Will blockchain really going to revolutionize the digital payments industry?
Payment methods have seen drastic changes with the rapid growth of internet. This has been the case with every sector which has undergone the transformation from traditional to new age technologies. With the advent of online payment and digital wallet system, making payments has become easier than ever and with the ever-increasing demand for such services, the number of users using digital money transfer systems are growing at a rapid rate. However, the existing online payment system has issues like transparency, and insider problem. Also, security in such online payments is crucial to mitigate risks and financial inefficiencies. This article is my take on how blockchain has the capability to be the saviour of the payments industry, but the road ahead is not as smooth as one thinks.
Is blockchain worth the hype?
Well, there has been no denying that blockchain has been seen as a one stop solution to many of the problems including transparency, security of the day-to-day transactions. But before we go to compare the pros and the cons, let’s have a quick on what the technology is about and why people are going gaga over it. In simple words it works on the principle of distributed ledger which is a collection of accounts where the transactions are recorded and is visible to everyone on the network. All businesses run on information. The faster it’s received and the more accurate it is, the better. Blockchain is a medium which is ideal for delivering that information because it provides immediate, shared and completely transparent information stored on an immutable ledger that can be accessed only by permissioned network members. A blockchain network can do a variety of jobs including tracking orders, payments, accounts, production and much more.
Let us have a look at some of the key elements of this technology which has attracted our attention. The first is that of immutability, which basically means something which cannot be altered. What it means here is that any changes in the ledger must be verified by others before adding. This in turn promotes transparency and increases security. Coming to its so-called next quality, which is of being decentralized. Being decentralized is a double-edged sword and we will see that why in the next section. But for now, let’s just focus on the good part over here. The network is decentralized in nature which means it doesn’t have a central body which governs the transactions. In simple words there is no central bank which looks after the functioning of financial institutions. As already mentioned, that the ledger is distributed, therefore anyone can access it. Therefore, any changes will be visible to everyone. With this basic knowledge, let us have a look at where it can be used.
Use cases of blockchain in payments
As we all know, the drawbacks of traditional cross payment include payment of commission fee, being slow and expensive. With blockchain technology, payments are fast, less expensive and does not require third party authorization. The example of banks such as Westpac which partnered with Ripple to implement a low-cost cross-border blockchain payment system. In 2015, CBA, Australian bank, planned to partner with Ripple for developing a ledger system on blockchain for payments settlements amongst its subsidiary business units. In 2016, the US Federal Reserve was working with a tech giant to implement a blockchain-based digital payment system. And these are not the only examples of banks using blockchain — other well-known banks tapping into the blockchain are Deutsche Bank, Barclays Bank, BNP Paribas, etc. Let’s take an example of a leading IT player payment solution to understand how efficient is the blockchain payment system. With the help of its payment solution, it claims to improve the payment ecosystem by cutting the management and operational cost by at least 10%. Also, about 55%-85% cost reduction in overall transaction cost. Some of its prominent features include standardized messaging channel, real time single network for cross border payments, management of user credentials.
How can someone describe blockchain with no mention of the cryptocurrency. Blockchain owes a lot of its popularity to crptos. While it is there is no denying the fact that cryptocurrencies are far off from completely replacing the fiat currency, nonetheless they have seen a tremendous growth in the past decade especially the likes of Bitcoin and Ethereum. Infact, Ethereum network reached a milestone to settle $1 Trillion in transactions in a single calendar year in 2020. Payment provider company such as BitPay helps merchants to store and accept bitcoins. It is also integrated with e-commerce platforms such as WooCommerce and Shopify. Some companies have been using this technology to improve B2B payment system in the developing economies of the world. One such example is that of BitPesa, which has played a significant role in facilitating blockchain based payments in the countries such as Uganda and Kenya. It has been widely used for remittances throughout the Sub Sahara region, which is known for its high costs of transfer fees. With BitPesa, there has been a reduction of almost 90% in transfer fees. Apart from these, there are numerous start-ups working in this field and attracting lots of traction. But this is not the end of the story.
Is the grass as green as it looks?
By now I have convinced you that blockchain is the cure all panacea for all problems, but with all these attractive benefits, why isn’t everyone excited about this technology and are reluctant to adopt in many of the countries. Cryptocurrencies are still used as an investment rather than as a medium of exchange in many countries. Take the case of India where cryptocurrencies were banned, and any transaction was considered illegal. One of the major reasons behind this is the anonymity of the transactions. This makes it useful for making illicit transactions. From 2011 to 2013, cryptocurrencies were the only currency which were accepted on the Silk Road, an infamous marketplace which is known for trading illegal goods and services. Not only that but most online illegal markets are using cryptocurrencies as their medium of exchange. Let us have a look at another devastating effect of using the blockchain technology. We all know that adding anything requires complex algorithms to run, which in turn use a large amount of computational power. Taking the example of the most popular cryptocurrency, Bitcoin, it supposedly used as much energy as was used by 159 nations of the world together to keep the network up and running. Of course, smaller scale of organization who privately maintain and track records will use a fraction of that. But still, it is an important consideration as the resulting implication affects us all. Apart from them there are some of important challenges that needs to be addressed. The first is of governance. As the transactions cannot be altered, it is very difficult to reverse or cancel the transaction which is a major drawback. There is an accountability issue involved due to absence of a central governing body which is there in case of a bank. One of the steps is to implement some standard governance rules to address the accountability issue and solutions must be developed to address the reversal or cancel of the payments. Special care needs to be taken to ensure that the regulations are complied with. This is because lot of sensitive information and money is at stake. Any violation can lead to heavy penalties. To ensure with compliance, some of the possible ways include conducting thorough research regarding regulations of a particular region as regulations vary from place to place. Also, the technical architecture should be verified to ensure compliance. And finally, one of the most important steps is to create awareness amongst the users regarding the guidelines to avoid any deviations.
Way Ahead
Adapting to new technologies come up with their own set of pros and cons. There are always some challenges even with the newer technologies. As this industry is still in its nascent form and is growing fast, technology will become more robust in the future. With proper regulations in place, these challenges can be overcome faster to reap the benefits of this technology.
References
· https://www.leewayhertz.com/blockchain-in-payments/
· https://definingai.com/advantages-of-blockchain-technology/
· https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain
