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Beyond Bitcoin: Blockchain Will Transform the Payments Industry

Daniil Saiko March 5, 2018

As the dramatic rise in the price of bitcoin and other cryptocurrencies grabbed media headlines in 2017, blockchain became something of a buzzword in financial circles. Companies who claimed to be pivoting to the technology saw their stock price explode. My favourite example came from an unprofitable Chinese juice company. When SkyPeople Fruit Juice changed its name to Future Fintech Group, shares surged as much as 220 percent. It didn’t make any changes to its business model or sign up any new customers. It just said it was going to use financial technology to help the business in some way. And the stock more than tripled.

The gaudy numbers surrounding the crypto space obscured a more important fact: the underlying blockchain technology has very practical applications that could potentially revolutionize many different industries. One sector ripe for disruption: global payments.

Before we get to the payments aspect, we should step back and explain how blockchain works. It’s a distributed ledger technology that creates a public record of transactions by adding a block of data that is sequentially linked together, hence the name blockchain. The ledger is maintained by a network of users, rather than one central entity. More simply, it’s like a shared document that everyone can update at once. Think of it like Wikipedia versus an old physical encyclopedia. This can either be public, like Bitcoin, or a private blockchain created within an organization or group. Because the updates are visible to everyone and verifiable by anyone, it creates transparency and eliminates the need for blind trust among parties.

That visibility is the main benefit to blockchain. It’s like having a package delivered. The courier provides a tracking number, so the buyer can go online to see where the package is every step of the way. It’s the same as making a payment on the blockchain.  When payment is made, it is done on the network right away with a traceable ID. That ID can be given to the beneficiary and used by the sender. Unlike the existing corresponding bank network, where you must use intermediaries, blockchain payment does a direct transfer. This reduces costs.

This carries massive implications for the payments space. It allows for safe transactions, even if the party on the other end isn’t a trusted partner. Currently, sending money to an unknown bank may expose the transaction to hidden fees. But the transparency of blockchain eliminates the need for a formal relationship. It is possible to follow the payment every step of the way. If the money doesn’t arrive as expected, it’s evident where things went wrong. The ledger keeps track of every movement.  There are also solutions that allow for bad actors to exist in the network, with no harm to it. That’s unfathomable in most existing networks.

The transparency also reduces transaction costs. In the current system, payments can pass through several intermediary banks before reaching the intended recipient. Every one of those middlemen takes a cut. With blockchain, it’s possible to pass over some of those intermediaries. There are also new companies in the space with different business models. Instead of taking a fee on every transaction, they look to process as many transactions as possible and make profit from foreign exchange spreads.  The economic viability of this model still has to be proven, but for now, it will drive down processing fees to help keep volumes high. This eliminates any surprises once a payment arrives. In a time-sensitive situation, payments could fall short because of unexpected intermediary fees. This eliminates that concern.

Finally, blockchain vastly reduces transaction time. Depending on where the payment is going, sending money can take hours or even days. But on blockchain, the process doesn’t have to be linear – it’s decentralized. All parties involved can see what’s happening. So, the transaction time can fall from hours to minutes. In business, that can make all the difference.

The benefits of blockchain are clear, but that doesn’t mean the technology is the right fit for every organization. Before moving ahead with a blockchain project, there are a few questions that should be asked. Is a database with shared access necessary? Are some of the users unknown or not trusted? Is it cheaper to avoid using a trusted third-party intermediary? If the answer to those questions is yes, a blockchain-based payment rail may make sense. Then a decision needs to be made whether the rail should be public, private, or a hybrid model. Organizations also need to decide if they should build their own blockchain program, or partner with a more experienced firm like Ripple, to leverage their expertise and network. If the answer to some or all of those questions is no, development money may be better spent on other projects.

Whether bitcoin will really change the way we think about currencies is still a mystery. But it’s clear the underlying technology is here to stay. Many of the blockchain payment projects in the pipeline are still in beta testing. As more of these projects come to market in 2018, we’ll get a better sense of the technology’s full potential. But one thing is clear: blockchain has the potential to disrupt payments in a way that hasn’t been seen since the Internet revolution. And every company needs to be thinking about how it could affect them, and decide whether they should be getting on board.

As published in Payments Business Magazine. Read the full feature here!