BLOCKCHAIN IN PAYMENTS — TRANSFORMING THE PAYMENTS INDUSTRY
Blockchain is an innovative technology with numerous applications across various industries like retail, advertising, energy, supply chain, healthcare, etc. With blockchain, people have found a way to conduct many processes securely and transparently. Even though blockchain applications can be found around diverse industries today, the payments and finance industry is behind the hype that attracted people to blockchain technology.
Blockchain technology was introduced to store time-stamped records. However, the technology didn't gain much attention until it was used to create and exchange a cryptocurrency called Bitcoin. Since then, numerous industries have adopted blockchain across the globe, and everyone has appreciated its benefits.
Lately, as the world is undergoing the digitization movement, the payments industry has adopted numerous technologies to ease out payment procedures for people. We have gone from accepting payments only via cash to building cashless economies. With the adoption of multiple digital payment methods, people have begun to accept this money exchange system. Now, with the development of technology, we are moving towards a new system of transferring money - payments via blockchain.
Blockchain Payment Systems are basically a method of making payments with the help of blockchain technology. But to understand this concept better, we must dive into the details of blockchain, how it works in payment systems, and the various benefits it offers.
In this article, we will answer the following questions:
- What is blockchain?
- What are the advantages of blockchain in payments?
- How do blockchain payment systems work?
- How can you address the challenges of blockchain payment systems?
- How can you implement a blockchain payment system?
- What are some of the use cases of blockchain in payments?
Let's begin by understanding the basics of blockchain technology.
What is Blockchain?
Just as the name suggests, blockchain refers to a "chain of blocks." The blocks contain timestamped digital records of any transactions or exchange of data that takes place via the technology. Blockchain functions as a decentralized and distributed ledger, which implies that there is no central authority in charge of the data. A "block" has its own cryptographic hash, which is like a unique ID. Every block contains its own hash as well as the hash of the previous block, along with data, which connects the blockchain.
The information stored on the blockchain is distributed among the various members of the transaction network, also known as nodes. Whenever a new transaction occurs, a new block is added to the blockchain.:
The transaction has to be validated by all the network nodes to add a new block to the blockchain. To validate a transaction, the nodes have to come to a consensus via a consensus mechanism. Different blockchains use different consensus mechanisms like Proof of Work, Proof of Stake, etc.
Blockchain offers multiple advantages like transparency and security, which is why it is a very suitable technology for the payments and finance industry. Let's learn more about the benefits of blockchain in payments.
What are the Advantages of Blockchain in Payments?
Blockchain offers several advantages in payments. Here, we have listed four such benefits:
Let's discuss them in detail.
With the current payments system, there is a need for middle-men and intermediaries. One has to pass through several intermediaries and authorizations to make a payment, such as the payment gateway, exchange mode, issuer, etc. Even though intermediaries and middle-men are responsible for maintaining the authenticity of payments, their services:
- are chargeable
- increase the transaction time
Also, there is a chance that intermediaries are not entirely reliable.
However, with blockchain payment systems, one can:
This advantage of blockchain payment systems has also motivated banks to introduce blockchain transactions in their system to:.
Transparency and Security
One of blockchain technology's most significant benefits is the high-level transparency it offers. Details of all transactions that take place via a blockchain network are:
Hence, while making payments, you don't have to worry about saving any records as they get saved in the blockchain and are entirely safe, while ensuring integrity of the data.
Since every block contains its own hash as well as the hash of the previous block, they are chronologically linked. Hence, no one can tamper with the records on the blockchain, as any change would be visible.
Thus, blockchain payment systems ensure high-level security, safety and transparency to assure you that your payments are authentic and safe.
Safe and Quick Cross-Border Payments
Cross-Border payments occur when the payee and the payer reside in different countries. Making cross-border payments has been a problematic area for a very long time. It faces several challenges, such as:
With blockchain, one can:
For example, Ripple (XRP) acts as a cryptocurrency intermediary to facilitate seamless cross-border transactions. If a person from India wishes to pay money to a friend in the USA, the money in Rupees would be transferred as XRP, and the person in the USA would receive it as USD.
Automation with Smart Contracts
Automation with smart contracts is a great advantage, especially for people running businesses and companies. Smart Contracts can:
While writing smart contracts, one can mention all the requirements that need to be met for transferring a payment. Once the required credentials are met, the concerned person is automatically paid.
