At their core, digital assets are programmable payment rails. Blockchain provides the ideal foundation to deliver these payment rails, uniquely catered to a multitude of use cases, while reducing the risk of costly fraud chargebacks, the expense of legacy payment methods or the complexity of currency exchange. Business owners need to be aware of their possibilities and prepare for implementing them as smoothly and securely as possible, so consumers feel confident paying this way.
There are many reasons why blockchain is the technology of choice for payments, and here René Pomassl, Co-Founder & Chief Executive Officer at Salamantex shares his thoughts on three of them.
Blockchain’s decentralised nature can cut organisations’ costs. According to a Santander FinTech study, blockchain technology could start reducing the cost of infrastructure in financial services by $15 billion per annum, by next year.
Blockchain’s core premise is to make the process of intermediation in payments more efficient. With fiat money, three to five parties facilitate a single transaction, including the merchant, the merchant’s payment processor, the corresponding network and ending with the card issuer. These together create the “payment stack”, a term used to refer to all the technologies and components that a company uses to accept payments from customers.
What blockchain technology helps to facilitate is more effective intermediation, through automation. The technology allows for data reconciliation between independent parties who, in many cases, don’t even need to trust each other. This is ensured because blockchain delivers almost guaranteed assurance to the transacting parties that ‘what you see is what I see’. In traditional payment methods on the other hand, this trust is not inbuilt, and each party takes a cut of the transaction, resulting in extra costs.
The decentralised model of blockchain also allows cross-border payments to bypass the costs that come with international third parties. McKinsey & Company estimated that blockchain technologies used in cross-border payments could save banks about $4 billion annually.
In the world of payments, automating or reducing the number of middlemen and improving cross-border transactions not only significantly reduces costs for merchants and consumers, but also results in faster transaction times.
Consumers and merchants alike are demanding near-instant transaction times when it comes to payments. The B2C payments world is often host to a number of new technologies, many of which are seen as the touchstone of innovation, such as ‘Buy Now, Pay Later’. Underpinning these innovations is a consumer-driven desire for speed and convenience.
Again, blockchain is the technology of choice to deliver. Thanks to its decentralised nature, the technology means that payments do not pass-through existing banking infrastructure. The end result is much faster settlement times than in traditional payment methods. In the recent digital euro project, blockchain technology was proven capable of processing more than 40,000 transactions per second.
That said, some may argue that fiat money already has a fast enough transaction time, but when it comes to transactions that go through many stages, that’s not the case. Yes, validating a payment may take place in a matter of seconds, but it can be days before money actually arrives in the business owner’s bank. This lag between time paid and money received particularly affects SMEs, for whom a healthy liquidity position is crucial.
Blockchain has the ability to end the days of these overcomplicated processes, which are far too time-consuming. Intermediary steps can be automated so that transactions are handled faster than conventional methods. Although transaction times vary for different digital assets, a Bitcoin cryptocurrency transaction can be completed within 10 minutes, and Ethereum in 15 seconds, according to Morgan Stanley. When it comes to conventional payment methods made through credit cards, for instance, it can often be the next working day when funds are cleared and arrive in the recipient’s bank account. For many business owners struggling to remain liquid, this day is one day too long.
It may seem ironic that a publicly accessible ledger can deliver superior levels of privacy for its transacting parties. However, blockchain technology promises to facilitate payments that are not only fast and low-cost, but secure. It is this public ledger that actually allows all transacting parties – known as ‘nodes’ – to monitor a money transfer. This is made possible through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions. Blockchain creates “blocks” of transactions with end-to-end encryption, which significantly reduces the risk of fraud and unauthorised activity. It is almost impossible to tamper with a single record because a hacker would need to change the block containing that record as well as those linked to it to avoid detection.
While blockchain-based solutions will never be a panacea for fraud, they can help significantly reduce it.
Are business owners ready for the future of payments?
As digital assets move towards mainstream adoption, business owners should observe and consider the right software solutions to keep up with the rapid pace of change taking place across the payment infrastructure landscape. Although the benefits of blockchain as the underlying platform for crypto payments is clear, many merchants are less clear on how to select a software solutions provider that can best deliver these. What’s more, the move to digital assets as a means of payment is not yet unanimously accepted across the board. This means that merchants ideally need software solutions that offer them the choice to accept payments in digital assets, but to then convert it to fiat money.
Blockchain promises great improvements over traditional payment solutions for both merchants and consumers. By accepting digital assets and implementing blockchain, merchants can experience and have a taste of where the future of payments is heading.