Blockchain has multiple applications in the payments industry including use in cross-border payments, foreign exchange (FX) settlement, trade settlements, card payments, and more.
For most people, blockchain and cryptocurrency are almost synonymous with each other. Cryptocurrencies like Bitcoin and Ethereum are often seen as competitors to traditional payments and official currencies. But the truth is that cryptocurrencies are applications that have been built on the principles of blockchain technology. If any other application used the same principles of peer-to-peer communication, distributed databases, transparency, permanence, and security, it could very well qualify to be called a blockchain application and enjoy the same benefits. These principles can be used in the payments industry offering many advantages.
Blockchain and Payments
Blockchain has multiple applications in the payments industry including use in cross-border payments, foreign exchange (FX) settlement, trade settlements, card payments, and more. We will explore some of these here.
International Reconciliation: SWIFT with 34 global
banks successfully completed a proof of concept
to evaluate if Distributed Ledger Technology/Blockchain could be used for
Nostro reconciliation. Nostro/Vostro accounts are used when a bank does not
provide services directly in some countries but does it through a correspondent
bank. The conclusion of this PoC was that Blockchain could effectively support
automated real-time liquidity monitoring and reconciliation if adopted globally
by all the participant banks.
Card Payments: Card payments are
for shoppers, but there is a high processing fee involved for merchants. This
is because there are multiple intermediaries involved that can be categorized
as acquirers (merchants bank), payment gateways, interchange (Visa/Master), and
issuer (cardholders bank). Since there is no central authority involved with
Blockchain, there would be no need for so many authoritative entities. This
would help the merchants who would have to pay less for service charges,
transaction charges and, in turn, can offer higher discounts to customers.
Cross-Border Payments: Cross-border payments have to pass
through several banks while going from one country to the other. This increases
the fees involved in making them. Mastercard has come up with a
blockchain-based solution that combines with its existing settlement network to
connect the sending and receiving bank directly without the intermediaries.
They will, however, accomplish this without using any cryptocurrency but will
allow funds to be transferred as fiat currencies used currently. Similarly, FinTech provider R3 is working with 22
banks to build a real-time international payments solution that uses
Distributed Ledgers to enable fast, efficient, and cost-effective cross-border
Trade Finance: Financing for trade
between a buyer and seller, whether domestic or intermediary, is done through
multiple intermediary banks that utilize different financial products that make
the trade possible. Smart contracts for trade finance is a capability
provided by blockchain technology. These are self-executing contracts, where
the terms of trade are directly written as code on the blockchain. These
automatically execute payments when specific conditions are met. An example of
a condition could be receipt of a shipment of goods.
While cryptocurrencies remain the
most popular and widely discussed application of blockchain, there is no
denying that it has a wide range of applications across various industries
globally. Almost all the big names in the finance and technology industry like
Mastercard, Visa, Oracle, and IBM have invested in
blockchain to create their version for use across some of the above
applications. They already had the required building blocks like expertise in
distributed databases and cryptography that could be put together using the
blockchain philosophy. Although there
isn’t a universal standard adopted yet, and some of the terms are too complex
for a non-technical person to understand, it is highly likely that blockchain
would be transparently adopted and become part of our daily lives soon.