For example, suppose a company hires a content creator to provide some content. The person will be automatically paid when he finishes and provides his end of the requirements, whatever required as per the deal.
As you understand the benefits of blockchain in payments now, let's learn about the working of blockchain payment systems.
How do Blockchain Payment Systems Work?
The working of blockchain payments systems is not very complicated. Here, we have explained how a cross-border payment will occur through a Stellar Blockchain Payment System with the help of an example.
Suppose you reside in the USA, and you have to pay $10,000 to a friend living in Germany. Both of your banks are linked to the Stellar blockchain network. This is how the payment would take place:
- You will send a payment of $10,000 from your bank to your friend's bank.
- Your friend's bank in Germany will receive a transaction request of $10,000.
- His bank will approve the request after confirming with him.
- After your bank receives the transaction approval, $10,000 will be deducted from your account.
- The $10,000 will move to your bank's pool account, where they will be converted to Stellar Lumens (XLM).
- The Stellar Lumens will move to the Stellar Network, where it will be converted into Euros at the best exchange rate.
- The money will then be credited to your friend's bank account in Germany in the form of Euros.
The banks act as "Anchors" in the Stellar Network. The bodies or organizations that hold deposits and issue credits as per the requirements are known as "Anchors" in the Stellar Network. They act as a bridge between the currencies and the Stellar network, as all money transactions occur in credit issued by Anchors in the Stellar Network (except XLM).
Now that you understand the working of blockchain payment systems, let us look at how one can address the challenges of blockchain in payments.
How can you Address the Challenges of Blockchain in Payments?
There are very minimal challenges of blockchain in payments, which can be addressed by taking a few measures. Here, we have listed four ways one can deal with the challenges of blockchain in payments:
- Technical Standards
- Safety And Security
Let's discuss them in detail.
When technicalities are considered, a significant challenge is the incomplete or broken adoption of blockchain. Fragmented adoption of blockchain has its own set of challenges which can hinder its seamless functioning, such as:
Interoperability is essential to ensure that blockchain payments can be seamlessly integrated into existing systems. To address this challenge, a firm focus on the following components is required:
- Development of common technical standards for interoperability
- Enhancement of network scale efficiencies
- Implementation of a standard mode of communication
- Conducting test runs to ensure:
- good speed
- compliance with geographical standards
Since transaction records of payments via blockchain are immutable, challenges that come up here are:
One can address these challenges by:
- laying down governance standards to address all challenges
- developing and integrating solutions to facilitate cancellation and reversal of payments
While implementing blockchain solutions, special attention needs to be given to the regulatory compliance required. As sensitive information about people's money and payments is being stored in the blockchain payment systems, it is essential to take care of all regulatory compliances to avoid any violation charges or penalties.
To ensure complete compliance with regulations, one can:
Safety and Security
Blockchain offers maximum transparency, which can be both good and bad for the users. On the one hand, it improves the payment systems by smoothening the payment flows. However, on the other hand, it comes up as a concern to users who don't wish to share all of their payment data with everyone.
To address these challenges, one can:
Whenever one moves from one technical solution to another, they will always face some challenges. As blockchain in payments is still a growing industry, it is very common to meet a few problems and concerns. However, with proper steps and precautions, one can quickly deal with those challenges and move on to enjoy the multiple benefits this technology has to offer.
Now that you know how one can deal with the challenges of blockchain in payments, let's understand how one can implement blockchain payments in their system.
Before beginning, many things must be figured out to implement a blockchain payment system seamlessly.
How to Implement a Blockchain Payment System?
Step 1: Define your Project Scope
While defining your project scope, you should figure out which approach you'll be taking to implement a blockchain payment system. Some strategies you can adopt are:
Step 2: Determine your Front-End Technology Stack
After defining your project scope, the next step you take is to determine your front-end technology stack. For deciding it, you first need to figure out what kind of front-end application you wish to provide your users and accordingly choose the technology stack for it.
For example, you may use Node.js for a web application or Swift for a native iOS application.
Step 3: Determine your Blockchain Platform
After deciding your front-end technology stack, you must choose a blockchain network platform. There are many blockchain network platforms with great benefits that you can use to implement the blockchain payments system in your business. However, it depends on the approach you choose.
If you plan to build a blockchain network and token from scratch, you should look into the functioning and pricing of some of the most promising blockchain platforms available.
If you plan to develop a new token on an existing platform, you should evaluate the available options before finalizing one.
