Future of Payments
How blockchain is set to revolutionise payments and beyond
3 October 2016 |
Business Reporter speaks to CTO Stephen Holmes about how the open-source Bitcoin technology could make payment, credit and many kinds of transactions transparent, simple and secure.
Blockchain, the technology that began life as the backbone of Bitcoin, is branching out into new areas, both in mainstream payments and beyond.
At its heart, the system is a permanent digital ledger that keeps records of transactions in an encrypted “chain”. Many copies are kept – any forged entries are rejected because they do not match the originals – and anybody can check the records.
The added security and transparency offered by the technology means it has many innovative potential applications beyond Bitcoin. We spoke to Stephen Holmes, CTO at VirtusaPolaris’s FINTech Banking Lab, about what might be on the horizon…
Payments and small businesses
Given that blockchain technology was designed to support Bitcoin, it comes as no surprise that one of its primary uses is to support low-cost money transfers.
“What we see is that there are various ways of using the Bitcoin network,” Holmes says. “But there are some challenges with this, particularly with respect to the speed.
“It’s not a fast payment solution, if you like, but it does give you a lot of transparency. You have a permanent record of every transaction.
“The challenge is if you are a new company, a start-up company, trying to sell to larger companies, you are often too small to be trusted,” Holmes explains. “If you have a blockchain where the record is public, which is permanently recorded and cannot be changed, even if a company disappears, the record is still publicly available. So we think this is one of the areas blockchain can help with. You can see there’s an equaliser there for smaller companies and SMEs.”
By cutting out the third party needed to process traditional payments, the transaction’s cost can be reduced. And a blockchain can hold data on any asset, not just money.
Blockchain technology could also aid asset financing for young people looking to start businesses, because it offers banks enhanced ways to track their investments.
“You can imagine the millennial wanting to go to the bank and wanting to actually have a loan on an asset,” Holmes says. “They don’t have a credit rating, but the asset has value.
“One of the things we think is really important is we think you can actually also use – on top of the blockchain, which has the asset and all the contracts relating to that – you can have a smart contract sitting on top of that.
“The smart contract is not just something you sign at the beginning, but it is something that can automate the execution and checking of the case.”
In order to keep track of the agreement, the lender needs to monitor how old the asset is, how much it has been used and how well it is being maintained. Holmes says these factors can be measured by connected devices and stored on a blockchain.
“The usage of the asset and the maintenance of the asset – you can actually get that from the internet of things,” he explains. “We see a huge potential to actually combine not only the blockchain, to not only hold assets and particularly capital assets like these, but also to combine that with the IoT to calculate a net present value of that asset.”
Further to this, he says the transparency and security offered by the blockchain’s permanent record of transactions could facilitate a peer-to-peer lending marketplace.
“What it also enables is the ability of banks to offer a marketplace for people wanting to borrow money and people wanting to loan money,” Holmes says.
“So the P2P-type scenario could also be something that the actual consumer could experience in a much more enhanced way than they do today.”
The sharing economy
Similarly, blockchain technology could benefit the growing sharing economy, providing another level of trust between individuals making small transactions with each other.
“If you look at the new sharing economy models, people are actually paying for access to resources rather than actually owning those resources,” Holmes says.
“Having a blockchain to record the contracts and doing micro-contracts using smart contracts is a very cost-effective mechanism of doing that.
“So we see huge potential with blockchain technology, not just in terms of the payments sphere, but looking beyond that and combining this with other technologies to come up with a way of addressing the millennial market.”
This could be complemented by more bespoke services from established businesses, as the blockchain makes it easier to create and monitor tailor-made deals.
“One of the issues we see is that there are lots of micro-contracts that I as a consumer might want to take out today,” Holmes says. “If I rent out my house on Airbnb, for example – if there was a product that provided insurance there, that would be really good.
“But it’s difficult for an insurer to not only create a product, but actually come up with a contract for that in a cost-effective way.
“So what we will start to see from a consumer perspective is that it will give you more opportunity to buy micro-products, like micro-insurance policies – things that you can’t buy today because the cost of delivering them is too expensive.”
For all their new and innovative uses, blockchains could also be implemented to make existing systems more reliable. Retailers, for example, could use the technology to make it easier to keep track of their reward point schemes.
“What we’re seeing is a lot of retail-type organisations wanting to have reward points in a way that they can control,” Holmes explains.
“Traditionally, that’s been done in terms of card payments and having accounts, but there’s no reason why it couldn’t be a crypto-currency or even a currency that’s unique to an organisation, because with blockchain you can create your own currency, essentially.”
This kind of system could also be employed in other instances where self-contained points systems are used – for example, when airlines reward passengers with air miles.
But for all its potential, for blockchain to be used for mainstream, real-world financial transactions it will need to be regulated and standardised.
Holmes says there is currently an “evolution happening in the industry”, with the banking sector working to define “standards for interoperability” so all organisations are on the same page when they use it to process payments with each other.
“What we’re starting to see is that the first blockchain-in-production products will be internal to an organisation. The second generation will be between an organisation and a supplier or partner, and the third generation will be truly between multiple parties,” he explains.
“Where we see it right now is that most of the banks are working on the first generation, and they’ll very quickly move to generation two and generation three as
the standards are ratified and rolled out.”
Once all this is ironed out, however, Holmes believes blockchain technology could open up new opportunities and help businesses to better serve their markets.
“I think what this is is a fantastic enabler for us to generate new products that are in line with particularly the millennials’ requirements for new services,” he says.
“So I think that is how we’ll start to see things rolling out.”