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Immediate payments is the need of the hour today. With instant payments, you have a transaction that takes place within seconds without error, also with an immediate confirmation to the buyer and the seller.
In my previous blog, I have elucidated some use cases for Instant payments for Consumers and Business.
Modern businesses, are turning towards more efficient ways of managing the transaction processing as they prefer faster and real time fund availability by paying minimal fees. The key focus of Business is predominantly on making payments faster while eliminating fraud and creating a transparent ecosystem.
Many banks are exploring Blockchain as a potential technology to cut costs of their immensely expensive payment-processing infrastructure and cumbersome back office systems that would improve the transparency of financial transactions.
For example: Settlements: Blockchain could simplify and streamline the trade processes in asset management systems by providing an automated trade lifecycle where all parties in the transaction would have access to the exact same data regarding a trade. This would lead to considerable infrastructural cost savings, effective data management and transparency, faster processing cycles, minimal reconciliation and the likely elimination of brokers and intermediaries overall.
Are Blockchain solutions the best fit to make the payments process more efficient and transparent for consumers? This blog is an attempt to uncover the same.
The Blockchain is a distributed database that provides an unalterable, (semi-)public record of digital transactions. Each block aggregates a timestamped batch of transactions to be included in the ledger/Blockchain. Each block is identified by a cryptographic signature. These blocks are all back-linked; which means, they refer to the signature of the previous block in the chain, and that chain can be traced all the way back to the very first block created. Per se, the Blockchain contains an un-editable record of all the transactions made. It is instant, virtually un-hackable, fully automated, end-to-end transaction system built on a private permission-based network.
A public Blockchain is one that anyone in the world can read, anyone in the world can send transactions to and expect to see them included if they are valid, and anyone in the world can part-take in the consensus process – the process for determining what blocks get added to the chain and what the current state is. As a substitute for centralized or quasi-centralized trust, public Blockchains are secured by crypto-economics – the combination of economic incentives and cryptographic verification using mechanisms such as proof of work or proof of stake, following a general principle that the degree to which someone can have an influence in the consensus process is proportional to the quantity of economic resources that they can bring to bear. These Blockchains are generally considered to be “fully decentralized”.
A fully private Blockchain is one where write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent. Prospective applications include database management, auditing, etc. that are internal to a single company, and hence public readability may not be necessary in many cases at all, though in other cases public auditability is desired.
Lately, larger banks and financial institutions have shown more interest in private Blockchains especially for Fraud prevention that is a major concern.
The public Blockchain, particularly for financial institutions, poses governance system and standards issues and unknowns, which potentially opens the door for a host of potential security concerns.
Blockchain is expected to enable businesses to eliminate unnecessary, and also expensive, intermediaries and significantly reduce processing time from days to near real time.
Such a system would not only aid banks to eliminate costly overheads, but would provide a lower-cost money transfer product attractive to large multi-national organizations with high frequent cross-border funding and transactions.
By removing central intermediaries, streamlining connections between counterparties and recording data on a tamper-proof block chain, the distributed ledger technology has the potential to improve speed, transparency and efﬁciency with which payments are made.
Connected consumers increasingly expect to be able to buy and pay anywhere at any time today. Consequently, digitalization is changing how people do business and is creating possibilities for payment systems.
The Blockchain solutions are intended to make the payments process more efficient and transparent for consumers. Blockchain targets Peer-to-Peer ecosystems, which implies that no intermediary will exist between the payer and the payee).
For example: The Blockchain-based Ripple network transfers value within seconds, which makes it virtually instantaneous.
Blockchain is used for transferring money in cryptocurrencies. It can also be used for numerous other transactions, such as securities transfers, property/land registrations, documentation/ collateral management and many more. It represents a ground-breaking manner to register and transfer any digitally represented value in a secure and decentralized manner; so in the future it might revolutionize the banking & financial industry.
1. For companies that are able to use a Blockchain implementation, it may allow them to save a considerable amount of time out of their payroll processes.
2. Trade Finance use case – Letter of credit transaction:
Enabling Letter of Credit transactions (document transmission and smart contracts) involving multiple parties across various phases.
3. Cross Border Payments: While it may be important for companies to be able to send quick payments nationally, sending cross-border payments on an international level in a timely and cost effective manner is vital.
4. Eliminating fraudulent transactions such as an intentional double send can also be prevented by taking into account the aspects of the transactions on the network.
Blockchain technology uses facets of various disciplines, such as peer-to-peer (P2P) networking without central coordination, cryptography and game theory (strategic decision making).
Although Blockchain cannot overnight replace traditional payment and clearing systems; Regulators and innovators have a very delicate balance to keep in implementing Blockchain for faster payments.
The imperative question to ask is whether a decentralized payments system overcomes security, throughput, and other potential hurdles and presents a meaningful situation to the incumbents?
Instant payments and Blockchain complement each other. The infrastructure/architecture for immediate payments is still open to vulnerabilities and faces security issues. It is also currently uncertain if Blockchain is proficient in supporting significant retail payment traffic.
Payments players like SWIFT which have legacy systems in place have limited flexibility and face severe security threat, especially after the Bangladesh bank heist.
• In February 2016, instructions were issued to steal US$951 million from Bangladesh Bank, the central bank of Bangladesh via the SWIFT network. 5 transactions issued by hackers, worth $101 million and withdrawn from a Bangladesh Bank account at the Federal Reserve Bank of New York, succeeded, with $20 million traced to Sri Lanka (since recovered) and $81 million to the Philippines (about $18 million recovered. The Federal Reserve Bank of NY blocked the remaining thirty transactions, amounting to $850 million, at the request of Bangladesh Bank.
• The vital inference is that cryptocurrencies are not a disruptive threat to the banks or card networks such as Visa/MasterCard, Money to Order models like Western Union) for cross border remittances, however that the impact will be more from its ability to open up newer markets and penetrate new customers.
• Banks in theory are well positioned to confront the changes triggered by the rise of distributed ledgers, but in practice the situation is more complex.
• A permissioned public ledger could remove the need for a central clearing house in the form of Visa and MasterCard. Nevertheless, the bank’s analysts still see limited risk to these card schemes, arguing that the decision by the likes of Apple to tap into their business will certainly them in a strong position.
• Regulatory and other hurdles may have forced most start-ups to partner with, rather than compete against, incumbent banks, but distributed ledgers will create winners and losers within the banking industry.