When it comes to the payments sector, consumers are demanding a seamless service entrenched in complete security over the infrastructure in which transactions are managed. In an increasingly digitalised world, meeting this demand has pertained to a shift towards online and app-based banking. But over time, a new frontier of payments technology has gradually emerged to deliver value for financial services companies and users alike, underpinned by blockchain. The main benefits cited include decentralisation, identity transparency, and immutability.
While much of this innovation is overseen by Web 3.0 start-ups, more established players including Visa and PayPal have also gotten involved in deploying blockchain in recent times. The 2023 New Value Report from business crypto solution provider Ripple has found that upwards of 80 per cent of financial leaders worldwide are exploring the use of blockchain in their organisation in the next three years, whether this comes in the form of cryptocurrencies, CBDCs or stablecoins.
Here are some of the key areas of blockchain-powered payments technologies, and the key considerations for businesses to consider in order to drive long-term value.
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Types of blockchain-powered payments
Cryptocurrencies
Pioneered by the enigma that is Satoshi Nakamoto, credited with launching Bitcoin in January 2009, cryptocurrencies are a kind of payment system that operates completely online and separate from any traditional FIAT currency. This can be traded across online marketplaces, with current values of each cryptocurrency – which can fluctuate – able to be tracked in real-time.
Speaking on Ripple’s research into crypto, Sendi Young, managing director for UK & Europe at Ripple said: “We are increasingly seeing this institutional take-up in the crypto space, that has been emerging in the last few years.
“As more institutions become interested, more marketable, mature and institutional-grade practice solutions can be developed.”
Joachim Keittelmann Bjørke, blockchain expert at PA Consulting added: “Cryptocurrencies can provide additional payment options for merchants, which in some cases has led to an additional 3 to 5 per cent of revenue.
“They may also provide transaction cost savings as credit card companies may charge up to 2.5 per cent transaction fee and blockchain can offer 0.1% or less in transaction fee.”
CBDCs
Central Bank Digital Currencies (CBDCs) are the digital form of a FIAT currency, operated over a digital ledger, but aren’t pegged to their physical counterpart. A reported 11 countries currently have CBDCs in place, with further national governments of countries including the UK and the US exploring the possibility of implementation. While modelled based on the operations of cryptocurrency networks, the centralised nature and backing from national governments distinguishes this kind of payment technology from cryptocurrencies altogether, as does the fact that in many cases, blockchain doesn’t necessarily need to be involved.
“We have CBDCs, which don’t necessarily use blockchain, but they may have similar systems that they’re leveraging. Some of the technology advancements we’re seeing in some of the CBDC platforms include cryptography and tokenisation,” said Jeremy Boot, product strategist, digital assets and currencies at Temenos.
“What we can see at the high level where we see the benefits clearly, is that these new systems’ networks can bring significant savings in terms of cost, transaction cost and time compared to traditional systems.”
Krista Griggs, head of banking, financial services & insurance at Fujitsu UK, commented: “While blockchain may not change how we pay for things right away, it’s showing real promise in the cross-border payment space.
“The rise of Central Bank Digital Currencies (CBDCs), particularly in emerging markets like Latin America and Asia, could significantly lessen the friction often experienced when making international transactions. This is particularly true for businesses and high-net-worth individuals who routinely exchange money between countries and stand to benefit most from the time and money savings that transacting with CBDCs can generate.”
McKinsey research reveals that 90 per cent of the world’s central banks were pursuing CBDC projects towards the end of 2022, up from 80 per cent the previous year.
Stablecoins and decentralised finance (DeFi) marketplaces
Issued and maintained by private companies, as opposed to CBDCs which are offered by governments, stablecoins are pegged to a globally major currency such as the US Dollar – giving this kind of payment infrastructure the ‘stable’ in its name.
Ripple insights say that security of payments, along with ease of cross-border transactions, and lower risks compared to other cryptocurrencies are the top reasons for adopting stablecoin infrastructure. Additionally, a study by The Block Research revealed that annual stablecoin adjusted transaction volume – payment flows from one address to another on a public blockchain – surpassed the $7.2tn mark in 2022.
“I think what underlines the value [of stablecoins], is that Visa recently announced that they’re now supporting settlement to their merchant acquirers, using the stablecoin USDC,” said Boot.
