanced. So, 1 BTC – (0.1 BTC + 0.89432145 BTC) should be 0. But it turns out to be 0.00567855. So, where did this amount go?

Well, this is the transaction fee that is paid to the miner who helped you in validating the transaction, adding it into a block, mining the block, and broadcasting to the network. The miner is given this amount as a mining fee for the work he has done.

The mining fee is charged in satoshi per byte. Our transaction has a size of 225 bytes and we were charged 2523.8 satoshi per byte. So, 2523.8 x 225 = 0.00567855 BTC.

The Concept of UTXO

Note that the two outputs here are mentioned as “unspent”. This is how bitcoin keeps track of balances. The sum of all unspent transaction outputs is what constitutes your balance. Bitcoin network does not have any database or global state of balance amount rather it uses the concept of UTXO.

So, how is a UTXO represented in the bitcoin protocol? Perhaps in the bitcoin protocol, there is no concept of “From address”. Yes, there is no concept of From address in Bitcoin. The Bitcoin addresses are used to receive payments. A transaction in Bitcoin never encodes a From address but only has a reference to a previous unspent transaction output. That said, the input of a Bitcoin address is actually a previous unspent output. Bitcoin refers to a previous unspent transaction output using a combination of transaction ID (or transaction hash) and an index. Once an unspent transaction is spent you cannot spend it again and thus prevent the double spending.

A Transaction with Multiple Inputs

So, how will a Bitcoin user transact an amount for which he has no unspent transaction output equal to or above that value? Say, a user wants to transfer 5 bitcoins but none of his unspent transaction output has that much amount although the user has multiple unspent transactions that add up to a value greater than 5.  Bitcoin allows you to combine unspent transaction outputs. A transaction with multiple inputs would sound new to a person doing a conventional digital transaction. This is because a conventional digital transaction always has only one sender (or From address). Let us analyze a bitcoin transaction with multiple inputs. In this case, the Bitcoin user wants to send 1.02 bitcoins but he has no unspent transaction outputs of that value. So, the user combines two inputs and then transacts (see below).

Bitcoin Transaction

The above transaction (ac194c19201a20cdd26bbb8d696588370c06261148fd20a96b3330b0bcb03207 ) has two inputs and two outputs and it is absolutely a valid transaction in Bitcoin. The total amount of BTC of these two inputs, which is 1.04997424 BTC, is sufficient to send a transaction of 1.02 BTC. And the remaining value has been collected in a change address with 0.02997013 BTC.

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How are transactions validated in Bitcoin?

Let us take an example of a transaction that involves one input and one output (as below). Here,  the input is a reference to a previous unspent transaction at index 0. The previous transaction is referred by a transaction hash: f5d8ee39a430901c91a5917b9f2dc19d6d1a0e9cea205b009ca73dd04470b9a6
The output sends 50 bitcoins to a bitcoin address. When the recipient wants to spend this 50 bitcoin he will reference output 0 of this transaction as an input of his own transaction.

Input:

Previous tx: f5d8ee39a430901c91a5917b9f2dc19d6d1a0e9cea205b009ca73dd04470b9a6
Index: 0
scriptSig: 304502206e21798a42fae0e854281abd38bacd1aeed3ee3738d9e1446618c4571d10

90db022100e2ac980643b0b82c0e88ffdfec6b64e3e6ba35e7ba5fdd7d5d6cc8d25c6b241501

Output:

Value: 5000000000

scriptPubKey: OP_DUP OP_HASH160 404371705fa9bd789a2fcd52d2c580b65d35549d

OP_EQUALVERIFY OP_CHECKSIG

Bitcoin uses a scripting system to verify a transaction. There are two script components that can be seen in the above transaction: scriptPubKey and scriptSig. So, the scriptSig refers to the sender’s signature and the public key. The scriptPubKey is the script that will be evaluated using bitcoin protocol and if the execution of the script returns true then the transaction is valid.

scriptSig: <sig> <pubKey>
scriptPubKey: OP_DUP OP_HASH160 <pubKeyHash> OP_EQUALVERIFY OP_CHECKSIG

Let us see how this script is executed on the stack:

Step 1: Combine scriptSig and scriptPubKey in that order
Step 2: Push <sig> and <pubKey> to stack
Step 3: Execute the operation OP_DUP which will duplicate top item, which is <pubKey>
Step 4: Execute the operation OP_HASH160 which will create hash of the <pubKey> and this hash will be pushed to the stack.
Step 5: Execute the operation OP_EQUALVERIFY to ensure the hash generated matches with the <pubKeyHash>
Step 6: Execute the operation OP_CHECKSIG for the two hashes on the stack.

In summary, a Bitcoin transaction involves one or more inputs and one or more outputs, has no concept of From addresses in its protocol, uses a concept of unspent transaction output, and verifies the transaction using a scripting architecture.

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The views and opinions expressed in this article are those of the author. To know more about our company, please click on Mindfire Solutions. 

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