Will Blockchain disrupt the current payment practices?
In medieval times, humans started making tools, hunting for food, gathering goods etc. and more importantly forming civilized communities to exchange any of these goods and services. Barter system helped communities to exchange goods/services with each other.
Few hundreds of years later came commodity backed currency which worked as a better medium of exchange to avail goods/services. Oyster, Gold, silver was proven successful as a store of value as well as a medium of exchange.
During Industrialization, Government-backed fiat currency was introduced by every country in the world. With the advent of fiat currency, various payment instruments such as cheques, drafts were introduced.
Years later in around 1950’s credit cards were introduced which would allow customers to keep open tabs with merchants to pay back later. Early adoption was only for the rich. Merchants kept track of customer purchases in ledger books, which could grow to hundreds of accounts and required each customer’s records to be aggregated and tallied. Later businesses gave customers tokens and later “charga-plates” to identify them. These converted into a single card which worked at multiple places and in its current form is called the ‘credit card’ which has very high adoption levels. In fact, these were initially ‘charge cards’ only later the concept/feature of credit was added to these cards by banks.
For banks, institutions, companies’ payment infrastructure system such as SWIFT helped to transfer and settle cross-border payments. For an individual level, payment system such as Paypal, western union money transfer helped to transfer money to their friends & family. In India there are now various payment options available from UPI to e-wallets etc.
The point is every time there has been a technological advancement, there has been a change in common payment practices and it gets disrupted.
Today, Blockchain technology has the potential to again disrupt the payment methods.
Let’s look at some of the companies trying to disrupt the payment space through Blockchain technology.
Ripple Labs is financial services blockchain company which aims to facilitate cross-border/global payments through its native token Ripple(XRP). Ripple’s technology is based on transactional protocol, built on top of distributed ledger network with various participants validating transactions (no centralized authority like in case of SWIFT).
It aims to solve the following problems:
Inter-ledger accounting — Financial institution A wants to move money to a Bank B. The movement of capital happens across multiple ledgers; this increases the time required. In addition to time there are high transaction fees for cross-border transactions. Ripple provides a system for single ledger accounting which increases transaction speed and does this at lower costs.
Trust- When company A is transferring money to company B, they will assign their respective banks to facilitate the transaction. The transaction moves between various middlemen. Ripple provides a bridge of trust across multiple respective parties to facilitate the payment.
Ripple provides three main products each serving different purposes:
xCurrent — works in unison with Interlegder protocol, which uses blockchain contracts to facilitate payments. The whole settlement process is bound by escrow type facility to every participant, resulting in trusted, transparent, distributed, immutable transactions in ledgers. For example, Bank A wants to send USD to bank B, but bank B wants INR. Bank A then holds USD in the escrow on xCurrent’s protocol, converts USD to INR in its escrow account and then finally transfers to bank B account in INR.
xRapid — It is a technological layer on top of xCurrent. It uses XRP token to issue payments. Similar to the previous example, bank A will convert USD to XRP token on xRapid platform and bank B will convert XRP back to INR. This interoperability feature offers liquidity solutions for different currencies, instruments and assets.
xVia — offers interface software for xCurrent and xRapid for banks/financial institutions.
Stellar is a hybrid distributed blockchain platform which helps to facilitate cross-border payment solutions for individuals. In simple terms, Ripple is designed for banks and Stellar is designed for individuals. One of the most important problem it is trying to solve is global remittances. For example — sending money from one country to another is still a cumbersome process with the following problems:
Time — Settlement across multiple ledgers and high volumes makes the process time-consuming sometimes running into days.
Transaction cost- Higher fees due to multiple middle-men like banks before it reaches the final beneficiary.
Point of failure — Current global remittances have 4 to 5% per cent failure rate
Stellar provides a solution to all these problems on its Stellar blockchain protocol and its native tokens Stellar (XLM). It provides real-time transfer of value between different currencies. XLM acts like a bridge currency between fiat/digital currencies. Stellar has its own decentralized exchange which aims to provides these settlement solutions (converting fiat to crypto, vice-versa and even different digital tokens conversions) quicker, faster and free.
3. Pundi X
Pundi X is decentralized blockchain platform which aims to facilitate payment system between merchants and customers. One of the major problems with the cryptocurrency market is usability of crypto/tokens for real world transactions. Pundi X bridges the gap by introducing its own POS system and its own native token (NXPS) for facilitating transactions. Current POS mechanism faces the following issues:
Security- Current POS systems are vulnerable to hacking attacks and system bugs. More importantly, customer’s security is compromised if the POS system is hacked.
Inaccurate Reporting — Due to multiple ledger accounting across various participants, there is a risk of inaccurate reporting which leads to loss.
Pundi X aims to solve these problems and also make the overall payment processes efficient and seamless. Underlying blockchain technology makes Pundi X impregnable to hackers. Pundi X has two blockchain communication layers- one for buy request and one for recording sales transactions- which records on the single master ledger. This solves the problem of inaccurate reporting. Merchants will also be saving cost by using Pundi X POS in comparison to fiat based POS systems.
Salt is a cryptocurrency backed lending platform. Some cryptocurrencies like Bitcoin have proven to be a good store of value. Salt envisions other major cryptocurrencies will also act as a good store of value if not a medium of exchange. Salt aims to provide a robust platform for lenders and payees. Currently, there are major problems in crypto lending.
Security- Due to inadequate infrastructure in place, crypto/digital assets have a higher risk. Centralized exchanges hacks and inadequate custodial/ insurance service results to improper security measures.
Commingling- Current cryptocurrency lending platform commingles multiple digital assets/cryptocurrencies which leads to breach of lender’s trust.
Salt provides robust security measures such as multi-signature wallet protection, offline storage and generation of all platform wallet keys. Salt lender’s contracts infer that the platform doesn’t commingle digital assets. Unlike other lending platforms, it doesn’t charge any fees (origination, prepayment, custodial etc.).
OmiseGO is an online payment solutions developed on Ethereum blockchain which aims to provide digital payment solutions to the world’s unbanked population. Digital payment solutions to hold, store, transfer digital assets, currencies etc. It is trying to solve the below mentioned problem:
Closed payment solutions- Roughly there are 2 billion people who don’t have access to banking services. Penetration of traditional financial services are heavily dependent on national jurisdictions/regulations.
OmiseGo aims to provide decentralized solution wherein Individuals can send money in easy, costless over a decentralized network without any cross-border restrictions. For example, a person in Namibia can hold and store digital assets, act as a lender to multiple payees from different countries and can also receive insurance services for his/her digital assets/ collectables. In short, OmiseGo aims to offer solutions to make every individual its own bank.
In the coming years, overall landscape of how financial payment systems work and how value is transferred across geographies is about to change and blockchain will be at the core of this.
Ordinary people will start using crypto in real-life transactions whether it is global remittances, lending, buying from a merchant, managing loyalty points and so on.
Blockchain offers a vision for the future where individuals regain financial autonomy.
The speed of universal mainstream adoption will depend upon the values which blockchain technologies add over traditional payment methods. Some of them are:
· Instant transactions, more secured, lower costs, complete interoperability
· Real time settlements for everyone on fiat currency (instant conversions)
· Non-speculative prices of crypto tokens used for payment transactions
· Immediate proof of payment, transparency and tamper proof history of transaction records.
· ‘Ease of use’ for everyone and ‘scalability’
· Implementation of a Unified Regulatory Framework across the globe.
(This blog series is co-written with inputs from Mr. Kunal Shivalkar, a JBIMS almunus who is a Blockchain enthusiast residing in Hyderabad. You can reach out to him on firstname.lastname@example.org)