What are the Advantages of Blockchain in Payments?

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Blockchain offers several advantages in payments, such benefits:

 

  1. Eliminates Intermediaries
  2. Transparency
  3. Safe and Quick Cross-Border Payments
  4. Automation with Smart Contracts

 

1.  Eliminates Intermediaries

 

With the current payments system, there is a need for middle-men and intermediaries. One must pass through several intermediaries and authorizations to make a payment, such as the payment gateway, exchange mode, issuer, etc. Even though intermediaries and middle men are responsible for maintaining the authenticity of payments, their services:

 

 

Also, there is a chance that intermediaries are not entirely reliable.

 

However, with blockchain payment systems, one can:

 

 

This advantage of blockchain payment systems has also motivated banks to introduce blockchain transactions in their system to:

 

 

2.    Transparency and Security

 

One of blockchain technology’s most significant benefits is the high-level transparency it offers. Details of all transactions that take place via a blockchain network are:

 

 

Hence, while making payments, not worry about saving any records as they get saved in the blockchain and are entirely safe, while ensuring integrity of the data.

 

Since every block contains its own hash as well as the hash of the previous block, they are chronologically linked. Hence, no one can tamper with the records on the blockchain, as any change would be visible.

Thus, blockchain payment systems ensure high-level security, safety, and transparency to assure you that your payments are authentic and safe.

 

3.  Safe and Quick Cross-Border Payments

 

Cross-Border payments occur when the payee and the payer reside in different countries. Making cross-border payments has been a problematic area for an exceptionally long time. It faces several challenges, such as:

 

 

With blockchain, one can:

 

 

 

 

4.  Automation with Smart Contracts

 

Automation with smart contracts is a great advantage, especially for people running businesses and companies.

 

Smart Contracts can:

 

 

 

 

While writing smart contracts, one can mention all the requirements that need to be met for transferring a payment.

 

Once the required credentials are met, the concerned person is automatically paid.

 

For example, suppose a company hires a content creator to provide some content. The person will be automatically paid when he finishes and provides his end of the requirements, whatever required as per the deal.

 

How do Blockchain Payment Systems Work?

The working of blockchain payments systems is not overly complicated. Here, there is explanation to how a cross-border payment will occur through a Stellar Blockchain Payment System.

Let understand with the help of an example.

Suppose you reside in USA, and you must pay $ 10,000 to a friend living in Germany. Both of your banks are linked to the Stellar blockchain network.

 

This is how the payment would take place:

 

1.   You will send a payment of Rs1,00,000 from your bank to your friend’s bank.

2.   Your friend’s bank in Germany will receive a transaction request of $ 10,000.

3.   His bank will approve the request after confirming with him.

4.   After your bank receives the transaction approval, $ 10,000 will be deducted from your account.

5.   The $ 10,000 will move to your bank’s pool account, where they will be converted to Stellar Lumens (XLM).

6.   The Stellar Lumens will move to the Stellar Network, where it will be converted into Euros at the best exchange rate.

7.   The money will then be credited to your friend’s bank account in Germany in the form of Euros.

 

The banks act as “Anchors” in the Stellar Network. The bodies or organizations that hold deposits and issue credits as per the requirements are known as “Anchors” in the Stellar Network. They act as a bridge between the currencies and the Stellar network, as all money transactions occur in credit issued by Anchors in the Stellar Network (except XLM).

 

What are the Challenges of Blockchain in Payments?

 

There are very minimal challenges of blockchain in payments, which can be addressed by taking a few measures. Here, we have listed four ways one can deal with the challenges of blockchain in payments:

 

1.   Technical Standards

2.   Governance

3.   Regulations

4.   Safety and Security

 

1. Technical Standards

 

When technicalities are considered, a significant challenge is the incomplete or broken adoption of blockchain. Fragmented adoption of blockchain has its own set of challenges which can hinder its seamless functioning, such as:

 

 

 

 

Interoperability is essential to ensure that blockchain payments can be seamlessly integrated into existing systems.

 

To address this challenge, a firm focus on the following components is required:

 

 

 

 

 

 

2. Governance

 

Since transaction records of payments via blockchain are immutable, challenges which come up here are:

 

 

 

 

One can address these challenges by:

 

 

3. Regulations

 

While implementing blockchain solutions, special attention needs to be given to the regulatory compliance required. As sensitive information about people’s money and payments is being stored in the blockchain payment systems, it is essential to take care of all regulatory compliances to avoid any violation charges or penalties.

 

To ensure complete compliance with regulations, one can:

 

 

4. Safety and Security

 

Blockchain offers maximum transparency, which can be both good and bad for the users. On the one hand, it improves the payment systems by smoothening the payment flows. However, on the other hand, it comes up as a concern to users who do not wish to share all of their payment data with everyone.

 

To address these challenges, one can:

 

 

Whenever one moves from one technical solution to another, they will always face some challenges. As blockchain in payments is still a growing industry, it is quite common to meet a few problems and concerns. However, with proper steps and precautions, one can quickly deal with those challenges and move on to enjoy the multiple benefits this technology has to offer.

 

What are the Use Cases of Blockchain in Payments?

 

Blockchain has multiple use cases in payments. Here, such use cases are:

 

Cross-Border Payments

 

Cross-border payments via traditional payment methods are secure but expensive and slow. There are numerous intermediaries in the system, which leads to commissions ranging from 3-20% of the amount being transferred.

 

Banks like Westpac partnered with Ripple to implement a low-cost cross-border blockchain payment system. Numerous banks and companies plan to get blockchain payment systems implemented in their business to conduct safe and quick cross border payments.

 

Trade Finance

 

Trade Finance means financial activities related to international trade. Trade finance struggles with the vast amounts of paperwork pertaining to payment records and invoices, bills, credited amounts, etc. Carrying out these procedures takes up a lot of time as several copies of the same paperwork are required for multiple uses, and any manual errors cause the complete documentation to go wrong.

 

With blockchain payment systems, trade finance paperwork can become more manageable as:

 

1.   No manual effort to record the payment details, invoices, and bills would be required.

 

2.    One single document can be accessed by all members, as blockchain payment systems work as a distributed ledger.

 

3.    The chances of manual errors will be eliminated as information of all payments taking place via the blockchain payment system will be saved directly in the blockchain.

 

Digital Identity Verification

 

With the current payments system, one must verify their identity every time they conduct a transaction. Sometimes, verification processes like checking via video calls or repeated logins make users feel uncomfortable and make the process very time-consuming.

 

With blockchain payment systems, the verified credentials of a person can be securely saved in the blockchain, and as blockchain is immutable, the authenticity of the data is also ensured. This will speed up the digital identity verification as the users will not have to put in their verification credentials repeatedly to make payments. It will also give users the authority to choose with whom they wish to share their verification credentials.

 

Peer-To-Peer (P2P) Transfers

 

Peer-to-peer transfers enable users to transfer funds directly from their accounts to another person. There are many traditional P2P transfer applications, but with numerous constraints like:

 

 

 

 

 

With blockchain payment systems, peer-to-peer transfers, and payments:

 

 

 

 

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