Blockchain is turning the payments industry on its head

Universal Payments Wire Photo

By Jesse Lund, vice president of blockchain market development, IBM Industry Platforms

Making payments seems deceptively simple — just tap an app, press your thumb on a button, and it’s done. It's less work than pulling paper money out of your wallet. But this simple interaction masks a web of communication among dozens of parties — banks, credit card issuers, merchants, and more — that work behind the scenes to ensure that each transfer of funds can occur within seconds.

With generational shifts in expectations, banks and the payments industry are racing to match the ease and convenience that digital payments have introduced to consumers. Now it’s time to make the back end just as convenient. And, despite our increasingly global society, cross-border payments and transfers in some parts of the world are an area that is still trapped in a process that takes multiple intermediaries and days to finalize.

This is an area that is ripe for disruption. It has the potential to enhance payment processing in the same way that Stripe enhanced online payments. Less than 10 years ago, online merchants were forced to use complicated and proprietary software to support online transactions, racking up costly fees and an awkward experience that often forced their customers to leave the merchant’s website to confirm a purchase. It also added another party to the already crowded payment process.

With a few lines of code cut-and-pasted into any website, Stripe made it possible for merchants to process credit cards seamlessly, creating the digital payment process and online experience we know and expect today, which is radically simple and virtually invisible. On the consumer front, Zelle and Venmo are delivering a similar peer-to-peer payment experience while banks are moving quickly to support new immediate inter-bank payments initiatives.

Blockchain is poised to usher in the next major shift in payments. IBM, KlickEx Group, and the Stellar Foundation have designed a universal, cross-border blockchain payments solution that reduces the time it takes for a payment to clear from days to seconds by completing the process all on one network.

The process of initiating and settling an international payment involves multiple steps, multiple currencies, and often many intermediaries. The process can take days to finalize with little visibility of transaction status in the process and is often error-prone and subject to high fees. This is especially true in emerging economies where the banking system is still developing.

This led IBM to create a new universal payments solution running on the IBM Blockchain Platform, an integrated network for recording payment instructions and facilitating transaction settlement in near real time. By introducing this single, transparent record of transaction, the network provides a low-cost, yet highly efficient method for payments to efficiently transfer across borders.

What makes this unique is that it combines the distinct processes of payment instruction messaging (commonly called clearing) and the physical transfer of funds (commonly called settlement) onto a single network that can process transactions in seconds with complete finality. There are no follow-up steps or secondary processes required to finalize a transaction. Even the foreign exchange between counterparties is provided as an integrated step in every individual transaction. It essentially provides a universally new approach to clearing and settling payments of all different types — corporate, consumer, remittances, large value, micropayments, whatever — a payment is a payment is a payment, and the network that services them need not be complicated or expensive.

In the future, this same universal payment solution could make it possible for a farmer in Samoa to enter into a trade contract with a buyer in Indonesia. The blockchain would then be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, secure letters of credit, and finalize transaction terms with immediate payment, conducting global trade with transparency and ease.

IBM hopes this initiative will pave the way for entirely new global financial services, working with banks and central banks around the world to create new, real-time global payment solutions, allowing large and small businesses alike to finally reach a higher level of efficiency and affordability in cross-border transactions. The use of blockchain can ultimately help eliminate today’s high costs of manual processes and reconciliations, and easily ensure that all transactions are transparent and compliant with regulations in all jurisdictions.

In time, we expect to see more blockchain-powered systems go far beyond payments to support the exchange of digital currencies, securities, bonds, and structured financial assets. All will have the ability to conduct immediate transfers and conversions of currencies, as well as complete transparency throughout the processing of every transaction.

This post is sponsor content from IBM and was created by IBM and BI Studios.

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