Margarita Khartanovich, Head of Insight, Binary District discusses how new blockchain technology will impact payments
When assessing the importance of an emerging technology for businesses the first thing to do is to dispense with all the hype. Then, look beyond the headlines to whether, fundamentally, the technology will make a positive impact. This can be measured by determining if it makes things faster, easier, cheaper or more secure. In the case of blockchain and its potential for the payments industry, the answer is ‘yes’ to all the above.
Blockchain – or distributed ledger technology – can be a tricky concept for the uninitiated to get their head around. Luckily, there are plenty of great introductory guides online. However, for our purposes, in relation to payments, the most crucial detail is that the blockchain can provide a real-time, single and transparent record of a transaction which is nearly impossible to corrupt. Payments do not require manual processing or third-party verification.
In essence, the blockchain provides an entirely new basis for the payments industry to operate on. This is facilitating the creation of a range of exciting and innovative solutions for clearing and settling payments of any type. For example, IBM, KlickEx Group, and the Stellar Foundation have designed a universal, cross-border blockchain payments solution that reduces the time it takes for a payment to clear from days to seconds by completing the process all on one network.
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R3 is working with 22 of the world’s largest banks to develop an international payments system on the blockchain to enable the transaction of every currency and all future cryptocurrencies. Meanwhile, Mastercard has adopted a hybrid approach by enabling blockchain payments in traditional local money using its existing settlement systems.
Companies such as Waves are developing an open blockchain platform designed for mass adoption. Anyone can use Waves to launch, distribute and trade their own crypto token.
The list of different applications goes on and on but the bottom line is that banks, credit card companies, fintech startups and establish tech industries are all developing blockchain-based payments solutions.
The big question is when will this technology gain widespread adoption by consumers and businesses? The answer depends who you ask. Swift, which handles the majority of high-value international payments, recently announced the results of a test of blockchain technology on the accounts of 34 banks. It concluded that ‘further progress is needed’ before blockchain was ready for mainstream payments adoption. Although the test underlined the speed and cost-savings inherent in blockchain-based payments, it also revealed that many banks need to completely overhaul their infrastructure before they are ready for the blockchain revolution. In contrast, Ripple argues that it’s approach means that it is already able to process as many transactions as Visa.
There is also more fundamental issues to resolve such as basic customer service. If you lose your password to a blockchain wallet there is no mechanism of recovery. Similarly, refunds, verifying loss and identifying transactions committed with stolen credit card information will be headaches for businesses seeking to enable blockchain payments.
Of course, with any revolutionary new technology there will be plenty of hurdles that threaten to hold back adoption. The key factor is whether there is the resolve and resources to overcome these issues. Given the interest of all the major players in the financial industry and the adoption of blockchain in other verticals such as supply chain management, insurance and even the media – there is clearly the money and technical know-how available to find solutions to these problems. Indeed, UBS Wealth Management recently said in a research note that blockchain could add as much as $400 billion of annual global economic value by 2027.
So, what is the conclusion for the average business owner, consumer or financial services professional? Well, blockchain has an incredible amount of promise and can apply to a huge range of different financial services – especially payments. There are numerous companies coming up with a range of solutions but there’s no real consensus on the best approach. Scalability has been identified as a major headwind and legacy technology at financial institutions poses a problem. Such is the rapid pace of development that the situation is changing on a near-monthly basis. Therefore, if you work in finance and you’re not familiar with blockchain, now is the time to become an expert in the technology. If you’re a business owner, chances are using a blockchain-based payments solution will only be beneficial in a few circumstances.