Blockchain has multiple applications in the payments industry including use in cross-border payments, foreign exchange (FX) settlement, trade settlements, card payments, and more.

For most people, blockchain and cryptocurrency are almost synonymous with each other. Cryptocurrencies like Bitcoin and Ethereum are often seen as competitors to traditional payments and official currencies. But the truth is that cryptocurrencies are applications that have been built on the principles of blockchain technology. If any other application used the same principles of peer-to-peer communication, distributed databases, transparency, permanence, and security, it could very well qualify to be called a blockchain application and enjoy the same benefits. These principles can be used in the payments industry offering many advantages.

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Blockchain has multiple applications in the payments industry including use in cross-border payments, foreign exchange (FX) settlement, trade settlements, card payments, and more. We will explore some of these here.

International Reconciliation: SWIFT with 34 globalbanks successfully completed a proof of concept(PoC)to evaluate if Distributed Ledger Technology/Blockchain could be used forNostro reconciliation. Nostro/Vostro accounts are used when a bank does notprovide services directly in some countries but does it through a correspondentbank. The conclusion of this PoC was that Blockchain could effectively supportautomated real-time liquidity monitoring and reconciliation if adopted globallyby all the participant banks.

Card Payments: Card payments areconvenient, cashlesspayment optionfor shoppers, but there is a high processing fee involved for merchants. Thisis because there are multiple intermediaries involved that can be categorizedas acquirers (merchants bank), payment gateways, interchange (Visa/Master), andissuer (cardholders bank). Since there is no central authority involved withBlockchain, there would be no need for so many authoritative entities. Thiswould help the merchants who would have to pay less for service charges,transaction charges and, in turn, can offer higher discounts to customers.

Cross-Border Payments: Cross-border payments have to passthrough several banks while going from one country to the other. This increasesthe fees involved in making them. Mastercard has come up with ablockchain-based solution that combines with its existing settlement network toconnect the sending and receiving bank directly without the intermediaries.They will, however, accomplish this without using any cryptocurrency but willallow funds to be transferred as fiat currencies used currently. Similarly, FinTech provider R3 is working with 22banks to build a real-time international payments solution that usesDistributed Ledgers to enable fast, efficient, and cost-effective cross-borderpayments.

Trade Finance: Financing for tradebetween a buyer and seller, whether domestic or intermediary, is done throughmultiple intermediary banks that utilize different financial products that makethe trade possible. Smart contracts for trade finance is a capabilityprovided by blockchain technology. These are self-executing contracts, wherethe terms of trade are directly written as code on the blockchain. Theseautomatically execute payments when specific conditions are met. An example ofa condition could be receipt of a shipment of goods.

While cryptocurrencies remain themost popular and widely discussed application of blockchain, there is nodenying that it has a wide range of applications across various industriesglobally. Almost all the big names in the finance and technology industry likeMastercard, Visa, Oracle, and IBM have invested inblockchain to create their version for use across some of the aboveapplications. They already had the required building blocks like expertise indistributed databases and cryptography that could be put together using theblockchain philosophy. Although thereisnt a universal standard adopted yet, and some of the terms are too complexfor a non-technical person to understand, it is highly likely that blockchainwould be transparently adopted and become part of our daily lives soon.

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Blockchain Applications in the Payments Industry - RTInsights