Blockchain Use Case: Payments
The private-asset-dominated legacy industry stands to benefit from blockchain applications.
Trading has been a part of man’s commerce since time immemorial to primarily provide for his subsistence and the subsequent generation of his wealth. Governments and authorities are tasked to manage the order of industries for the general sustenance of economies. The various exchange of monies to acquire and dispose of assets are called Payments. Payments facilitate money movement called cashflow liquidities so that products and services are availed to serve its purposes. While the questions to the who, what, where, and why of things are established even on the project proposals stage, the assurance of when will things get paid beyond how much usually ends up in grey territories. It applies to both local and international transactions. People of their times have had a different deployment of systems and mechanisms for better payments schemes to improve cashflow. But none came close because it is not that easy.
The invention of blockchain technology came about to answer that question of “when specifically will I get paid?” where present scenarios involve slow, old, and expensive system of payments. Blockchain technology will disrupt just that through fast, cheap, and safe and secure processing of payments using the distributed ledger technology, or DLT. It can verify transactions in real-time, eliminating the need for third-party mediation such as correspondent banks, clearinghouses, and legal counsels.
The area of international payments wants excellent client experience in terms of more efficient processing, reconciliation, and transparencies regarding fees. It needs to evolve into blockchain capabilities in order to facilitate faster payments across borders. DLT can play an integral part in realizing this concept since the central character of international payments is reachability which enables banks to facilitate payment anywhere in the world. The SWIFT network is currently functioning as such with 11,000 banks attached to its borderless operations. Still, it takes days to complete transactions with an average of 10% processing charges for correspondent banks with inefficient infrastructures.
Pain points of trade finance are the unbelievable delays in payments from weeks to months due to outdated paper-based and manual processes involved. The digitization of documents through the blockchain is currently being studied through the Digital Trade Chain Consortium where members include Deutsche Bank, HSBC, Rabobank, UniCredit, KBC, and Natixis. The project aims to connect all actors in the international trade such as sellers, buyers, transporters, insurers, financiers, and others. This decentralized solution will not only be technologically challenging but also from a regulatory point of view. But it is worth the shot given that other banks from any geographical location will soon be welcome to join the Consortium.
Smart contracts are digital, programmable, and self-executing contracts embedded in the DLT that are automated to deliver payments after conditions are verified. When applied in trade finance, smart contracts will execute an automatic payment processing mechanism after and when an entity confirms the veracity of a shipment delivered. The fast-tracking payment system will, thus, eliminating any error caused by manual intervention in reconciliation processes.
The payments industry stands to enjoy the benefits of blockchain technology adoption given the application possibilities in cross-border payments, foreign exchange settlements, trade finance settlements, card payments, and so much more. Cryptocurrencies built on the blockchain also stand in wait to further accelerate the progress of the payments industry by potentially becoming the standard mediums of exchange.
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