Blockchain for Payments

Well, its already August 2020 and we have wrapped up the decade with a lot of technological advances. Past decade has seen a considerable phase shift in terms of technology; and I have to say Blockchain is one the biggest breakthrough that has been achieved. Although invented in 2008, industry has realized its true potential in this decade. But the question is — have we even unlocked 10% of it? I will let that question unanswered as its parallel to our area of focus in this blog, but it surely will lead us to a better view of the untapped Blockchain potential.

This blog aims at simplifying the terminologies and operation of a Blockchain and serves as a platform to understand the basic usage of Blockchain in Transaction Banking.

What is a Blockchain?

A lot of my friends and colleagues have recently asked me to explain them Blockchain in the simplest way possible. So, let us start with a basic definition of Blockchain.

“Blockchain, simply put, is a chain of records which are called blocks that are linked to each other with secured encryption methods. These blocks keep on growing while maintaining cryptographic information, timestamp and actual data. This feature makes the Blockchain a series of immutable records”

A Blockchain at an initial stage is a closed group of participants who agree to share data which is always transparent and known to all of them. These participants share the information on the network which is accessible by all the other participants at the same time. Thus, making Blockchain a collection or database of information chunks or blocks which are linked to each other in a secured manner. Information recorded can be of any form; It can be a simple money transfer (transaction) between two parties, an agreement for goods transfer between 2 parties, addition of police records for citizens, transfer of titles or even as small as information about one particular flavour of Ice cream for a multinational dairy chain. So, what distinguishes Blockchain from the traditional data management systems? This can be easily understood with the following characteristics of a Blockchain:

1. Information is always added with Secured Hash (linked to the previous block), Unique identity and Timestamp.
2. Any participant on the Blockchain can view the ledger (or blocks) of transactions.
3. Information added cannot be altered by anyone at any point of time.

Now that we have defined a Blockchain and we are “somewhat” aware of the basic terms, let us move on to understand how it is useful in the world of financial payments.

Blockchain for Cross Border payments

Financial data is considered to be one of the most valuable data in the world. We don’t want our bank balances to be scattered over internet, do we? One such key application in Financial services that can prove to be a game changer if utilizing Blockchain is — Transaction Banking or simply put Payment transfers.

Current system:

Traditional cross border payments usually take 1 or more days to finally credit the beneficiary customer since it involves several intermediary agents. With Blockchain — it can be achieved in seconds!

Payments on Blockchain:

With Blockchain, each participant will be connected to the Blockchain network and will be able to connect/talk to every other participant.

Now let us go a little bit further and understand how a payment will be processed via Blockchain and how it will be different to the traditional approach. In this step we will also try to shed some light on the term “Distributed Ledger”.

Distributed Ledger refers to secured, replicated and synchronized digital data that is spread across geographies (multiples countries, sites or institutions). In simple terms it means everyone on the network has a real time copy of the data and is able to witness any change on the data instantly. When distributed ledger term applies to transaction baking or payments — it refers to information related to accounts, account balances and account transactions. Now it will make more sense to imagine how a Blockchain can help achieve a distributed ledger. DLT — Distributed Ledger Technology.

How a payment would be done using Blockchain/DLT?

Let us take a simple example where Jenny form France is trying to send 1000,00 EUR from BNP Paribas, Paris to Alex who has an USD account with Bank of America, New York Branch. Using a traditional approach, this payment would ideally be sent by BNPP Paris to its Correspondent in USA which would then forward this payment BoFA via the Fedwire/CHIPS system. Thus, the time taken for settling this payment would indeed be affected by the multiple hops involved in the process.

Switching on to a Blockchain, where both BNP Paribas and BoFA are part of the Secured Blockchain and hold a Distributed ledger, its just a matter of new transaction being added to the chain. Now, as Jenny requests BNP for the transfer, BNP creates a record of this transaction which has details like:

1. Timestamp
2. Debit account
3. Credit account
4. Sending bank
5. Amount
6. Currency
7. Receiving bank

and places this record on to the chain with required encryption (hash). As soon as the record is added on to the chain, its validated by each node (participant) with their key for integrity and the block is finalized. Block now contains the information that is accessible by all participants and denotes that Jenny from BNP Paris, is trying to send money to Alex who has account with BoFA. In turn the receiving bank — BoFA instantly initiates the accounting at their end where in customer account is credited with the required amount. Thus, finalizing this payment within 5–6 seconds.

After a block is added, the immutable property of a Blockchain makes it impossible to alter any information on the block thus making it highly secured and uncompromised.

Talking about robustness, a Blockchain relies heavily on the underlying algorithm, which is basically the foundation that controls the complete functioning. There are a variety of different algorithms currently in market that help us build a robust Blockchain. Consequently, making a Blockchain capable of handling huge volumes easily with 100% accuracy — all this in a secured environment. Some key advantages of using Blockchain for payments are listed below:

Advantages of using Blockchain for payments

1. Real-time — Payment transfers are completed within seconds, in turn helping the beneficiaries with early access and better utilization of funds.
2. Low cost — Reduction in number of intermediaries reduces the Fees applied on the payment and hence is beneficial to the customers and Financial institutes.
3. Secured — Immutable nature of Blockchain makes the transaction tamper proof- eliminating the risk of any cyber-crime.
4. Unambiguous — Since Blockchain stores unique records, there is no ambiguity or duplicate data present on the chain.
5. Transparent — One of the key advantages which enables all the participants to view all the records without any concealment of information.

Current market status:

Blockchain for payments adoption has already begun with a lot of FinTechs jumping the DLT bandwagon. IBM has already introduced a Cross-Border payments solution using Stellar Protocol, called as IBM WorldWire. Major banks like Bank of America, HSBC, RBC, Rabobank, ANZ, SBI and Barclays have already planned/begun initial trials of their Blockchain based payment systems. Tech companies like Ripple Labs Inc. have already placed their Ripple protocol-based payment RTGS systems in the market. Ripple makes use of their cryptocurrency XRP to achieve a decentralized ledger.

Thus, looking at the immense potential that Blockchain has, it becomes imperative to include more and more use case for its application in different work areas. Feel free to share the different scenarios that you think can really be a great use cases for Blockchain based usage in the comments section. Also, feel free to connect with me for any review comments, queries or any additional discussions that you would like to have regarding payments and Blockchain.