A Potential Role for Blockchain in Payments

The main use case that is focused on when looking at the possibilities of blockchain for banking is that of payments. Blockchain could be used as “another way of paying each other, not depending on SWIFT and other payment schemes.” There is a potential role for blockchain in payments and that currently there is an “unprecedented period of change and transformation.” Blockchain could have benefits for not only bank customers, but this could also lead to operational efficiencies and cost savings for banks themselves.

He also stated that payment systems collectively are currently under a lot of pressure, as there has been urgency to modernize payments and to address the questions of safety and security since the 2008 financial crash. This has led to new market entrants, such as FinTechs, looking to solve these problems using blockchain. The existing payment system has always gone through banks and central banks, a process that was first put into place in the 1970s and 1980s.

Apart from speeding up money transfers, blockchain could also help banks to operate continuously, 24 hours a day. This is now somewhat expected by customers who want an omni-channel banking experience at any time day or night – especially for “millennials who are now firmly within the workforce and want a better, quicker and easier way to make payments.” Rabobank has been heavily involved in the on-going development and use of Ripple Lab’s blockchain Ripple protocol. It was announced in December 2014 that the three banks had started to test blockchain technology in making payments to customers and cross-border transactions. Ripple has said that its technology could give banks a 33% reduction in their operating costs during the international payment process and allow lenders to move money “in seconds.”

Ripple can be used by banks for an open-source approach to payments to replace many of the common intermediaries in the payments industry, thereby passing on savings to partner institutions, and thus by extension, to their customers. Thus, blockchain can be used to make payments in real-time globally, with real-time execution, complete transparency, real-time fraud analysis and prevention and also at a reasonable cost. The only issue with Ripple, at the moment, is that it is a proprietary blockchain network that cannot yet connect with other systems. In order to connect Ripple to other blockchain protocols an inter-ledger protocol will have to be developed, tested and put in place.

Case Study

Blockchain and government services in Estonia In the governmental sector, blockchain technology can be used to verify transactions and changes to key registers, transaction logs, agreements, and any other data, which are ordinarily labeled data-at-rest. This term comprises all data that are stored in a digital form (databases, spreadsheets, archives, backups, etc.), but excludes any data that are being processed, to which another label applies: data-in-use.

Traditionally, the main objective in protecting digital data has been confidentiality—the restriction of access to protected information to only a specific set of individuals. Yet this focus might not be appropriate for data protection in the context of democratic governments; a government’s legitimacy may require authorities to increase the transparency and accountability of their processes rather than prioritizing confidentiality. In addition, prioritizing confidentiality requires increasing the complexity of the overall system: confidentiality requires strong secret keys, which in turn require key management protocols that increase overall vulnerability surface and result in various performance challenges. It is important to understand the particular security objectives of the public sector and how to attain them within a democratic context. Estonia’s experience with the use of blockchain technology in government offers valuable insights on this question; it also provides a useful benchmark for comparison with other nations.

Outcomes

It is clear that there can be many different use cases for banks to utilize blockchain technology. Each well implemented use should result in quicker transactions, less friction, greater robustness and more transparency and immutability. A blockchain solution should also reduce costs and administration burdens on banks and customers alike. It is estimated that blockchain technologies could reduce banks’ infrastructural costs by $15-20 billion a year by 2022 – as claimed in the “FinTech 2.0 Paper” from Santander InnoVentures. Not that there aren’t still issues and challenges facing all the stakeholders that will be involved in the development in this area though.

Challenges of privacy, of developing and agreeing upon acceptable regulations and of scalability all need to be properly addressed as does the issue of security (e.g. the Bitfinex hack). This will only be done through collaboration and co-operation. As Chris Mager from BNY Mellon put it: “there will need to be a common collective will” between banks, regulators and FinTech innovators. It is evident, though, that this has already been happening in the last two years in terms of (i) the required technological innovation and (ii) as of Q1 2016, the total venture capital investment in blockchain start-ups now exceeding $1.1 billion shows that there is financial backing and appetite to make this potentially one of the biggest revolutions to happen in banking.