Payment ecosystems are evolving at an accelerating pace to embrace new transaction processing methods and technologies. Let us understand how we can use blockchain use in simplifying payments.
The payment verticals of retail banking, merchant retail, transaction banking, billers, and digital banking that have traditionally operated in isolation are evolving toward a consolidated, real-time, any-to-any ecosystem.
Payment ecosystems square measure evolving toward a period of time, any-to-any payments experience for consumers; blockchain is a fundamentally disruptive technology that will play a role in the evolution toward real time.
Blockchain has the flexibility to modernize a payment’s elementary imperative of transferring price between multiple parties, securely and with minimal operational or technical friction. Modernizing the fundamental imperative delivers substantial benefits in the future use of computing for banks, businesses and governments.
Recent rapid growth of peer-to-peer market exchanges for lending (Zopa, Lending Club and Funding Circle, etc.), accommodation (AirBnB) and taxi services (Uber) has demonstrated the potential of peer-to-peer architectures. Blockchain has the potential to accelerate and change such models in each new and existing markets.
The areas of application for blockchain stretch so much on the far side pure payments. Across the banking system, uses include post-trade settlement, asset management, securities, and trade finance. Beyond banking, blockchain interest includes insurance, government, identity management, and accounting services. Not only is this likely to generate new opportunities for payment providers, but also new entrants with disruptive business models, as new market areas become more practically addressable.
Blockchain technologies are immature and their ability to support the challenging non-functional requirements of payment services has yet to be proven.
Current blockchain proof-of-work algorithms require seven seconds on average to gain consensus; further technical maturity is required in this area to support consensus in under 25 milliseconds. Recent advancements leveraging a proof-of-stake approach hold promise to improve consensus performance. Technical advancements are being made toward maturity; technical maturity has accelerated over the past year, fuelled by increasing blockchain investments worldwide that exceed $1.5 billion.
Different types of uses in payment system:
Value Transfer: The use case for transferring funds between parties is the major focus. Blockchain 2.0 technologies could be applied to a variety of different payment sceneries.
In single currency domestic payment the impact could be to reduce or remove the need for central counterparty and the delays in setting transaction net or gross in real-time. Transfers in multiple currencies between countries cross border payments.
Trade Finance: The use case for trade finance covers a single common record of the liabilities and obligations of parties in trade finance. Possible users of blockchain 2.0 include: invoice fraud prevention, process efficiency, service improvement.
Reference Data: Enable the rapid, auditable and secure updating of records by any authorized participant and sharing the change across the network of users. Potential areas where these technologies could be used to streamline the update process and simplify integration into existing payments processing include hot card files, sanctions lists, routing records etc.
As real-time, open-source and trusted platforms that securely transmit data and value, they can help banks not only reduce the cost of processing payments, but also create new products and services that can generate important new revenue streams.
The biggest key to turning the potential of blockchain’s use in simplifying payments into reality is a collaborative effort among banks to create the network necessary to support global payments. Blockchain technology itself works—there’s no debate about that. Now it’s time for banks to seem at the larger image and work along and with non-banks—to facilitate outline the backbone which will underpin a universally accepted, ubiquitous global payment system which will remodel however banks execute transactions.
Against a backdrop of escalating costs, complex manual processes and increased regulatory scrutiny, financial institutions are required to critically evaluate their operating procedures and look to innovative technologies to retain profitability and ensure compliance with global regulations. This is why they are resorting to Blockchain in KYC & AML technology.
As a technology predicated on collaboration, Blockchain enables parties across the industry to come together to achieve a shared goal, without the need for intermediaries or paper trails to ensure trust. This simplifies and streamlines interactions.
Blockchain is a platform that supports multiple use cases within Financial Services, and it has the ability to transform a number of processes, including peer-to-peer payments, trade settlements, and supply chain tracking. One such use case being explored is in the area of Know Your Customer (KYC).
