Unlocking Potential: How Blockchain is Transforming Payments
Western Union, Visa, Mastercard, PayPal, SWIFT, and significant commercial and central banks all began to test and implement new technologies. What caused such interest?
Blockchain is an innovative way to build databases. In addition to storing information about transactions, the database itself is verified and guarantees security. This means that the information in it is genuine and has not been used on the blockchain without the consent of other users.
This is due to the fact that the information on the blockchain is recorded in blocks that are recorded in the system. And all this is not even stored on one server but in the form of many copies on the devices of network participants (nodes or nodes). And the immutable information entered in one copy is automatically duplicated in all the others.
The global blockchain technology market is growing rapidly. If, in 2021, its volume was $5.85 billion, then according to forecasts, by 2030, it will increase to $1235.7 billion.
The use of blockchain makes it possible to eliminate intermediaries when performing banking operations and automate many processes. The efficiency of the banking system is also increased by reducing costs. Banks can get additional sources of income thanks to the emergence of new business models and products based on the blockchain.
Companies can also use blockchain to calculate taxes and their financial implications in any jurisdiction in real or near real-time, tracking the transactions of each of their branches and collating them into a single, easily accessible digital ledger.
What Are Blockchain Payments?
When making a bank payment, approval is required from the banks in which the accounts of the sender and recipient of funds are registered, as well as confirmation from the payment system. When using the blockchain, there is no single controlling body.
An important feature and advantage is that once a transaction has been confirmed on the blockchain, it cannot be edited, deleted, or faked. It is impossible to charge back or cancel the operation here. In addition, the history of transfers cannot be lost: it is stored on many independent computers and will not disappear even if one of them breaks.
In addition, the principles of blockchain (decentralization and distribution) provide the following:
- commissions are often lower than when paying through a bank (especially for international payments);
- high processing speed;
- full transparency and therefore fraud protection;
- the anonymity of the participants;
Independence from financial or government organizations means a low probability of blocking an account or canceling an international blockchain payment due to sanctions restrictions.
The disadvantages include the volatility of the cryptocurrency, as well as its being in a “grey zone” in terms of legislation. This can make paying taxes more difficult. Nevertheless, the implementation of blockchain technology is becoming an increasingly urgent task for companies around the world.
Acceptance of blockchain payments using cryptoprocessing
It allows merchants to automate the receipt of crypto transactions, and also help to issue invoices, track transactions, and withdraw received funds to a wallet.
You can accept payments in cryptocurrency from almost anywhere in the world by connecting processing to a website or online store. For example, the service offers three integration methods: ready-made CMS modules, a structured API, and an HTML module.
Why Use Blockchain Payments?
Making a payment through the blockchain has a number of advantages for both parties: security, anonymity, fast processing, low fees, and decentralization. These advantages are of particular importance for international companies: such payments can hardly be blocked as a result of restrictions, and the commission will be much lower than for a cross-border banking transaction.
The most convenient way to set up payment is to connect the acquisition of cryptocurrencies. The intermediary service charges a minimum commission and allows you to automate payment, collect statistics, and place orders on the company's website.
Advantages of Blockchain Technology in Payments
Since the blockchain itself can ensure the correctness of the transaction, payment systems based on it do not need intermediaries.
In the blockchain, the buyer and the seller can make a direct transfer of funds (peer-to-peer), and the system will save the transaction data. Unlike traditional transfers, this data will be 100% accurate and authentic, and the transaction will be completed quickly.
Cryptocurrencies such as Bitcoin or Ethereum are examples of independent payment systems where intermediaries are not needed. Anyone can create a crypto wallet in a couple of minutes, replenish it and use it as a regular means of payment.
Transparency and security
Blockchain-based platforms can help banks secure transaction information in several ways:
- Blockchain allows transactions to be completed much faster than is possible in traditional centralized systems, which will give hackers less time to tamper with and redirect payments or gather information about transactions.
- Each entry in the blockchain log, after verification, becomes an irrefutable and unchanging part of the chronological history of the ledger, a copy of which is available to all network participants.
- Blockchain uses two security keys: public (private), available to each user, and closed (private), which is used only by the parties to the transaction.
Even if a hacker can steal the private key and decrypt it, it will prevent him from making any further transactions.
Now the low speed of international transfers is due to restrictions and the fact that money again passes through several intermediaries.
Typically, operations occur according to this scenario:
- The client initiates a money transfer through a terminal or online banking.
- During the day, the outgoing bank sends money in several batches to an automatic distribution center (aka a clearing house).
- The automatic distribution center sorts the transactions and usually transfers the money to the receiving bank within a few hours.
Even the slowest blockchains allow you to transfer finance from one country to another within a few hours. And in some systems, the speed is reduced to a few thousandths of a second. There is a difference, right?
Blockchain systems have security, privacy, optimization, and decentralization. Most of the disadvantages of a centralized database are absent in the blockchain - and we are gradually moving towards the fact that against the backdrop of blockchain payment systems, traditional ones will simply become uncompetitive in the coming years.
Challenges in Blockchain Payments
When we talk about blockchain, it is most vividly associated with cryptocurrency and hacker technologies. Therefore, in the minds of many, blockchain is associated with risk, investments in which you can both get rich overnight and lose your savings due to unpredictable exchange rate fluctuations.
The Blockchain, due to its approach to processing and storing information, disrupts the usual processes of regulatory bodies. Simply put, it is more difficult for authorities to control consumers and markets if they operate on the basis of the blockchain.
But at the same time, the reliability and transparency of the blockchain are in demand in certain areas and, of course, arouse interest from the state.
Blockchain technology is already being actively used by many government agencies. For example, it has proved to be excellent for maintaining patient records in hospitals, and the US Postal Service is considering blockchain for conducting national votes by mail.