Step 4: Initiate Development
Before beginning with the execution, the final planning step you need to take is finalizing a highly competent development team. Your approach will decide the members you’ll need in your team.
For example, if your strategy is to build a new token on Stellar, you will need dedicated stellar developers in your team.
Some of the necessary members your development team should include are:
- Project Managers
- Blockchain Developers
- App Developers (based on your front-end application requirements)
- Quality Testers
You can also consider hiring a dedicated development team to implement the blockchain payment system. Now that you’re done with planning your project, you move on to project execution.
Step 5: Execute your Project
The execution of your project will differ according to your project scope. You can either carry out the execution yourself or hire a blockchain development company to help you out with the technicalities.
If you are planning to build a new blockchain network and cryptocurrency, then you must build:
- the infrastructure using a cloud-based Infrastructure-As-A-Service (IaaS)
- your peer-to-peer network via the latest encryption techniques
- a consensus algorithm
If you are planning to develop a new token on a blockchain network like Stellar or Tezos, you must:
- create your account and crypto-wallet
- install and configure relevant tools and APIs
- code your smart contracts
- test your smart contracts
- deploy your smart contracts
- create crypto-tokens
If you plan to use a crypto-payment gateway, or Stellar or Ripple, you can set them up conveniently to send and receive crypto-payments.
Implementing a blockchain payment system is a highly technical task that requires expert supervision to ensure it has been performed efficiently. Therefore, it is always preferable to hire a dedicated blockchain development company to help you perform the task so that you can ensure seamless and complete implementation of the blockchain payment system.
Now that you understand how you can implement a blockchain payment system, let’s look at some of the use cases of blockchain in payments.
What are some of the Use Cases of Blockchain in Payments?
Blockchain has multiple use cases in payments. Here, we have listed four such use cases:
- Cross Border Payments
- Trade Finance
- Digital Identity Verification
- Peer-To-Peer (P2P) Transfers
Let’s discuss them in detail.
As we discussed earlier in this article, cross-border payments via traditional payment methods are secure but very expensive and slow. There are numerous intermediaries in the system, which leads to commissions ranging from 3–20% of the amount being transferred.
- less expensive
- transferred without the need for any third-party authorizations
Banks like Westpac partnered with Ripple to implement a low-cost cross-border blockchain payment system. Numerous banks and companies plan to get blockchain payment systems implemented in their business to conduct safe and quick cross border payments.
Trade Finance means financial activities related to international trade. Trade finance struggles with the vast amounts of paperwork pertaining to payment records and invoices, bills, credited amounts, etc. Carrying out these procedures takes up a lot of time as several copies of the same paperwork are required for multiple uses, and any manual errors cause the complete documentation to go wrong.
With blockchain payment systems, trade finance paperwork can become more manageable as:
- No manual effort to record the payment details, invoices, and bills would be required.
- One single document can be accessed by all members, as blockchain payment systems work as a distributed ledger.
- The chances of manual errors will be eliminated as information of all payments taking place via the blockchain payment system will be saved directly in the blockchain.
Digital Identity Verification
With the current payments system, one has to verify their identity every time they conduct a transaction. Sometimes, verification processes like checking via video calls or repeated logins make users feel uncomfortable and make the process very time-consuming.
With blockchain payment systems, the verified credentials of a person can be securely saved in the blockchain, and as blockchain is immutable, the authenticity of the data is also ensured. This will speed up the digital identity verification as the users won’t have to put in their verification credentials repeatedly to make payments. It will also give users the authority to choose with whom they wish to share their verification credentials.
Peer-To-Peer (P2P) Transfers
Peer-to-peer transfers enable users to transfer funds directly from their accounts to another person. There are many traditional P2P transfer applications, but with numerous constraints like:
- You can make payments only within a specific region.
- You have to pay a commission to send a payment outside your area.
- You have to save your information, which might not seem safe.
- You cannot make cross-border payments conveniently.
With blockchain payment systems, peer-to-peer transfers and payments:
- twill be decentralized. Hence, security concerns will be addressed efficiently.
- can be conducted globally as blockchain doesn’t have any limitations geographically.
- can occur in real-time. Therefore the payment speed will increase.
Blockchain technology can transform the payments industry. With its benefits, payments can become very secure and easy to conduct. If one efficiently deals with the challenges and manages to form a dedicated and experienced team to implement a blockchain payment system in their business, they can easily avail of its multiple benefits.
Originally published at https://www.leewayhertz.com/blockchain-in-payments/