4 minute read
Blockchain technology is revolutionizing payments
From sci-fi to real life, blockchain technology is gaining popularity. Especially in financial services. Payment applications accounted for 44% of global blockchain revenue in 2022. And by 2030, global blockchain revenue is expected to reach $1.4 trillion.
“I believe blockchain is bringing in one of the fundamental technological changes of our generation. We're at the very start of something that's maybe a 10- to 20-year trend.”
Discover® Global Network, Global Head of innovation and Emerging Products
What is blockchain, and how does it work?
Before diving into the benefits of blockchain, we'll provide a brief introduction. And discuss a few key terms related to the conversation.
- Blockchain is a “distributed database or ledger that is shared among the nodes of a computer network.”
- A “node" refers to a device–like a computer–connected to a network.
- Transactions are approved by “validator" nodes (also called “miners") that reach a consensus (agreement) using a dedicated algorithm or set of rules.
- A "block" contains approved transactions.
- When strung together, a series of blocks—called a "blockchain"—hold the history of these transactions.
- The content of a block is cryptographically protected (locked by a code) and visible only to users with the appropriate “key".
In a public blockchain (also called open or permissionless), all of the blocks in the chain are public and viewable to anyone in the network, but not the content inside the blocks. That way, personal information contained in a block cannot be accessed, ensuring privacy. In a private blockchain, only approved users can access the blocks themselves. Permissioned blockchains require permission to do so.
The information within a block cannot be changed; it's recorded and becomes permanent as soon as it enters the ledger. That's what an “immutable ledger” is. If there's an error in the blockchain, another block must be added to reverse the error.
You'll also hear the term "decentralized" when discussing blockchain. In a decentralized blockchain network, each participant can join the network. And each validator node (or miner) verifies the data or transaction. This process is handled through a “consensus mechanism” to achieve agreement that the data or transaction is valid. No central authority, like a government or bank, is needed to approve the transaction.
Why is blockchain so popular in payments?
Blockchain has several advantages that make it attractive for payments, including speed, transparency, privacy and security:
- Speed. Blockchain doesn't require a central authority–or gateway, acquiring bank, card association and issuing bank–to approve and authenticate a payment. Once the validator nodes reach consensus, the information is added to a block in real time.
- Transparency. Anyone with the proper credentials can view transactions anytime because they're recorded on an immutable distributed ledger. The entire history of the transaction is unchangeable and traceable.
- Privacy and security. Blockchains use public and private keys, which encrypt the data. With no personal information visible, blockchain systems keep data from becoming vulnerable to hackers.
With benefits like these, it's no wonder blockchain technology is revolutionizing payments. One example is cross-border payments.
Blockchain in action: cross-border payments
Cross-border (or international) payments rely on more complex authentication processes because you transact with banks from different countries. And different countries have different centralized authorities operating in accordance with their own regulations. The method of authenticating a cross-border payment can take days.
Blockchain simplifies this process. Using a decentralized network removes the need for multiple intermediaries to authenticate and process transactions. A payment is authenticated in real time against data contained in a blockchain. This new transaction is added to a block that is then added to the chain for traceability. What took days to process now takes minutes.
These benefits make transactions faster, transparent and more secure for both peer-to-peer and business-to-business cross-border payments.
Peer-to-peer (P2P) cross-border payments: P2P payments are transactions between two individuals. Blockchain can rapidly and affordably facilitate P2P transactions across borders because of its global reach and decentralized nature. Payments and remittances get to their intended recipient without intermediaries (like Western Union or MoneyGram).
Business-to-business (B2B) cross-border payments: In the same way that blockchain makes P2P payments faster and more efficient across borders, it also solves these same challenges with cross-border B2B payments. Many businesses already realize these benefits. A PYMNTS survey reports that 37% of businesses already use blockchain for cross-border transactions.
Blockchain makes cross-border B2B payments faster. A PYMNTS survey reports that 37 percent of businesses use blockchain for cross-border transactions.
Blockchain technology is a trend to watch
Leveraging the power of the blockchain, financial institutions are introducing new services that will change how we view money and payments. This makes blockchain technology a trend to watch in 2023 and beyond.
Explore blockchain further in our 2023 Commerce and Payment Trends Report. And see what else is shaping payments and commerce this year—metaverse, social and live commerce, biometrics and much more.