A recent PwC survey shows that the financial services industry is seen as a leader in adopting blockchain technology.[1] One area of interest is payments, as inefficiencies have opened opportunities for new players. Non-bank digital startups have already made their presence felt in this field. Will the next round of disruption be led by blockchain?

Why blockchain?

Blockchain is a record that connects a series of transactions. Once the chain is created, it cannot be edited or erased. The information is permanently recorded in a distributed ledger. Transactions processed using blockchain technology are not only secure, but they also save time and money.

Guaranteed security

The distributed ledger permanently and securely stores transaction data with all relevant details. Once established and verified, account profiles can be trusted absolutely, minimizing the chance of engaging in a transaction with an unknown party. Hacking and tampering is highly unlikely, as is the chance that double counting or double payments could occur without notice. As a result, the likelihood of cybercrime decreases substantially when payments are processed on the blockchain.

Increased speed

Cross-border payments using conventional banking processes are inefficient, as each bank participating in the transaction must also process the transaction. At present, international money transfers take 3 – 4 days to complete. In contrast, transfers using blockchain payment networks can be completed in approximately 2.5 hours.[2] As the technology becomes more common, these times will be further reduced until transactions are virtually instantaneous.[3] In addition, access to a secure and reliable source of identity information will speed up many other financial processes, such as applications for loans or mortgages. Blockchain will also enable increased speed in issuing invoices, and will streamline processes associated with accounts payable and accounts receivable. For international enterprises with many vendors and partners, the benefits will be significant.

Reduced costs

Processing payments involves time-consuming and complex manual systems that are still largely paper-based. There are separate parties involved in each stage of the process, and all of them receive fees for their services. Because a payment processed on the blockchain typically involves just two parties, the payer and the payee, the costs associated with processing the payment are substantially reduced.

Opening new avenues for payments

Founded in 2013, Kenya’s BitPesa uses blockchain technology to “significantly lower the cost and increase the speed of business payments to and from frontier markets.”[4] Operating in every major African currency, BitPesa has enabled many African businesses to move into international markets. It allows for quick and low-cost payments, and because users are not required to have bank accounts, it has transformed access to money for the two-thirds of sub-Saharan Africans who are unbanked.[5]

Major projects currently in development

The three major credit card companies have all launched blockchain platforms. Mastercard is developing its own blockchain network, focussing on B2B and cross-border transactions.[6] Visa has launched the B2B Connect payment platform, aimed at digital currencies and cross-border transactions.[7] And American Express has plans to use blockchain for its own payment system, to improve the speed and functionality of existing card networks.[8]

IoT growth drives payment innovation

The number of IoT devices is increasing at a staggering rate, and blockchain offers an opportunity to automate payments across these networks. Payments for service completion or product delivery could be triggered by IoT sensors, for example. Similarly, micropayments linked to usage of specific device capabilities could be automated using blockchain technology.[9] It’s also likely that IoT devices will be developed that will be able to automatically issue invoices and make payments, and that these processes will be executed using smart contracts on the blockchain.

These are just a few of the ways that blockchain is driving innovation in payments. Although there’s still some distance to travel before blockchain can be considered the new standard, the steps taken so far are not likely to be reversed. If anything, the speed of change will only increase as use cases are developed and gain acceptance.

 

[1] http://explore.pwc.com/blockchain/Exec-summary?WT.mc_id=CT11-PL1000-DM2-TR1-LS4-ND30-TTA5-CN_US-GX-xLoSBlockchain-LB-PwCExecSum&eq=CT11-PL1000-DM2-CN_US-GX-xLoSBlockchain-LB-PwCExecSum

[2] https://medium.com/datadriveninvestor/disruptive-innovation-and-blockchain-in-financial-services-911b102e785b

[3] https://www.nasdaq.com/article/blockchain-powering-innovation-in-payments-industry-cm945333

[4] https://www.bitpesa.co/press/

[5] http://documents.worldbank.org/curated/en/187761468179367706/The-Global-Findex-Database-2014-measuring-financial-inclusion-around-the-world

[6] http://fortune.com/2017/10/20/mastercard-blockchain-bitcoin/

[7] https://usa.visa.com/visa-everywhere/innovation/visa-b2b-connect.html

[8] http://fortune.com/2017/11/16/amex-payments-ripple-blockchain/

[9] https://www.forbes.com/sites/forbestechcouncil/2018/07/18/is-blockchain-the-way-to-save-iot/#787a0ee95a74

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