The benefits of Blockchain are aligned with industry attempts to solve the KYC challenges of: complex, inefficient processes; access to accurate data; and an increasingly stringent regulatory environment, all of which have led to excessive operational overheads and poor client experiences.
Ever-increasing anti-money laundering (AML) regulations, coupled with more aggressive enforcement activities have led many financial institutions to implement lengthy, expensive processes in a bid to remain compliant. These slow the pace of business and have had an increasingly negative impact on the client experience.
As a consequence of the complex regulatory environment and challenge of accessing quality public data, the collection and verification of client entity information is increasingly burdensome.
Financial Institutions have traditionally increased staffing as the mechanism for managing complexity in KYC requirements, but with large financial institutions reportedly spending on average $150m on KYC processes in 2017, this operating model is no longer sustainable.
Characteristics of Blockchain that make it advantageous technology
Immutability Records are given a unique ID and stored cryptographically in a way that ensures lineage and eradicates the opportunity to tamper with information without alerting the rest of the network.
Privacy Encryption through complex cryptography and obfuscation techniques ensures that clients maintain control of their sensitive information and can decide which parties are granted permission to access this information via access to the correct key.
Shared ledger Consensus mechanisms ensure that shared data is agreed upon, improving access to accurate information across the industry.
Transparency Any participant in the network can access a record, with the correct permission from the client. This is an opportunity for regulators to be nodes on the Blockchain and monitor information directly, ensuring compliance.
Blockchain enabled document exchange pilots
There has been significant collaboration across the industry, with fintechs, banks, data vendors and regulators working to pilot Blockchain solutions for sub-sections of the KYC process. Whilst many of these solutions will not solve all the KYC challenges encountered by market participants, they are effectively introducing the technology into the KYC space.
Governments in countries such as Estonia and Singapore are exploring replacing centralized registries with decentralized ledgers to create a trusted, tamper-proof repository of information on an individual, which spans multiple facets of their identity.
From a KYC perspective, digital identities provide the capability to automate the verification of an individual’s identity. They also enable the use of digital signatures, improve data quality and deliver operational efficiencies when on-boarding retail clients.
However, owing to the complexity of the identification requirements for corporate entities, there is a limitation on the application of digital identities in solving institutional KYC challenges.
A solution enabled using Blockchain in KYC & AML could be on the horizon, but the journey towards achieving it requires significant collaboration across industry participants and a number of hurdles to be overcome.Blockchain provides the perfect platform to deliver an automated, secure, trustworthy KYC solution that improves client experience, streamlines operational processes and enhances regulatory compliance.
The insurance industry will still have obstacles to overcome, but blockchain’s ability to provide complete accountability, transparency and superior security will help insurers save time and money, as well as improve customer satisfaction. Let us understand how Blockchain application in Insurance will be robust.
Problem with Current Insurance system
Fraud is estimated to cost the insurance industry more than $80 billion annually.
Health insurance fraud ranges from providers submitting claims for services never rendered to up-coding services to receive higher payments. Plan members can commit fraud by failing to report other types of health insurance coverage that would cover the billed services or ﬁling claims on behalf of ineligible members/dependents (e.g., keeping an ex-wife on an insurance plan after a divorce).
Life insurance fraud typically occurs during the application process—applicants withhold key medical information such as a history of diabetes or a heart condition, for example. To decrease costs, life and health insurers both look to protect themselves, their shareholders and their policyholders from fraud.
Information is an insurance company’s lifeblood. Properly acquiring, processing, sharing, securing and using that information to make decisions in a timely manner is crucial—but some of today’s transactions may take days (or weeks) to locate and process. Many insurers are using claims systems that were originally built more than 30 years ago.
Maintaining these outdated technologies increases costs for insurers and may hamper their eﬀorts to adopt new value-based payment strategies that will change the way insurers approach network development, provider contracting and payments.
How Blockchain helps?
