It’s a very exciting time to be in the payments industry; new entrants and incumbents are putting many hundreds of millions of dollars and countless hours into improving the payments infrastructure.
And it seems that not a week goes by without a big bank investing millions in a blockchain startup or a blockchain startup announcing a revolutionary new approach. “A blockchain is a distributed database that maintains a continuously growing list of data records hardened against tampering and revision,” according to Wikipedia. The blockchain is the main technical innovation behind bitcoin, serving as the public ledger of the virtual currency’s transactions.
It’s often tricky to separate the hype from reality about bitcoin, so I did some research. The findings? Blockchain has a lot of potential and will be disruptive to existing business models. That of course seems obvious and could have been written three months ago. What else did I learn?
- Public blockchain technologies do not offer the scale and speed needed to achieve mass adoption for high-volume use cases.
- However, a private, permissioned-based network built on blockchain technology can provide tremendous value to the payments industry. [According to Bitcoin Magazine, a permissioned network is one in which “fast and cheap transactions are permanently recorded in a shared ledger — without the troublesome openness of the Bitcoin network … “]
- The technologies are immature and their ability to support the challenging needs of the business has yet to be proved. My opinion is that it will be between three to five years before there is substantial adoption and impact on payments costs and revenues.
- Blockchain technology can be deployed within existing payment processing models.
- The current industry focus on the move to real-time payments and hence on the clearing process in payments will drive interest in these new technologies.
Public ledgers have publicly admitted that today there is a limitation on transactions. The 7 to 10 seconds needed to complete a transaction is too long to displace the current consumer expectation of 25 milliseconds for a card payment, but for settlement, it is significantly faster and more secure than one to two business days.
There are multiple potential uses cases, with many around the world actively exploring and developing solutions. Here are some examples.
Multi-party clearing. Applying the technology to the multi-party clearing process will bring tremendous benefit. Banks and their customers will be able to have a single view of balances and transactions. Today parties must clear with individual counterparties, creating a complex web of payment flows. These payment flows are between suppliers, wholesalers, and intermediary banks and can take place in multiple currencies. Blockchain technology can act as a centralized netting system which would simplify the complex web of payments and eradicate mistakes and errors.
Immutable and common data/ledger. An indisputable, permanent, up-to-date, and distributed record of transfers, exposures, and ownership that is tamper-proof. The blockchain can provide immense value across wholesale payments to banks, their customers, clients, and potentially to regulators.
For example, a private blockchain would restrict access to those parties directly involved in a given supply chain. These parties would all be able to see the same information on the blockchain. That information could be invoice numbers, bills of exchange, customs documents, etc. A primary role of the bank in a trade transaction today is to accept risk; this would lower the risk for those involved.
Customer Service. Benefits will result from improvements in data/transaction visibility and consistency across multiple parties; reducing complexity and incidence of exceptions; and improving access and visibility of the status of a payment at any given moment.
Transfer of Funds. Blockchain technologies could be applied to a variety of payment scenarios. In single currency domestic payment, the impact could be to reduce or remove the need for a central counterparty and the delays in settling transaction net or gross in real time. When applied to cross-border payments, benefits could include real-time settlement and changing or replacing traditional correspondent banking. That would make the settlement process cheaper and faster for payments service users.
I’m a blockchain proponent. Adopting it in small networks or highly targeted markets can bring unbelievable benefits and true business value to the payments industry. However, blockchain is not quite ready for adoption for mass consumer transactions, though it could be in three to five years. In the meantime, there is real value to be had in exploring the deployment of blockchain technologies in the clearing and settlement process.
Paul McMeekin is a big believer in the power of payments and how electronic payments can change the world. He currently leads market intelligence at ACI Worldwide.