Blockchain in Payment System
Blockchain technology is quite popular these days for its impeccable security features and transparency. The payment and finance industry are witnessing no less than a revolution since the boom of blockchain technology in 2018. While other industries follow suit, there is no denying the fact that online/digital payments are the latest game-changers in all business industries.
Blockchain payment is the latest addition to the field of online/digital payments that are widely being accepted because of its numerous advantages. Lets first try and understand the underlying concepts.
Blockchain Technology
Simply put, a blockchain is a chain of blocks. Each block here contains data for a transaction and the chain is stored on a distributed network of computers located across the globe. To ensure data security and integrity, every block also has its own cryptographic hash linked to the previous block’s hash, thereby linking the chain. So, if there is any change in the data stored in a block, then its hash would change entirely as a result of which, the link will break and the blockchain will be compromised.
Hence, blockchains are immutable, tamper-proof distributed ledgers that can safely store huge amounts of data over a network without needing any central authority or intermediary. It ensures security and transparency making it especially useful in the finance sector.
Advantages of blockchain payments
Blockchain allows super-fast and secure international payment processing using the underlying distributed ledger technology that is secured by cryptography. Since this technology is decentralised, the lack of intermediaries also make it cost-efficient.
Additionally, every transaction on a blockchain has to be verified by a consensus of the network before execution, thus preventing the risk of frauds and malfunctions. Let’s review the benefits of blockchain as a payment method :
1. Transparency
The details of every transaction that occur on a blockchain network are stored in the blockchain and are immutable. Usually, these details are also visible to the public. Such a transparent procedure reduces the risk of embezzlement, or corruption making the process a lot more reliable.
2. No intermediaries
Blockchain transactions are executed without the need of any third party whatsoever. Hence, a lot of money and time is saved that would otherwise be spent on middlemen. This method also allows easy transactions where the authenticity is verified by a peer-to-peer network of unbiased nodes. Making the process efficient and without any bias.
3. Quick Cross border payments
Cross-border payments refer to payments where either the payer or the payee reside in a different nation. Usually these payments are cumbersome because of the involvement of a large number of intermediaries, high transaction costs, high fraud risk, lack of transparency and the lack of data privacy.
Blockchain payments on the other hand, can easily occur from one country to another at very high speeds. The lack of intermediaries make the process faster, cheaper and more secure. The encrypted nature of transactions ensures data security as well.
4. Save the transaction data securely
The encrypted nature of blockchain allows data security and prevents any malicious third party from gaining access to private user data without proper authentication.
5. Automation with smart contracts
Smart Contracts can drastically reduce payment time and entirely automate the process, thereby removing the need for human involvement. The conditions need to be mentioned clearly while drafting any smart contract to avoid hassles.
Challenges of blockchain payment systems
Payment in blockchain faces only some challenges which can be easily tackled. Here, we have listed four ways one can deal with the challenges of blockchain in payments:
Technical Standards
Since blockchain is yet to be adopted wholly, fragmented adoption has led to :
- Higher costs
- Standardisation failure
- Lack of interoperability
Interoperability is needed to ensure that blockchain payments are easily integrated into existing systems. To address this challenge, a firm should enhance network scale efficacies and implement a standard mode of communication.
Governance
Blockchain transaction records are immutable and hence irreversible, this means payments cant be cancelled. We can tackle this challenge by laying down governance standards and developing solutions to allow payment reversal.
Regulations
While implementing blockchain solutions, special attention needs to be given to the regulatory compliance required. To avoid violation charges or penalties, compliance with all regulations is essential when sensitive information about people’s money and payments is stored in the blockchain payment system. This can be avoided by taking care of mandatory regulations of an area and evaluating blockchain payment systems.
Safety and Security
The transparency offered by blockchain improves the payment systems but also might risk privacy of the data. This can be addressed by conducting regular scans and informing users about maintaining their credentials.
Implementing a blockchain payment system
Before beginning, many things must be figured out to implement a blockchain payment system seamlessly.
Step 1: Define your Project Scope
While defining your project scope, you should figure out which approach you’ll be taking to implement a blockchain payment system.