When fraudulent information is submitted to a life or health insurer via false claims, falsiﬁed applications, or other channels, blockchain’s smart contracts can help determine if the submission is indeed valid.
Blockchain cannot verify all types of data (e.g., whether the claim was up-coded), but it can validate the submitter and the completeness of the information (e.g., billing code and date are included in the claim). For example, a health insurer could link a claim submission to a patient’s interoperable health record on the blockchain to verify that the patient was actually seen for the appropriate condition.
A life insurer could compare elements of an applicant’s health record—whether the person had been treated for cancer, or whether the person is a smoker—to public or employment records to verify that the information the applicant provided is correct. Once conﬁrmed, the claim would be paid. If not conﬁrmed, the claim either would not be paid or at least trigger further investigation.
The many millions of transactions and data exchanges between an insurance company and its customers, providers, vendors, employers, auditors, and regulators should become much easier to access and view securely with blockchain, saving time and resources.
Blockchain could automatically collect records of agreements, transactions and other valuable information sets, then link together the information and act on the data using smart contracts.
Blockchain-based provider directories could leverage the technology’s decentralized consensus protocols to allow providers and insurers to update listings more quickly and easily. If a provider changes networks or someone ﬁnds a mistake, they can initiate a correction, which can be automatically accepted or rejected by smart contracts based on other information in the blockchain (e.g., a recently rejected claim).
Health plans will be able to keep track of all provider updates and will know which information is most current. Providers, who currently have to maintain multiple directories, would only have to update their information in one place (e.g., a government-sponsored blockchain applications in insurance).
Blockchain has the potential to introduce new models, reinvent existing insurance processes and increase the capacity of insurance providers. Health and life insurers should be positive when it comes to blockchain. The greatest opportunities may extend beyond making incremental improvements in current business models to harnessing blockchain’s unique attributes to create entirely new types of interactive policies and launch innovative services that add value and grow the business.
A blockchain is a decentralized, distributed record or “ledger” of transactions in which the transactions are stored in a permanent and near inalterable way using cryptographic techniques. Let’s do a reality check on Blockchain security
Unlike traditional databases, which are administered by a central entity, blockchains rely on a peer-to-peer network that no single party can control.
Authentication of transactions is achieved through cryptographic means and a mathematical “consensus protocol” which determines the rules by which the ledger is updated and allows participants with no particular trust in each other to collaborate, without having to rely on a single trusted third party. We can say that Blockchain is a “trust machine”.
Although blockchains are highly resilient compared to traditional databases due to their decentralized and distributed nature and the use of cryptographic techniques, they are not completely immune from traditional security challenges and advances in technologies, in particular, the rise of quantum computing could, in the long term, represent a threat to blockchain Security.
From Centralized to Decentralized: Blockchain shifts data storage and protection from a centralized to a decentralized model. In traditional centralized models, security methods can be consolidated with the technology products they serve. Blockchain requires innovative security measures to protect the dynamic and highly distributed financial products the technology aims to support. As with any crypto-based infrastructure, protecting keys is paramount to ensuring a blockchain system’s security. A successful blockchain system needs highly reliable methods of interfacing with the strong key protection practices afforded by Hardware Security Modules (HSMs) and these HSMs must deliver the scaling and flexibility a decentralized blockchain model needs.
The Asset is the Key: Blockchain and distributed ledger technology applications combine the message and the asset in a single token. When an asset is embedded into a blockchain or distributed ledger, possessing the associated cryptographic keys is the only way to retrieve or move the asset. In other words, the key becomes an asset.
Instant Exploitation: When the key and the assets are one and the same, anyone who obtains the key can monetize and exploit the asset instantly. As we’ve seen in security breaches in public blockchain settings, such as Bitfinex, Mt. Gox and others, the malicious transfer of ‘value’ can be instantaneous, irreversible and significant. Participants in these systems lost millions of dollars as a result of compromised security systems. However, these attacks exploited vulnerabilities at the application layer—the wallets holding the keys to the assets—rather than the underlying blockchain protocol. So far, blockchain technology itself has proved tamper-resistant.
