It should come as no surprise to tech visionaries and keen observers that blockchain is now looked upon not as a solution seeking a problem but as a core building block to the future of many industries, with the financial services space being a key beneficiary.
In the payments space alone, there are many reasons for harnessing blockchain technology. A fundamental driver would be to meet growing consumer demand for speed, easier reconciliation and greater fee transparency.
The Monetary Authority of Singapore, for example, has successfully leveraged blockchain technology for the settlement of tokenised assets (such as interbank payments) with the Association of Banks in Singapore back in 2017.
In fact, some experts may view blockchain-enabled payment technology to be akin to 5G for the communications marketplace. Just as communications networks continue to be upgraded year-on-year to keep up with demand for faster streaming of mobile and internet content, payments networks need to be enhanced to bring about more streamlined, secured and advanced systems through the use of blockchain technology.
We examine the factors fuelling the hype behind blockchain as the future of payments and what makes it such a viable solution.
- Security, security, security
Blockchain technology is a chain of digital blocks (digital information) that contains records of all transactions, which can be verified and updated in real time. It maintains the transparency of transactions on a peer-to-peer network where each user receives a copy of the electronic transaction ledger for record. Each record is time-stamped and stored using the highest degree of data encryption.On a fundamental level, blockchain eliminates the risk of the loss of data kept by a central authority, which is particularly vulnerable to cyber breach. A decentralised ledger powered by blockchain and secured by its cryptography and distributed among participants in a ledger will reduce the risk of fraud or error.
Source: Blockchain Research Group
According to a March 2019 white paper by the World Economic Forum, more than 40 central banks globally are “exploring, researching or actively experimenting with blockchain technology, with an eye to potentially issue a digital currency in the eventual future”.
- Fast and cost-effective – no compromises required
The distributed nature of blockchain’s digital ledger also removes the need for centralised institutions (intermediaries) and manual processing, translating to lower cost. This also means that companies may derive significant cost savings from the elimination of transfer fees to multiple parties in frequent trading.The processing of payments through the blockchain is also completed almost instantaneously – in a matter of seconds instead of days.
- Powering cross-border payments in real time
There is often a lack of visibility in international payments, especially pertaining to when the funds will be credited to the end beneficiary, as well as the amount financial institutions might deduct in fees. In addition, these transactions often come with high transfer fees and are often slow to conclude due to delays in physical distance (the last mile problem in remittance) and relying on middlemen (susceptible to fraud and human error). Blockchain will serve as a real game-changer for cross-border payments as it offers businesses with efficient, secure, faster transfers, and lower conversion fees all in real-time.
- Convergence of blockchain and the Internet of Things (IoT)
In recent years, the payment industry has seen dramatic transformation coming from technology innovations such as NFC, mPOS and wearables.As more businesses are utilising IoT-enabled devices for added efficiency and accuracy for their business operations, using blockchain-enabled payment technology to connect to these devices through the IoT will help to further optimise their payment processes, creating a more seamless purchase journey for their customers.