Blockchain has proven itself to be a versatile technology since its introduction with Bitcoin more than a decade ago. It offers the potential to process payments in real-time without compromising the data’s security.
The current infrastructure for payments is mostly based on messaging and file exchanges. Multiple parties get their hands on this information, with a typical cross-border lifecycle requiring several steps to complete. It can take several days to process a single transaction.
Because of this delay, companies that initiate payments must monitor their statements or bank accounts to know when it clears. Blockchain provides a different approach to consider.
Current Blockchain Initiatives for Payments
Most of the efforts to introduce blockchain into the payments sector are still more of an initiative than an actual application.
SWIFT is one of the most well-known attempts in the financial industry to bring blockchain to payments. It explores whether the technology’s distributed ledger is useful for banks when working to improve database reconciliation in real-time.
Over 20 global banks have joined this initiative, including DBS Bank, RBC Royal Bank, and Deutsche Bank.
The NASDAQ Exchange announced a partnership with Citibank to explore a similar approach that uses blockchain for payments.
Several non-profit agencies and for-profit corporations are also exploring the idea of using blockchain for settlements of internal payments.
Challenges to the Use of Blockchain for Payments
The upside for using blockchain for payments is quite high, but these efforts do not come without risks.
Scalability is the primary challenge that must be solved before the widespread implementation of this policy becomes possible. The current volume of cryptocurrency transactions is only a few hundred thousand per day, but payment networks can process up to 150 million of them. This tech hasn’t been tested for the high data volumes needed.
Blockchain also creates an open network. That means the deployment of a payment infrastructure is not always feasible. Private options are available with this technology, but the feasibility of using it globally is untested.
According to Deltec Bank, “There are even legal concerns to review when thinking about blockchain for payments. Although the technology rapidly evolved since its introduction more than a decade ago, laws and regulations have been slow to develop.” Using this option would create higher levels of uncertainty, and it could limit product or service access in some areas if it becomes the only available solution.
Is Blockchain a Worthwhile Investment for Payments?
If we can find a way to deploy blockchain technologies on a large scale, then there would be significant benefits for payments for companies and financial institutions. It would eliminate the need for clearing and settlement systems while providing real-time accounting ledgers.
Today’s current initiatives could become tomorrow’s go-to systems. Instant payments would strength the global economy while offering businesses of every size the opportunity to become digital so that they can sell internationally.
Is blockchain a worthwhile investment for payments? If we can find the answers to the challenges that this concept faces, then this technology has the power to be transformative for society.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in Economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.