Protecting the Key is critical: The ability to edit a distributed database broadens the technology’s applicability. While the redaction capability broadens blockchain’s applicability, it also makes the protection of the keys that must come together to “unlock” and relock the chain mission-critical.
Blockchain researchers are working to patch up security vulnerabilities. We have also witnessed the hard-fork in extreme cases, where they can result in a new version of that blockchain. Considering all things, blockchain is a much better solution to many of the enterprises. But still, it is important to keep developing and improving the blockchain ecosystem to make it as secure as possible.
Blockchain is everywhere, literally. But not many people have a clear understanding of this simple, transformational technology. I say “simple” because if you understand its architecture and functionality, you will be marveled by how brilliant it is and in how many ways it can be exploited. Of course, there are complexities involved but they are at a micro-level. So, if you are looking for a jargon-free, not-so-technical explanation of the blockchain concept, this post is for you.
Another thing before you dive deep, blockchain finds many other applications apart from Bitcoin. In fact, Bitcoin is just one of the 700 applications that work on the blockchain principle. But since cryptocurrencies seem to be the flavor of the season, I will mainly talk about blockchain technology in the context of digital payments.
Why Blockchain Technology?
Historically, monetary transactions have relied heavily on intermediaries or middlemen for authenticating the transactions and maintaining records. They acted as a regulatory body to prevent frauds.
Digital assets are more vulnerable since they are easy to compromise and duplicate. They are generally files that can be duplicated if their source code is accessed. Therefore, permission had to be sought from banks in case of money) or intermediaries (for stocks, etc.) for completing a digital transaction. This process could take time but was important to prevent the problem of double-spending (spending the same asset more than once).
So, in 2008, someone called Satoshi Nakamoto released a whitepaper in which he detailed a revolutionary technology by which digital transactions could be verified, authenticated, recorded and completed, without any intermediary! In fact, all the checking and record-keeping was to be done by people themselves. But not everybody is equipped with special verification powers. This can be achieved by specialized people who can solve complex puzzles (miners) by a process called mining. The good news is that miners are normal people like you and me (peer to peer), not banks or middlemen. They use the processing power of super-powerful computers and software to solve big puzzles (like Sudoku, only tougher). Each puzzle has a definite answer and follows a complex algorithm. The puzzle gets harder as the network gets bigger. All miners in a network have to follow the network’s protocol strictly and they are rewarded for their services by Bitcoins. Once a transaction is verified and attached to the network, it is irreversible. Reversing, modifying or deleting a transaction would require manipulation of all previous transactions (remember, it’s a chain). This is practically impossible and thus blockchains are thought secure.
Blockchains have eliminated the need for a bank by fulfilling three of its roles- storing value, verifying identities and keeping transactions records. Hence, blockchains intrigue people more than other digital payment methods like PayTM that require tie up and verification from banks.
A network of value
Blockchain can be interpreted linguistically as a chain of blocks. A block being a bundle of transactions and the chain made up of many interconnected blocks. Miners compete with each other to verify all new transactions by solving complex puzzles. The miner who gets to the result first, attaches his solution (proof of work) and is awarded with a fraction of Bitcoins that are generated now. The other miners double-check his solution and if a majority is in agreement, the transaction completes (Consensus).
Verified transactions are bundled up with their proof of work and made into a block. The new block is time stamped and attached to the existing blockchain, in a chronological order. Now, everybody in the network knows that payment has taken place and it becomes impossible to spend the same currency twice.
Since every block contains an encrypted link to a previous block, all transactions can be back-verified till we reach the origin of the first transaction. So, data that once enters a blockchain becomes immortal, a property it shares with internet!
