Can blockchain help the cards and payments industry?
Blockchain has been for many years a synonym for bitcoin. Whenever people talked about blockchain they thought of bitcoin, and vice versa.
Things have quickly changed in the past few months as shown by the number of banks racing to harness the power of the blockchain technology, in the belief that it could cut up to US$20 billion off costs and transform the way the industry works .
What is Blockchain?
If you still think that blockchain and bitcoin are the same, think again. Blockchain is the rail, and bitcoin is the wagon. You may not know how bitcoin works, but you all know is that it’s a cryptocurrency.
So, what is blockchain? According to my own desktop research, the most common definition of blockchain is that of “a distributed transaction ledger of immutable transactions.”
It is called block chain because this distributed ledger is made of blocks and each block is made of a group of transactions recorded in chronological order. Once a group of transactions is verified and securely recorded through cryptographic tools, the block is closed and added to the chain in a linear order.
This is where it gets a bit geekier.
Every block, about 100 lines, contains a timestamp, the hash of the previous block as a reference, the block’s own hash and the difficulty statement. Depending on the protocol, a block can be created, added to the blockchain, and quickly published to all nodes.
This allows the blockchain software to automatically determine when a particular amount has been spent, which is necessary to prevent double-spending in an environment without central oversight.
The validation takes place by full nodes – computers connected to the network which fully enforce all the rules of the network – and transactions are confirmed either by miners or by alternative solutions aimed at reaching consensus on the latest blockchain version or ledger balance.
In exchange for this proof of work, miners receive a reward and possibly fees. Once transactions are recorded in the blockchain, they cannot be removed and become immutable.
How does this apply to cards and payments?
A report by GrowthPraxis (a payments-specific research and consulting firm) has identified about 50 technology start-ups that are developing ideas to make blockchain work for non-financial services.
These applications span from proof of ownership for digital content storage and delivery to modules in app development to prove digital identity. From decentralized prediction platforms dedicated to market shares and politics to points-based value transfer for ride sharing. From the ownership and transfer of digital security trading and companies incorporation to home automation.
The key characteristics of blockchain – automation and decentralization – are geared towards removing the middleman and enabling a direct contractual interface between the two parties involved in any transaction. This technology thereby has the power to democratize payments and make any exchange of value quicker, safer and also cheaper.
Transferring control from a central authority to equals remove the need for a clearing house to act as intermediary during a transaction. If implemented, blockchain could even make the card networks irrelevant. How so?
Imagine a cardholder who goes to a merchant and uses his card to buy things without having to build a direct relationship with the merchant or needing to give cash. Scary. Or maybe not … but let’s not go there.
Instead, let’s think of cases that, according to a recent Lafferty report, could see the blockchain at work for cards and payments:
- Integration of domestic payment networks: If competition from cash and checks wasn’t enough to worry the MasterCards and the Visas of the world, more headaches are now coming from successful domestic payment networks that have expanded internationally (China Union Pay); or that have become so strong that even the banks joined them (MPesa in Kenya); or that could process transactions so efficiently and cheaply that pushed the regulator to cap interchange fees across the board (MEPS in Malaysia). Blockchain could help the smaller networks to join forces in a private blockchain network that manages an integrated (but independent) cross-country payment chain.
Wearable and IoT payments: Payments originated from wearables and the Internet of Things (IoT) are yet to take off. Although APIs are increasingly simplifying the integration and connection between systems, between online and offline devices, and between retailers and payment providers, they are still struggling to marry the security of the card networks with the open convenience of the internet. The blockchain could facilitate a secure convergence of these two worlds by democratizing the current antagonistic and fenced operating model.
P2P lending: The crowd-funding model of peer-to-peer lending is the fastest growing form of consumer lending today. It is truly democratic and embodies fully the free market philosophy. The blockchain seems to be the most logical technology to adopt to sustain its growth.
B2B payments: Purchasing cards and commercial cards are still fighting against checks and ACH payments. Migrating commercial cards to the blockchain platform may be an enabling factor to tap into the huge B2B (business to business) payments pool and finally displace cash.
Remittances: The World Bank estimates that the average cost of remittance across the globe is 7.5%. Reducing the cost by even 5% means a saving of $16 billion a year . The cost is largely composed of fees charged by the different channels and networks that move the money across countries. So by eliminating the intermediaries, the blockchain can enable cheaper cross-border remittances and therefore enhance the spending power of recipients.
Banking the unbanked: The most common attempt to bank the unbanked and the underbanked largely relies on providing them with prepaid cards that have yet to prove successful. Leaving the arguable consumers’ need for electronic payments aside, one big hurdle in banking them lays in the pricing structure of a payment card and its high fees. By connecting the unbanked directly with agencies and individuals willing to provide funds, blockchain could make those fees more equitable.
Social media payments: The proliferation of payments over social media – Facebook credits, TwitterPay – has not reflected in very high adoption rates largely due to lack of trust and confidence among consumers. The blockchain could make social media payments safer, even at a perceptive level, and strengthen the already existing bond between the transacting parties.
A transformational technology
The financial industry has already recognized the potential of blockchain to radically change the way it operates. The adoption of blockchain, however, could still be hindered by the lack of business case to sustain the investment and by strict regulations that, if passed, may reduce the scope of use. The interest is there, and I’m eager to see how truly transformational the first large scale consumer and commercial deployments are going to be.
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[Note 1]: A recent paper released by Santander Innoventures concluded that the blockchain technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading and regulatory compliance by between $15-20 billion per annum by 2022.
[Note 2]: Recent report issued by the WorldBank.