Lack of standardization and limited compatibility
Blockchain projects today are developed in different languages and differ in consensus mechanisms and ledger models. Such a variety of blockchains has not yet generated universal standards and general principles of interaction between different networks. For example, now transferring assets from one blockchain to another is a non-trivial engineering task. And this affects the scalability and attractiveness of blockchain use by both organizations and individuals.
Establishing industry standards for blockchain network protocols could help enterprises more confidently adopt the technology without fear of difficulties in integrating and collaborating with blockchain partner companies.
So far, there are no unified development standards in the blockchain system, but a step in this direction has already been taken: international committees from 42 countries have been identified that will solve this problem.
Realizing the need to streamline processes, many large companies are joining forces to improve the security and quality of blockchain applications. For example, eight companies, including well-known players such as Cisco Systems Inc (CSCO.O), Bosch Ltd (BOSH.NS), and others, decided to develop a common protocol for the Internet of Things. Another consortium includes about 40 banks, led by the Central Bank of Singapore, and aims, in cooperation with fintech company R3, to introduce blockchain technologies in the Asia-Pacific region.
Lack of government regulation
So far, at the government level, there is no single clear position regarding the blockchain. If we look at the example of cryptocurrency, then, for example, in Switzerland, it has already been recognized as a payment instrument and allowed to pay with bitcoins not only purchases but also taxes and utility bills, while at the same time, in China, mining is outlawed and restrictions on the use of digital coins have been adopted. In the US, every second person owns a cryptocurrency, but its legal status has not yet been clearly defined.
At the same time, for example, many players in the banking sector are already working with Ripple Labs (using a centralized blockchain): American Express, Bank of America - about 100 financial institutions.
What are Some Use Cases of Blockchain Technology in Payments?
Cryptocurrencies raise many questions that are critical to the credibility of economic transactions using such assets, in particular with regard to their legal nature and related tax issues. However, they are very convenient for buyers and owners of online stores: cryptocurrency payments in online stores are already becoming common.
The blockchain platform facilitates the creation of a secure and reliable catalog of sensitive actions. It is exceptionally suitable for global transactions and fund transfers.
As an example, in April 2018, Banco Santander pioneered the market's initial blockchain-based payment transfer system. With Santander One’s "Pay FX," customers can now enjoy quicker and more efficient international fund transfers thanks to the integration of Ripple’s xCurrent solution.
Santander's use of blockchain has decreased the typical number of parties involved in these deals, leading to expedited completion times.
Through its extensive network and depth of knowledge, Santander provides tailored payment solutions that enable retail clients to make affordable and seamless transactions across borders. By implementing blockchain, the requirement for manual settlement by banks can be diminished, thereby lowering costs.
The integration of blockchain can bring about immense changes in financial marketplaces. A McKinsey report identifies the benefits that blockchain solutions offer to capital markets, some of which include:
- Faster clearing and settlement
- Consolidated audit trail
- Operational improvements
Startup Axoni was founded in 2013 and creates blockchain-based solutions specifically for the capital market. Recently, Axoni unveiled a decentralized network designed to facilitate equity swap transaction management – allowing both parties involved in an equity swap to be updated simultaneously throughout its lifespan, with real-time communication of changes between them.
Approaches to trade financing have been a painful point for businesses, since the slow processes often cause problems in business and make liquidity hard to manage. International commerce involves a multitude of factors when conveying data – including the country of origin and product specifications – and these transactions produce vast amounts of documentation.
Blockchain helps to streamline trade finance deals and simplify the across-borders process.
Regulatory Compliance and Audit
The secure essence of blockchain makes it useful for accounting and auditing because it minimizes the possibility of human error. No one can change account records because they are locked in blockchain technology.
Money Laundering Protection
Encryption is integral to blockchain, making it useful in fighting against money laundering. The technology empowers record keeping, supporting “Know Your Customer (KYC),” the process with the help of which a business verifies the identities of clients.
The top blockchain application for insurance is utilizing smart contracts. Smart contracts help customers and insurers to manage claims in a totally transparent and secure way. All contracts are recorded on the blockchain, which will determine invalid claims.
For instance, open IDL, created on the IBM Blockchain Platform, helps to automate insurance reporting and smooth compliance requirements.
P2P payment services
For instance, Venmo is one of the useful payment processing services but has limits. Services have local restrictions on transactions. Also, charge a fee for service utilization. And many services are vulnerable to attacks, which is not convenient for customers who are using their personal financial information. Blockchain technology can fix these issues.
If you are interested in implementing blockchain technology in your payment services, our dedicated team can help you. Just contact us, complimentary consultation is available.
1. How Blockchain Technology Will Change Payments
Ledger technology will fundamentally change online payments. Many believe that this has already happened. Unlike traditional banks, blockchain can make international payments almost instantly. Also, many see cryptocurrencies as a safer way to transfer value, although not without risks.
The only thing that couldn't be eliminated even in the technology of distributed ledger is the commission for transactions. Although on the blockchain it is usually much lower than traditional banks and other payment services. Processing fees are valid for all cryptocurrency transactions on any blockchain network.
2. Why decentralization in the economy is better than centralization
On the centralized side, you become more dependent. There are also economic rents. And one single weak point is the issue of system vulnerability.
Decentralization issues are mostly about team coordination, as well as security and scalability.
3. Do governments license blockchain?
It should be noted that supranational associations are not based in any jurisdiction, and therefore are not subject to licensing by the state. If blockchain services and private blockchain networks are located in any jurisdiction, then their activities are regulated within the framework of the relevant national legislation on the activities of legal entities.
To some extent, as a “licensing” of the blockchain, one can perceive the initiatives of individual states to restrict the circulation of cryptocurrencies at the legislative level.