The payments industry currently has several significant pain points, including high transaction fees, chargebacks, and cross-border payments. Blockchain has the potential to resolve all these issues, and in doing so, it could disrupt the payments industry.
High transaction fees
When consumers pay for purchases using credit cards, the transaction must pass through several providers before the merchant receives any funds. These include the merchant’s financial institution, the payment gateway, the credit card company, and the financial institution that issued the card. All these providers charge a fee for their services, and they can add up to as much as 3.5% of the total purchase. That cost is borne entirely by merchants. In contrast, transactions processed using blockchain would involve no middlemen, and as a result, transaction fees could be as low as 0.1%.
Chargebacks exist primarily as a form of consumer protection. If a customer fails to receive goods they have purchased, or if they don’t recognize a charge on their credit card statement, they can file a dispute. As the chargeback is processed by the various providers involved in the initial transaction, fees are once again incurred, and these are generally passed on to the merchant. In addition to these processing fees, there are also significant fees associated with the chargeback itself, and again, unless the chargeback is determined to be fraudulent, the merchant is liable for these fees. Chargeback fraud is a significant issue, however: it’s estimated that more than half of all chargebacks are either “friendly” fraud (a customer mistakenly requests a chargeback) or deliberate fraud. But because blockchain transactions are processed directly between the consumer and the merchant, the opportunities for fraud are reduced. Consumers authorize a payment, and smart contracts allow the merchant to receive that exact payment only when the consumer receives their product or service. In addition, because transactions are indelibly recorded, both parties can more easily track down transaction information, and fraudulent chargebacks can be reduced.
At present, cross-border payments have average fees of 7.5%. Even a small reduction in fees associated with these transactions would save billions of dollars annually. Many straightforward transactions can take hours to process, and blockchain would generate savings in time as well.
Blockchain offers reliable and verifiable transaction records, available to both parties. And because identity records can be accessed quickly, blockchain can help financial institutions streamline their AML and KYC processes. Blockchain also offers scope to extend payments services into new markets, such as payments on social media platforms, or to extend banking to communities that are underserved by the current financial services industry.
Use cases in development
The major credit card companies are all developing blockchain solutions in the payments sphere. Here are some of the highlights of what’s in development:
With the number of merchants accepting Bitcoin as payment growing steadily – the list now includes major players such as Expedia and Microsoft – it’s clear that the blockchain technology that supports the cryptocurrency is rapidly moving into the mainstream. Blockchain payments solutions are a natural next step, and both merchants and consumers will benefit from increased convenience and lower fees.