Feared and Promising; Blockchain is Challenging the Payments Ecosystem

blockchain is the future of payments

What is Blockchain? Blockchain is a global distributed ledger which facilitates the movement of digital value across the world within seconds, without the support of a third party. Its best-known application is a cryptocurrency, known as Bitcoin. It was invented as a cryptographic method to provide an alternative trust-mechanism between two transacting parties.

A new PwC Report, based on a Survey of 544 C-Level executives in financial services companies around the world, reveals that 83% of FinServ companies believe their businesses to be at risk of emerging Fintech startups. PwC further identified 700 companies entering the Blockchain space, 25 of which are likely to emerge as industry leaders. According to this PwC report, fund transfer and payment companies believe they could lose as much as 28% of their business to Fintech startups over the next 5 years, while bankers expect to lose a quarter of their business.

Most surprising, a 57% of those surveyed say they are unsure or unlikely to respond to Blockchain technology. As stakeholders in the e-Payments sector, it is crucial to stay ahead of your game and explore ways in which this new and disruptive technology could innovate your business model. As Inga Beale, CEO at Lloyd’s commented at the recent WEF in Davos:” How to survive and thrive in the Fintech Revolution? Engage, Embrace, And Evolve!”

Let’s look have a closer look at the process behind Blockchain; transactions are stored in a string of digital blocks, with each block referencing to the prior one. A block of transactions is only added to the chain after automated verification, by secure cryptographic techniques using intelligent computing power, effectively eliminating the possibility of fraudulent transactions. It is crucial that previously added blocks cannot be changed or deleted. The database is distributed, allowing all users to have a verified and secure version of the Blockchain at all times. This entire process typically takes just 3-10 secs.

The whole idea behind Bitcoin was based on a revolutionary, disruptive, open and Permissionless exchange of cryptocurrency, making use of Blockchain technology. Having to be Compliant to strict Laws and Regulations, an Enterprise level system requires a Permissioned Blockchain. This includes a Due Diligence-Customer Identification (KYC) process, which manages authorized access for users, based on permission rights and a clear differentiation between Member Nodes and Validator Nodes. Permissioned Blockchain will accelerate the confluence of Blockchain and Card-not-Present (CNP) Payments and as such it will have a huge impact on the booming and lucrative e-Commerce sector.

During February’s Merchant Payment Eco-System Conference (MPE 2016) in Berlin, Security Expert and Founder of Alina Consultants Inc., Mr. Ashok Misra stated that “Multiple methods (tokenization, enhanced authentication, etc.) have been used to ‘patch’ the inherently insecure nature of credit card payments, but the solutions tend to be vastly inferior by orders of magnitude compared to the security offered using Blockchain technologies.”

Blockchain technology will impact Mobile Payments and m-Commerce, which already takes up a growing percent of global e-Commerce. Mobile Wallet providers, such as Apple Pay, Samsung Pay and Android Pay, consider Blockchain technology to enhance security features. Blockchain can also be used to improve efficiency of regulatory compliance processes. It can save back-office costs, while increasing transparency through the implementation of “smart contracts” which are translated into self-executing computer programs. PwC warns: “A lack of understanding may lead market participants to underestimate the potential impact of Blockchain on their activities.”

Feared by some, promising to others, Wall Street is obsessed with Blockchain.

Bob Greifeld, CEO of NASDAQ, called Blockchain “the biggest opportunity set we can think of over the next decade or so”

Goldman Sachs:” “Bitcoin was just the opening act, with the Blockchain ready to take center stage.”

Bill Gates has called Blockchain Technology: “a technological tour de force”

In the autumn of 2015, Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, JPMorgan, State Street, Royal Bank of Scotland, and UBS formed a partnership to draw up industry standards and protocols for the use of Blockchain technology in the financial sector. R3 was co-founded by Wall Street veteran David Rutter and brought together industry experts like Richard Gendal Brown and James Carlyle and Bitcoin experts Tim Swanson, Ian Grigg and Mike Hearn. The financial innovation firm leads DLG, a consortium of 42 financial companies in their Research & Development of Blockchain standards in the financial sector.

While many Payment Facilitators tend to fear the disruptive power of Blockchain, there are some which embrace its challenging innovative potential. Distributed financial technology firm Ripple is developing platforms, based on partnerships with Payment Service Providers (PSP) in different jurisdictions to act as gateways for their ledger network. The gateway holds the fiat currency as collateral, and creates a digital version of the currency on the network. These gateways can then trade in real-time with each other, either directly or through ‘market makers’. Interestingly, leading e-Commerce and Payment Processing solutions provider First Data, recently partnered with Blockchain infrastructure provider Chain, which formed a Blockchain Working Group together with VISA, NASDAQ, Citi Ventures, Capital One, Fiserv and Orange.

In January, 2016 China’s e-Commerce giant Alibaba announced that it is exploring the use of Blockchain technology for its Alipay services. Alibaba’s Alipay handles 80 Million transactions a day for 400 Million registered users. Another innovative e-Commerce and e-Payment solutions provider which applies the Engage, Embrace and Evolve strategy is Adyen; one of the fastest growing European internet companies, headquartered in Amsterdam, the Netherlands. Adyen just recently partnered with BitPay to enable bitcoin payments.

Blockchain, Biometrics and Mobile Payments are the three hottest buzzwords in Fintech. When Biometrics security firm HYPR and bitcoin security platform BitGo joined in a partnership to bring biometric authentication to the Blockchain space, this news was met with great excitement.

If Blockchain is the railroad, then Bitcoin was the first car of a train that is getting quickly up to speed. Jump on board and don’t fear the ride! Engage, research, explore new business models and grab the momentum!