Blockchain’s Disintermediation of Payment Processors in Fintech
The bitcoin blockchain has recently emerged as a powerful tool for disintermediation that despite interest from major financial players still has lots of unused potential especially in the B2C industry. However, banks and payment processors are hesitant to use blockchain technology, and when they do, seek to adapt the concept to suit their own needs while rendering many benefits desired by customers unrecognizable.
To further illustrate this dichotomy — while the bitcoin blockchain is transparent and permissionless, these adapted concepts are usually opaque and permissioned or do not have an adequate network effect. One notable product launched as a response to Bitcoin was the Mintchip, created by the Canadian Government, which was hindered by consumer consensus and struggled to overcome the first-mover advantage of Bitcoin.
Permissioned — Requires permission or identification to participate in a private network, or a trusted group of administrators to validate activity. Any and all data history on the system can be altered.
Permissionless — Anyone can view and participate without limitations. Every participant is equal, and the rules of the system are enforced by mathematical rules and proof-of-work consensus. Data history is immutable.
The corporate resistance to bitcoin is a natural consequence of being confronted with disintermediation. Nobody wants to be ignored, or support the instrument that will result in them being left behind in the industry. This is why many organizations and governments feel an innate desire to patent the concept to create their own digital applications on the blockchain, rather than adopt their consumers’ choice. This is a sign that something is working, perhaps too well.
To provide a contrast, it is the merchants and consumers who benefit from the removal of middlemen and external fees. This is a relatively unique case in the payment industry, because financial institutions and payment processors have directly opposing motivations to their own clientele. However, since merchants and consumers are still at an early stage of adoption, this presents an incredibly difficult challenge for creating solid incentives towards acceptance of bitcoin.
If consumers can’t walk down to their local grocery store and pay with a digital currency, they will have no reason to obtain or hold the currency itself. And if only very few consumers are actively spending, merchants will not have a reason to put effort into accepting it. Despite credit cards resulting in fees between 1.9% to 3% for the merchant, and the fact that bitcoin transaction fees are well below a dollar, this is not enough to jumpstart adoption. This means that while there is plenty of incentive to maintain the usage of bitcoin once it is in full force, there is no starting incentive available.
A proxy solution to this is to exchange digital currency deposits on-the-fly, and transfer the funds onto virtual debit card(s). With the ecosystem’s best interests and liquidity in mind, the optimal way to do this is using a peer-to-peer platform. And this is exactly the basis for Plutus itself. In an optimal case, all processes are essentially disintermediated by using the distributed networks as a counterparty, notary, or point of exchange. While KYC and the interaction with the traditional banking system cannot be decentralized, this ‘hybrid’ solution nonetheless improves liquidity, transparency, uptime, security and stability. It also makes it far easier to automate accounting.
We believe that at this stage, Fintech needs to first overcome it’s innate fear of decentralization that has developed over hundreds of years of centralized services. This will improve customer experience, transparency and secure a competitive advantage for many applicable business models. And as development in this industry continues, even aspects thought to be resistant to decentralization such as KYC may eventually be decentralized.
How do you think disintermediation will affect the future landscape in your own industry and beyond?
Image Credit: Duru Eksioglu
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