An overview of blockchain applications in the payments and fintech industry, with recent examples. For full article, see - https://www.penser.co.uk/blockchain-applications-payments-fintech/

1. Blockchain Applications in Payments & Fintech
January 2018

2. Introduction
• Distributed ledger technology (DLT), more commonly known as
Blockchain, was originally invented in 2008. It allows groups of individuals
who are anonymous to establish trust with each other by achieving
consensus. More specifically, it is a shared database that updates itself in
real-time, with the ability to process and settle transactions in minutes
using computer algorithms, without the need for third-party verification,
making these transactions highly secure.
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3. Principles of blockchain technology
There are some basic principles underlying blockchain technology:
• A distributed database: Each entity on a blockchain can access records on the
entire database, but no single entity controls the data or the information.
• Peer-based communication: Communication is not through a central node, but
occurs directly between peers. Each node stores and forwards information to all
other nodes.
• Transparency: All transactions and associated values are visible to anyone with
access to the system. However, each user can choose to provide their identity to
others or remain anonymous.
• Permanent records: Once a transaction is entered, the records cannot be altered
as they are linked to every transaction record that came before them in the
“chain”.
• Computational logic: Due to its digital nature, blockchain transactions can be tied
to computational logic and in essence, programmed. Users can set up algorithms
and rules that automatically trigger transactions between nodes.
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4. Financial impact
The potential financial impact of this technology is yet to be realised, but
expectations are high. For instance:
• According to a report by Accenture, blockchain technology could reduce
infrastructure costs for eight of the world’s 10 largest investment banks by an
average of 30%, translating to $8 - $12 billion in annual cost savings for those
banks
• McKinsey & Co predict that blockchain will drive savings of $50 - $60 billion in
cross-border B2B payments, and $3 - $5 billion in cross-border P2P payments
• UBS Wealth Management says that blockchain could add as much as $400 billion
of annual global economic value by 2027
• A recent World Economic Forum report predicts that by 2025, 10% of GDP will be
stored on blockchains or blockchain-related technology
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5. Application in payments
The technology could therefore have significant impact on the payments
industry. More specifically, it could enable the following:
• Security: Most banking systems are built on a centralised database, creating a
single point of failure that is more vulnerable; once hackers breach the one system
they have full access. Blockchain-based platforms are almost impossible to
infiltrate as it would require access to every computer system on the network
simultaneously to succeed. Also, since each transaction is tied (in the chain) to
previous transactions or records, and viewable by all participants of a blockchain
distributed ledger, tampering with the data would require that the hacker also
change all the previous records in the blockchain. Finally, participants can opt to
set up a private or public blockchain; a private blockchain limits the number of
participants that are verified and trusted.
• Know your Customer: Financial institutions spend $60 - $500 million per year to
keep up with Know your Customer (KYC) and customer due diligence regulations
according to a Thomson Reuters Survey. Blockchain would allow the independent
verification of one client by one organisation to be accessed by other organisations
so the KYC process wouldn’t have to start over again.
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6. Application in payments (continued)
• Processing speed: The distributed ledger could make it possible to connect all the
parties in a financial trade in real time for faster processing of a payment. For
instance, if you use another bank’s cash machine (ATM) today, that bank must
contact your bank to make sure you have enough funds in your account before
dispensing the cash. If both banks used the same blockchain ledger, the bank
could dispense the funds instantly without waiting for approval. In practice, this
would need to be tested - although the transaction itself will register on the
blockchain instantaneously, the funds would still need to move through existing
systems, which may not always show improvements in speed.
• Audit trail: Distributed ledger technology can be leveraged by banks for their
compliance efforts. The transparency of information and permanence of records
makes it nearly impossible to alter or manipulate the data, so banks no longer
have to keep redundant audit trails of transactions; the transaction ledger is the
audit trail. Regulators and auditors have the capability to review transaction flows
and controls directly within the network as all transactions are transparent to
others in the network, and are therefore verifiable.
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7. Investment in blockchain
It is not surprising that banks and other fintech companies have blockchain as
one of their key priority areas to explore.
• A PWC study found that total investment in blockchain startups was $1.6 billion in
2017, which is an increase of just over 2100% since 2015 (from $72 million).
• Similarly, the banking industry is also expected to spend ~$300 million on
blockchain technology this year, according to McKinsey & Co.
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$1.6 B
Investment in
blockchain startups
$300 M
Banking
industry
investment in
blockchain tech