Some people describe blockchain as the internet of value, and it seems fitting. In the internet, anyone can upload information and others can view it. A blockchain allows anyone to send Bitcoins (encrypted currency) anywhere but only the person who knows its unique address (private key) can access them. So, to transfer your Bitcoins you have to share your coins’ unique address with the recipient.
A distributed ledger
Blockchains not only have an auto-verification system, record-keeping is also automated. A copy of the entire blockchain is available to everybody on the system. Since blocks contain encrypted records representing receipt or payments of money (Bitcoins, in this case), blockchain is a type of virtual ledger. There is no central server that holds the record database or that gives permission to access the database. It is distributed and decentralized. As explained before, there is no need for an intermediary.
Blockchains can be private
Another revelation- blockchains can be private. I know, this essentially kills our favorite feature of blockchains- decentralization. But hold on; there’s more to this. Bitcoin blockchains are public, meaning anybody who has a computer and an internet connection and follows the rules of the blockchain, can join. Then he is given a copy of the entire database. A new transaction cannot be added to the ledger till all its associated previous transactions are verified. Once everything is found in order, the new entry is written and the entire database is synced and replicated to reflect new addition. As you can note, their process has built-in redundancy. This also makes the blockchain concept a bit sluggish.
Enter… private blockchains. They have rules governing who can access the network. They are mostly initiated by enterprises for their private use; something like an intranet. Private blockchains can be accessed by anyone who has been granted permission (invitation) by the starter of the network or who matches the protocol set by the starter. Since the number of participants in private blockchains is less, processing speeds are much faster and processing costs are lower than of public blockchains.
Aside from the access rights, public and private blockchains share similar features:
Both are decentralized. A copy of the entire blockchain is available with each and every participant.
Both have an access protocol (consensus).
Both are immutable and irreversible.
Public or private, the blockchain concept is intriguing. They have made digitization of assets possible and transfer of assets faster. Their encrypted, peer to peer mechanism has phased out the need for regulatory bodies and administrators. And while the blockchain concept purists might protest that private blockchains aren’t exactly permission-free, we say- better a devil known than a devil unknown!
Blockchains are made to go beyond Bitcoins
Although blockchain’s application in digital currencies and asset transfers is most widely documented and exploited, blockchains go way beyond finance. Blocks can store any kind of encrypted information. Bitcoins are also lines of code that hold a unique address.
Apart from handling currency, the blockchain concept can be made to execute some actions (in the real and physical world) if they work in tandem with other technologies. Actions can be to fetch external data such as medical records, census information, intellectual property, weather reports, inventory details, etc. But here comes a problem. Not all participants in a blockchain trust each other. So, how can they filter who can access their data? This can be done using smart contracts. A smart contract contains sets of conditions that must be met by a user, for him or her to gain trust and enter a blockchain. Once a user meets all criteria, blockchain programs trigger and perform some action.
Consider an example. You must have heard of smart devices. They are regular appliances fitted with sensors and connected to the Cloud. These devices are programmed to operate in a predefined manner if certain conditions are met. For example, a smart glucometer keeps monitoring the user’s glucose level and triggers an alarm when levels rise beyond a certain defined limit. They might also send a message to the user’s physician if a low or high sugar situation arises. Now, add blockchain to this equation.
Suppose the physician stores all patient records in a blockchain and shares its private key with his patients. He will be controlling access to confidential records. Apart from securing his patients’ data in encrypted form, the blockchain will be governed by smart contracts that will control who can access the data. Suppose an invalid transaction is tried, the entire blockchain is alerted and doctor, as well as patient, gets a notification. A smart contract can set a protocol that if an input is valid, access should be granted. Programmed devices will be triggered to perform any action- increase insulin dose, contact emergency room, etc. incredible, isn’t it? No need for manual intervention, no hassle, no delay! The Blockchain concept is more than a bubble. It’s an ocean of possibilities and opportunities. Take a dip and find out for yourself!