Block-Chain as a global payment solution
Posted by Unity Infotech on July 24, 2020
For banks, payments are a source of revenues and a critical element in terms of customer data. This is a relevant source of knowledge about the customers and they cannot afford losing stakes in payments. The current payment systems are old, costly and slow. Addressing the challenges posed by safety and security is another concern.
Cross-border payments can take days to complete and can involve fees of up to 10 percent. Transferring money across international borders often involves sending money to people via money transfer operators & banks and is known as remittances that is the key for banking business. The trend of digitization of services and processes is pushing financial companies to rethink their business models and strategies.
Blockchain is redefining the way, people access money and businesses transact around the world. This is an innovative payments solution that banks can look forward to solving in any global payment transaction involving a currency conversion.
Blockchain changes the way we verify, access and transact data with each other. This is designed to enable trustless electronic transactions between two parties, without depending on a central authority for verification. The technology relies on strong cryptography, a distributed network architecture, and a concept called “proof of work” to authenticate transactions almost instantaneously. The technology promises low-cost financial transactions and near real-time settlement.
Be it a global intra-bank transaction, remittances or peer-to-peer global money transfers, institutional payments such as global corporate payrolls or FX transfers through correspondent banking and SWIFT the block-chain technologies has dramatically reduced the cost and time in international payment.
Potential Benefits of Blockchain payments:
Faster settlement of Cross-border payments
Currently to service cross-border transactions, financial institutions rely on multiple correspondent banks to provide access to global currency corridors. There is a lot of uncertainty in delivery and funds settlements with multiple potential points of failure and limited transaction visibility. This can result in frequent errors, longer transaction settlement time especially when parties are across different time zones.
Adding to this, banks absorb significant costs in order to service global payments, such as payment processing, treasury operations, FX, liquidity and compliance.
Reduction of Fraud
One of the main challenges facing the banking industry today is the growth of fraud and cyber-attacks. Traditionally, bank ledgers have created within a centralized database. This model has been more susceptible to hackers and cyber-attacks as all the information is located in one place – usually secured behind outdated legacy IT systems. In contrast, as the blockchain is decentralized, it is less prone to this type of fraud. By using blockchain there would not only be real-time execution of payments but also complete transparency, which would enable real-time fraud analysis and prevention.
Block-chain is explored as a fraud and risk compliance solution that addresses some of the most critical problems with current Anti Money Laundering procedures.
Reduce Complexity & Cost
One of the main issues that blockchain can tackle is the high complexity of payments networks, due to the fragmentation of the financial industry itself, which makes it impractical for individual banks to deal directly with all other banks on the planet.
Millions of dollars are spent each year reconciling ledgers between banks. Blockchain as a distributed ledger solution can handle the volume of transactions between the banks, and cost can be greatly reduced.
Case studies of blockchain in Banking Industry
Emirates NBD: Dubai’s largest bank, Emirates NBD, decided to use blockchain to tackle the sizable challenge of cheque fraud.
A study found “Fraudsters apply sophisticated printing technologies to simulate cheques, such as counterfeiting and forgery, as well as fraudulent alteration, which causes financial, reputational and legal risks. As the group issues close to one million cheques every month, representing 30 per cent of total UAE clearing volumes, it is more likely to be susceptible to fraud”. Hence, blockchain was explored as a mechanism to counter this risk.
Through applying a QR code on every page of a new chequebook and applying blockchain as a tamper-proof verification layer, the bank found an innovative solution to tackle cheque fraud.
The UAE Trade Connect: (Etisalat Digital and a consortium of eight banks) is using the blockchain to curb the practice of using the same invoice to avail financing from multiple banks. The financial implication of the problem is an estimated 3.75 million fraudulent transactions in the UAE annually. The new solution is capable of addressing US$435 million in potential losses.
China Construction Bank: Of the 26 publicly listed banks in China, 12 have already adopted blockchain technology for various use cases within their systems.
China Construction Bank stated that cross-bank and cross-border loan issuances for small businesses were now running on a blockchain-based platform. They have also claimed that this platform had processed over $251 million USD worth of transactions.
JB Bank provides an easy login service based on the Open Keychain technology of Blockchain for the New Smart Banking App, which is the new version of mobile banking. Customers can simply login by installing the Blockchain Certificate in the JB Bank banking App, and then enter the password for the certificate. It is learned that JB Bank plans to apply Blockchain-based authentication service to all online financial services.
The Smart Easy Login service applied to mobile banking App of JB Bank is limited to increasing convenience of the mobile App banking service with the Open Keychain technology of Blockchain.
Other block chain implementations
ALFA Bank from Russia, Yes Bank from India, UOB (United Overseas Bank) from Singapore, CommonWealth Bank from Australia, and LatiPay from New Zealand are a few banks that have collaborated with a US based blockchain company.
Axis Bank, RAK Bank, & Standard Charter Bank have connected with another blockchain network.
Emirates Airlines has been using the blockchain for its loyalty program since March 2019. Benefits include greater transparency, enhanced security reduced fraud, and improved customer experience.
Blockchain provides cost-efficiency, faster settlement, security and transparency into the payment area because of its decentralized, secure and immutable nature. It can also create better financial products, which will create more competition and inherently innovation.
The technology is still not trusted by many; mostly because of the regulation inconsistencies. Nevertheless, benefits do exist and it is a question of time that when will the big players start using them. The full potential of the technology can be only tapped if everyone adopts it. It has to be all or nothing.