The issue of making payments became relevant as soon as mankind invented money: how to pay so that it is honest and reliable? A real revolution in payments occurred with the introduction of electronic payment systems. It seemed that now it is possible to easily and freely transfer funds to any country in the world. But then blockchain appeared and it turned out that everything can work much faster and safer.
Today, almost all inhabitants of the planet use payments. Small household payments in stores, transferring funds between accounts or cards, electronic payments — all this is the norm of life. As well as the commission, which is paid almost every time. It is almost imperceptible if you, for example, buy a hot dog. But if the purchase or transfer is significant, then the commission becomes a real pain for the one who gives his funds. Why is this happening?
A typical financial transaction without a blockchain
Let’s take a look at the usual money transfer scheme. Do not be confused by the word “transfer”, because it involves the movement of monetary assets from one place to another. That is, any purchase is a money transfer, as well as a simple transfer of funds, a money loan and much more.
From point A to point B
At first glance, it may seem that only two participants are involved: the one who transfers funds and the one who receives them. However, this process does not take place from hand to hand, but goes through certain services or financial institutions – that means there are at least three participants, since we also have the role of an intermediary. However, in reality there are many more intermediaries than you might think:
- acquirer (financial institution that makes payments to the seller);
- payment gateway (eg Stripe Connect, Adyen MarketPay, MANGOPAY);
- exchange (for example, Visa, MasterCard or AmEx);
- issuer (card holder’s bank).
All this is not some individual person, but a large organization, where hundreds or even thousands of employees work. Therefore, each intermediary is interested in getting as much profit as possible from each transaction, which is added to the final commission payment. And if we talk about international payments, several other intermediaries will be added to the list, including state regulatory bodies. So you understand how many “hungry eyes” are actually aimed at each of your payments.
Speed of operations
Simple transfers, for example, purchases in a store, take place in a matter of seconds. Transferring funds within one country and one payment system also takes little time. But interbank transfers are already taking longer, and international transfers take several days. Regarding this type of payment, there is a generally accepted rule that allows financial institutions to hold your funds for three days in a row. This is done to combat fraud and very often it really helps to prevent scams. However, banks will happily hold all funds for as long as it is legal, so no one will voluntarily waive the three-day rule for you.
It is clear that the transaction time is affected by the number of intermediaries, which we talked about earlier. And in this case, excessive waiting is not the worst thing the client gets. The long time period gives carte blanche to attackers who can use it to misappropriate the money transfer.
Security
Usually, the integrity of transfers is confirmed by intermediaries by keeping information about who transfers, how much, to whom, for what and under what conditions. Thus, the more personal data collected and processed in one transaction, the more transparent and secure it is. But is it really so? After all, attackers hunt not so much for the transactions themselves as for the personal data of their participants, which allow them to impersonate other people and illegally obtain their assets. Despite the development of security technologies, it is extremely difficult to verify all data and correctly verify participants in transactions.
Implementation of blockchain capabilities
Previously, we listed several significant disadvantages of modern payment systems. This is not to say that they are all bad, but the fundamental changes brought about by blockchain technology make things much better. The main technological solution that allows this to be done is a fundamentally different database architecture. In the classic case, the whole process depends on some centralized body, for example a bank, which owns the register of users and their assets and deals with their distribution between accounts. Blockchain is a decentralized database, where the register is located at once in all participants of the transaction. Accordingly, the number of intermediaries is automatically reduced to 1 (validator) — a participant who certifies the fact of a transaction between two other subjects: the payer and the recipient.
From this we get the next advantage, which is achieved with a lot of money in the traditional payment system — the veracity of transactions. Blockchain itself is the “source of truth” and stores all transactions that can be verified at any time. Therefore, there is no need to certify who paid whom and how much, as the system itself stores all this.
Likewise with security and anonymity. Blockchain uses two keys: public and private. The first is needed to view the balance of the wallet, the second — known only to the transaction participant — to make transfers. The private key is used only 1 time, so even if an attacker stole it and somehow managed to decrypt it, it will not be possible to use such a key a second time. Anonymity also helps to save money: according to IBM, in 2018, more than $4 billion was stolen not due to hacking of networks, but due to stolen personal data. Anonymous blockchain operations do not reveal the personalities of their participants, which means that it makes no sense to hunt for information about them.
Lightning speed
But the next two benefits of blockchain in payment systems actually go beyond everything mentioned above. Let’s start with speed, which is now measured not in days, but in fractions of a second. Even in slow blockchains, you don’t have to wait long for confirmation of the transfer. And it doesn’t matter whether it’s buying coffee from a vending machine or an international transfer: transactions take place instantly and their confirmation is known to all participants of the transaction. The issue of converting cryptocurrency to fiat has also been resolved. There are specialized blockchains capable of exchanging even currencies that are not convertible by banks. For this, a special algorithm is used, which searches for the most profitable common fiat currency and makes a calculation based on it.
And all this should cost less than a traditional money transfer. Of course, the authors of the decisions set the rules and can really appoint any commission. However, in the conditions of a competitive environment and the absence of a centralized monopoly, the market players themselves closely monitor the cost and do not abuse it by overestimating it. This is the only way to retain customers and make a profit. In numbers, it looks like this: the bank’s commission for a financial transaction within one country costs 1% to 3% of the amount of the transfer. For blockchain, this cost is 0.001%-0.1%. A noticeable difference. is not it?
So if there are so many benefits to implementing blockchain in the payment system, what do modern payment systems hope for in the future? In fact, powerful market players are well aware of all this and are moving in the direction of technology integration. Financial giant JP Morgan has been developing the ZSL zero-disclosure protocol on the Quorum blockchain since 2017. And the world leader Mastercard plans to create its own anonymous payment system on the blockchain. Visa, PayPal American Express is also taking certain steps to implement the technology. Therefore, we at BeFund are convinced that many new opportunities and solutions will appear for the general public in the near future. And if you have questions or ideas, we will be happy to help you implement your own project on the introduction of blockchain into the payment system.