8. Examples of blockchain in payments & fintech
• MasterCard announced in November 2017 that it will be opening up
access to its blockchain technology via its API; for the first
time, MasterCard is offering the ability to send money over a blockchain
rather than by swiping a credit card.
• MasterCard plans to implement the technology initially in the realm of
business-to-business (B2B) transactions.
• The company believes its blockchain technology will help to address
challenges involving speed, transparency and costs associated with cross-
border payments.
• Besides payments, MasterCard envisions that companies could use its
blockchain to track the movement of pharmaceuticals as well as luxury
goods such as handbags and diamonds, thereby reducing fraud by
providing “proof of provenance.”
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9. Examples of blockchain in payments & fintech
• Fintech firm R3 and its consortium of 22 of the world’s biggest banks
(including names like Barclays, BBVA, Commerzbank, DNB, HSBC, Intesa,
KBC, KEB Hana Bank, U.S. Bank and others) have together developed an
international payments system that would allow instant transfers of fiat
currencies and existing central bank currencies to be transacted via a
‘blockchain inspired’ platform.
• The payment system is built on R3's DLT platform, Corda, and relies on
shared infrastructure to facilitate workflows.
• They expect live pilots to commence towards the end of 2018 and broader
adoption in 2019.
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10. Examples of blockchain in payments & fintech
• Ripple announced that more than 100 financial institutions now have
joined its enterprise blockchain network RippleNet.
• Banks such as Santander, UniCredit, UBS and Royal Bank of Canada view
Ripple's payment protocol and its decentralised global exchange network
RippleNet, as a valid mechanism for offering real-time cross-border
payments.
• Many financial companies have subsequently announced experimenting
and integrations with Ripple.
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11. Examples of blockchain in payments & fintech
• SWIFT and 22 additional global banks (including names like ABN Amro,
BBVA, China Construction Bank, Deutsche Bank, Erste Group, FirstRand
Bank, JP Morgan, Rabobank and Santander) have joined its blockchain
proof of concept (PoC), designed to explore whether this technology can
help banks reconcile their international nostro accounts in real time,
optimising their global liquidity.
• They joined a group of six founding banks (ANZ, BNP Paribas, BNY Mellon,
DBS, RBC and Wells Fargo) who have been working since January 2017 to
test and validate the new blockchain application.
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12. Examples of blockchain in payments & fintech
• J.P. Morgan has created a blockchain payments network called the
Interbank Information Network (IIN), with the aim of reducing the number
of participants needed to respond to compliance and other data inquiries
that delay payments.
• Royal Bank of Canada and the Australia & New Zealand Banking Group are
the first to join the blockchain network, with other banks expected to join
soon.
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13. Examples of blockchain in payments & fintech
• IBM has begun processing payments over its own proprietary
blockchain between banks in the South Pacific as well as Australia, New
Zealand and the United Kingdom.
• They have teamed up with blockchain startup Stellar (a nonprofit
organisation that supports an open-source blockchain network for
financial services) and payment company KlickEx (a United Nations-
funded, Pacific-region financial services firm) to launch a cross-border
payment system for banks.
• IBM blockchain only transmits money in the form of Lumens, a virtual
currency created by Stellar.
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14. Examples of blockchain in payments & fintech
• The Bill & Melinda Gates Foundation have launched an open-source
blockchain-based payment platform, named Mojaloop, as a payment
service for the poor.
• Mojaloop’s mobile payment software, built as part of the Foundation's
Level One Project, is powered by the Interledger technology, which in turn
was built by distributed ledger technology startup Ripple.
• The foundation is also working with other fintech companies to make
Mojaloop easily accessible; an API for mobile systems companies
developed by Ericsson, Huawei, Telepin, and Mahindra Comviva will make
it easier for mobile money providers to integrate their services with, and
build products for Mojaloop.
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15. Conclusion
As with any new technology, blockchain will have its initial challenges as it
grows. However, there is no denying that the underlying principle that
governs blockchain has great applications across several industries. Within
payments, money remittances and trade finance may well be the sectors
where blockchain based applications first prove to have tangible value to end
users in the near future.
• To learn more about Penser’s experience in blockchain based payments,
get in touch at info@penser.co.uk or +44-207-096-0061
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16. Sources
• Transparent Transactions: How Blockchain Payments Can Make Life Easier For B2B Companies (Forbes, Nov 2017)
• MasterCard Will Now Let You Pay With Blockchain—But Not Bitcoin (Fortune, Oct 2017)
• Top banks and R3 build blockchain-based payments system (Reuters, Oct 2017)
• The Truth About Blockchain (Harvard Business Review (Feb 2017)
• Blockchain in financial services (PWC, Nov 2017)
• Blockchain and payments: further on the Gartner Hype cycle? (Finextra, Nov 2017)
• IBM is using the blockchain to speed up and simplify cross-border payments (TechCrunch, Oct 2017)
• McKinsey sees blockchain technology reaching full potential in 5 years (Brave New Coin, Jan 2017)
• Blockchain: Applications in payments (European Payments Council, Aug 2017)
• Practical Examples Of How Blockchains Are Used In Banking And The Financial Services Sector (Forbes, Aug 2017)
• Is blockchain technology secure for your company’s transactions? (CIO, May 2017)
• Why more people will use Blockchain-based payment platforms over banks in the future (The Next Web, Sep 2017)
• How Blockchain Improves Security and Transaction Times (Due, Apr 2017)
• Blockchain gains traction in FinTech as payment networks emerge (ComputerWorld, Oct 2017)
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