“PayPal is another example that emerged recently, with the launch of their own stablecoin, also on public blockchain. This shows how major players really believe these new forms of digital money and platforms can be used moving forwards.”
Stablecoins will usually be available over decentralised finance (DeFi) marketplaces. Unlike traditional payment outlets, these marketplaces are allowing business users to utilise payments without the involvement of third parties and centralised institutions such as a bank. Payments can be made on a 24/7/365 basis, allowing for maximised operational flexibility.
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Driving business value
As the payment space gets more competitive, businesses in the space need to look to maximise any possible benefits they can offer customers. With blockchain acting as a technology enabler, it’s vital to consumers’ user experience that its presence is as hidden as possible.
How to maintain customer experience
As well as maintaining maximum accessibility, allowing for ease of payment management without needing to know about blockchain, a balancing act needs to be struck between innovation and security.
According to Rosie McConnell, head of product at IFX Payments, “the high standards of customers raises the bar when innovating with any new technology. The ‘viable’ in MVP encompasses core principles like security, speed and reliability, but as well as this, customers now expect seamless and smooth user journeys and personalised products and approaches.”
McConnell added: “Building from this, releasing iteratively and with strong feedback loops embedded in the process will allow companies to innovate while maintaining a good customer experience.”
When it comes to adopting blockchain for retail payments, know-your-customer (KYC) processes should only need to be completed once, by one payment service provider, and reflected across all further interactions – even when other providers are involved.
Chloe Harrison-Steward, blockchain innovation expert at PA Consulting, explained: “Having this in place avoids repetitive and manual verification process while still providing a secure, immutable audit trail of activities, decreasing operational costs. However, there needs to be careful consideration for responsible handling of customer personal data.”
Cross-border payments
When it comes to doing business globally, having a strong cross-border payment system in place is crucial to maintaining operations. Underpinning this system with blockchain has been found to lead to increased transparency and security, and indeed to cross-border payments being among the most valuable use cases for both CBDCs and stablecoins.
“Early adopters of blockchain see how this technology can address challenges – particularly in cross border payments – around cost, efficiency, transparency, speed and locking up capital. All of these are traditional pain points,” said Young.
“We’ve seen, from our own experience, hundreds of customers using this network to sign up for cross border payments. They may start with one corridor, but as they gradually see the real benefits, they will jump in and do more.”
Future trends
As blockchain technology continues to evolve, the capabilities it brings are bound to grow in the payments space in the coming years, whether backed by centralised banks, or in a decentralised environment.
“I expect to see opportunities to integrate with existing systems and co-exist with current payment infrastructures, ensuring smoother transition and immediate benefits,” said Daniele Servadei, co-founder of Sellix.
“Tokenisation will also extend the types of transactions that can be managed, including real estate and intellectual property. Meanwhile, smart contracts will continue to automate contractual obligations to make transactions like escrows and automatic payments more efficient.”
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Regulation
There is also the evolving matter of regulation of blockchain-powered payment infrastructure to consider. Similar to governmental approach towards AI, legislation will need to keep up with continued blockchain innovation in order to be effective across the board.
According to Boot, “established players like commercial banks will be key because they have the deep experience in terms of regulatory controls and compliance; Know Your Customer; and Anti-Money Laundering controls around suspicious transactions.
“They know this is their bread and butter, and this is what they do every day. So they’ll be very well placed to, to support CBDCs and will have the public-facing elements to manage that.”
Biometric security
Another future trend to watch out for is the possible roll-out of biometric security for blockchain-powered payments, similar to how fingerprinting and facial recognition measures are currently used natively and within mobile apps for secure access.
“As user behaviour changes, so do the standards for protection. Fingerprint biometrics provides near-instant authentication of payments and identity, making the consumers’ lives more convenient and providing them with more choices for confirming their identity,” said Catharina Eklof, chief commercial officer at IDEX Biometrics.
“With definitive advantages to both users and issuers, biometric payment cards have the potential for exponential growth.
“With the rise of data privacy concerns, biometric smart cards can securely store fingerprint data in the card’s chip without transferring data to bank servers. The biometric smart card’s highly secure and personal nature is critical for its continued success, as it mitigates concerns associated with facial recognition including fraud and deepfakes.”
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