When blockchain technology first was implemented into payment services, two areas that appeared to be the most suitable ones were international payments via bank-to-bank transfers and trade finance.
Back in 2017, a consortium of banks in Japan implemented blockchain payment processing methods. The aim was to transfer funds cross-border as well as within the country. They could see that the implementation of blockchain technology reduced the cost of the transfer. It was far cheaper than traditional methods.
Similarly, the area of trade finance was also ready for blockchain. The process of trade finance, historically, took a lot of time and involved a lot of paperwork. The scope of manual intervention was huge.
The first application of blockchain payment systems in trade finance took place in 2017. Two branches of Brighann Cotton had to track and pay for their shipments between Texas and China. The two banks involved were the Commonwealth Bank of Australia and Wells Fargo. These two banks devised a collaborative workflow. It became the first live global blockchain transaction between banks.
Taking a cue from this development, IBM started developing its blockchain payment system. The solutions could settle payment disputes between two trading parties in 10 days. Traditional systems were taking as high as 44 days.
The Advantages of Blockchain
So, what are those advantages of blockchain technology that make it such an efficient choice for international payments and trade finance?
The answer lies in the application of DLT or Distributed Ledger Technology in conventional currencies. For example, in case of a cross-border transaction, the payment is conducted in a certain currency. The provider of the blockchain payment services uses DLT to convert the currency into crypto, for example, bitcoin. Then the provider converts the bitcoin again into the receiver’s local currency and pays the receiver. This helps to get rid of the intricacies of the existing banking applications. In turn, the process becomes faster with a notable reduction in cost. Using blockchain payment methods, international transfers could be completed in 1-3 days.
In trade finance, the aspect of blockchain that paid off was the system of smart contracts. As we know, these smart contracts are self-executing codes that run by themselves. As and when parties agree upon the conditions, the codes execute themselves. In trade finance, whenever a party receives their shipment, they could verify the receipt on the contract. And this approval could trigger the payment being delivered to the other party. The process makes the transaction faster with fewer chances of error.
Payments, especially those made digitally, often suffer the risk of hacking and cyber-attacks. The advantage of blockchain technology is that it is hard to hack because of its decentralized nature. It also helps to get rid of fraudulent payments. Owing to these advantages, 55% of global businesses see Blockchain as one of their top strategic priorities for the next 2 years.
The Emerging Market of Blockchain Payments
Driven by the COVID 19 outbreak, one area that has found blockchain payments useful is online retail and e-commerce. More and more customers prefer to make payments using cryptocurrency. E-commerce and online retail companies are also investing large amounts to make their blockchain payment gateways better.
Hit by receding incomes, consumers are looking for ways that reduce transaction costs. This requires cutting intermediaries. So, blockchain technology, with its decentralized finance protocols, provides means to make it happen. Blockchain processing is a cheaper option for the payers as well as the merchants.
Blockchain payment gateway APIs are also getting sophisticated with each passing day. These APIs not only help to receive payments but also provides full control over the consumer’s checkout and shopping experience. Such APIs help to create and fetch invoices. They also provide status updates regarding the invoice regularly.
Many developers are also working on blockchain payments software. These products are available for all the different types of stakeholders: individual consumers, businesses, and financial institutions.
There are levels of payment software based upon the types of services they provide. Some payment gateways help to create smart contracts. Some are less sophisticated and work almost as a payment gateway. The only major difference between the less sophisticated software and the blockchain payment gateways is that the former offers documentation and traceability features for international payments.
Drawbacks of Blockchain in Payments
Being decentralized, blockchain processing is far more secure than traditional methods. However, the decentralized nature can make it difficult to work upon. Companies implementing blockchain payment technologies often find it difficult to work alone. The development at an enterprise level without the guidance and involvement of a central authority can be full of friction and difficulties.
The Potential of Blockchain Payments
Experts believe that blockchain payments will keep on exploring still new areas due to the inherent qualities of blockchain. These payments have no processing fees and do not require personal information. The speed of processing is fast. The technology eliminates the scope of duplicate spends and failures due to false-positives. There is no scope of data loss owing to the benefits of distributed record-keeping. The rise of blockchain analysis and blockchain forensic companies have also made it difficult to falsify transactions.
Besides e-commerce, another industry-segment that finds the use of blockchain payment convenient is manufacturing. Like e-commerce, this sector also involves order management and stock monitoring. Doing these processes manually often results in duplication, mismanagement, and missed transactions. Blockchain payment processing systems, with their smart contracts in place, help to do away with the manual handling of transactions. This results in quick delivery fewer financial risks.
It’s thus reasonable to expect that the area of blockchain payments will keep growing in the days to come. Its growth will bring more innovations and solutions that make payments hassle-free and cost-effective.
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