Step 2: Determine your Front-End Technology Stack
Identify what kind of front-end application you wish to provide your users and choose the technology stack for it first.
Step 3: Determine your Blockchain Platform
There are many blockchain network platforms with a lot of benefits that you can use to implement the blockchain payments system in your business. However, it depends on your choices and needs. Hence, extensive research is needed for the same.
Step 4: Build your team
Any task no matter how ambitious could be rendered incomplete without a good and hard working team. Thus, the final planning step you need to take is finalising a highly competent development team.
Step 5: Execute your Project
The execution of your project will differ according to your project scope. You can either carry out the execution yourself or hire a blockchain development company to help you out with the technicalities.
Working of Blockchain payment system
Let us try to understand this using an example. Imagine that you live in India and wish to send 500USD to a friend in the USA. Both of your banks are linked to the Bitcoin blockchain network(hypothetical scenario), then the payment process would follow these steps :
1. You send Rs.5000 from your bank to your friends.
2. Your friend in the USA will receive a transaction request
3. Once they approve the request the bank will deduct Rs.5000 from your account.
4. This money will enter your bank’s pool account and be converted to bitcoins.
5. These bitcoins will move across the Bitcoin network to convert to USD at the best exchange
6. The money is credited into your friend’s bank account in the USA as American Dollars.
Of course, if both of you are strong believers in cryptocurrencies and own a digital wallet, you could also simply transfer the bitcoins as a mode of payment.
Use cases of blockchain in payments
Blockchain has multiple use cases in payments. Here, we have listed four such use cases:
1. Cross-Border Payments
Like we discussed earlier, cross border payments through traditional means are a herculean task which need a lot of time and money. Hence, numerous banks and companies plan to get blockchain payment systems integrated into their business to conduct quick and secure cross border payments.
2. Trade Finance
The financial activities for international markets require a lot of paperwork of invoices, bills, etc. This makes the process really tough and even a small manual error could further waste a lot of resources. Integrating blockchain into this sector would make the system decentralised, easier to store and process as all transactions will be directly available on the blockchain which can easily be accessed by authorised personnels.
3. Identity Verification
Currency payment systems face a high risk of fraud simply because there is no secure and scalable method to verify identity. Checking via video calls or repeated logins make users quite uncomfortable and the process also becomes unnecessarily long. Blockchain payments allow easy storage of verified credentials in the blockchain and since it is immutable, the credentials cannot be modified.
4. Peer-to-peer transfers
These allow funds transfer directly from one person to another. Usually P2P transactions can only occur within a specific region, require huge commissions, demand private details and are basically inconvenient.
With blockchain the system is decentralised, secure, cheap, quick and can take place across the globe.
5. Data Security
The blockchain billing system, offers a secured network process where merchants can store the information of the customers, and no one will be able to access it. This process can actually get rid of any kind of data security problems for good.
Key Issues in Primary Sector
1. High Processing Fee: As the processing fee rises every year, it is becoming increasingly hard to keep track of it and how much payments would cost eventually.
2. Complex Financial Regulation Across Territories: Every nation has its own financial systems and regulations and while conducting international transactions it is impossible to keep track of them all. This makes international trade and commerce very tough.
3. Increasing Cyber Attacks: The growing digitalisation of the payment system has also led to a rapid rise in the cyber attacks faced by businesses big and small worldwide. More importantly, most payment gateways are not secure enough to protect consumers.
4. Repetitive KYC Procedures: The Know Your Customer or KYC procedures are there to safeguard the payment providers and the consumers from any identity-based issues. However, this process is not as easy as it sounds. In reality, it involves a lot of paperwork and needs a lot of official documentation to verify it. It eventually becomes cumbersome to undergo these procedures repeatedly.
5. Lack of Proper Technical Integration: Even today, in order to conduct their daily business, payment providers rely on legacy networks that are unable to meet the increasing demands of businesses and consumers.
Conclusion
In this article, we learnt a little about blockchain, how blockchain are beneficial in payments, and what makes them advantageous. We also pondered on how blockchain payment systems function and what all are the possible use cases of it.