The payments industry currently has several significant pain points, including high transaction fees, chargebacks, and cross-border payments. Blockchain has the potential to resolve all these issues, and in doing so, it could disrupt the payments industry.
High transaction fees
When consumers pay for purchases using credit cards, the transaction must pass through several providers before the merchant receives any funds. These include the merchant’s financial institution, the payment gateway, the credit card company, and the financial institution that issued the card. All these providers charge a fee for their services, and they can add up to as much as 3.5% of the total purchase. That cost is borne entirely by merchants. In contrast, transactions processed using blockchain would involve no middlemen, and as a result, transaction fees could be as low as 0.1%.
Chargebacks exist primarily as a form of consumer protection. If a customer fails to receive goods they have purchased, or if they don’t recognize a charge on their credit card statement, they can file a dispute. As the chargeback is processed by the various providers involved in the initial transaction, fees are once again incurred, and these are generally passed on to the merchant. In addition to these processing fees, there are also significant fees associated with the chargeback itself, and again, unless the chargeback is determined to be fraudulent, the merchant is liable for these fees. Chargeback fraud is a significant issue, however: it’s estimated that more than half of all chargebacks are either “friendly” fraud (a customer mistakenly requests a chargeback) or deliberate fraud. But because blockchain transactions are processed directly between the consumer and the merchant, the opportunities for fraud are reduced. Consumers authorize a payment, and smart contracts allow the merchant to receive that exact payment only when the consumer receives their product or service. In addition, because transactions are indelibly recorded, both parties can more easily track down transaction information, and fraudulent chargebacks can be reduced.
At present, cross-border payments have average fees of 7.5%. Even a small reduction in fees associated with these transactions would save billions of dollars annually. Many straightforward transactions can take hours to process, and blockchain would generate savings in time as well.
Blockchain offers reliable and verifiable transaction records, available to both parties. And because identity records can be accessed quickly, blockchain can help financial institutions streamline their AML and KYC processes. Blockchain also offers scope to extend payments services into new markets, such as payments on social media platforms, or to extend banking to communities that are underserved by the current financial services industry.
Use cases in development
The major credit card companies are all developing blockchain solutions in the payments sphere. Here are some of the highlights of what’s in development:
- Mastercard recently filed a patent for a blockchain system that will verify users’ information while also “maintaining a high level of security, particularly against skimming.” Mastercard’s blockchain platform will employ asymmetric encryption techniques to secure customer information. When a transaction occurs, the keys are used to verify the card data. Mastercard has also been issued a patent that will enable it to link cryptocurrencies such as Bitcoin and Ethereum with fiat currency accounts. This will allow cardholders to pay for purchases with cryptocurrencies using their existing credit cards.
- Visa is partnering with blockchain platform Chain to simplify cross-border payments. Testing of cross-border bank-to-bank payments began in 2017; the system is expected to be launched later this year.
- Amex is partnering with blockchain platform Ripple to develop an international payments system that will improve the speed and functionality of its card networks. Amex is also developing a blockchain solution for its loyalty program. This will allow merchants to generate their own specific offers involving Amex rewards points on their own platforms. The aim here is to improve merchants’ ability to reward customers and thus improve customer engagement.
With the number of merchants accepting Bitcoin as payment growing steadily – the list now includes major players such as Expedia and Microsoft – it’s clear that the blockchain technology that supports the cryptocurrency is rapidly moving into the mainstream. Blockchain payments solutions are a natural next step, and both merchants and consumers will benefit from increased convenience and lower fees.