Making Sense of Blockchain Technology: An Inside Look at Decentralized Payment Processing

Blockchain technology has gradually advanced into the world of payments to transform the traditional banking environment, driving efficiency and simplicity by establishing new financial processes and services. Blockchain and distributed ledger technologies (DLT) promise to solve certain problems, including security, hacking, counterfeiting and reliability. One of the most immediate problems that blockchain technology can help solve is the problem of failed and disputed payment transactions that greatly plagues the traditional banking industry.

For example, Africa’s digital payments infrastructure remains fragmented despite the huge investments in the industry over the years and major players working to retell the story. Compared to widespread smartphone adoption in developed markets, smartphone penetration in Africa is still less than 50%. Although this may be due to several factors, the consequence of this for the banking industry is that the majority of users of digital payment services use alternative devices to perform payment transactions, in particular, Point Of Sale (PoS) terminals and Automated Teller Machines (ATM), which are still plagued with issues with dispensing errors and non-reversal of failed transactions in some situations. This level of usage can be seen from reports that in Nigeria’s first 7 months of 2022, ₦4.61 trillion was processed through PoS terminals compared to ₦3.56 trillion processed in the same period in 2021.

Another problem is that this fragmentation of the payments ecosystem forces merchants to integrate with multiple payment service providers (PSPs) and banks to accept payments from their consumers, which is not only cumbersome but can also be expensive for small businesses. Problems with settlement and transaction fees encourage customers and businesses to default on cash.

With blockchain’s most powerful application for payments, stakeholders believe the resulting benefits for this industry will include real-time settlements, faster transaction times and payment transparency. This article examines what has brought us here and how blockchain technology can solve a long-standing problem in this industry.

Legacy Banking Systems in the Era of Fintech

In 2021, Nigeria Interbank Settlement (NIBSS) data showed about 307,000 Point of Sale (PoS) in Nigeria, 30,000 ATMs and over 6,000 bank branches. However, most of the PoS machines (which are rapidly being adopted by cardholders) are idle. Only 167,000 of the PoS terminals are active, while most are usually confirmed to be non-functional when attempted. In addition, PoS terminals and ATMs (even when functional) often generate incomplete transactions that tie up customers’ funds and put customers through long and painful dispute resolution processes. This has led many bank customers to reject PoS transactions due to these issues and regular transactions. error.

There are many reasons why banks should modernize their old banking systems, but issues related to payment channels (as described above) are a good example.

Alan McIntyre, a senior managing director at Accenture and head of its global banking practice, spoke of “a wealth of unvalued value that can be extracted from banks’ operational systems”, but unlocking and optimizing this value “depends on the bank’s ability to use digital technologies “. He further explained that “the challenge lies in banks’ legacy systems, which can hinder a bank’s ability to improve operations and prepare for the future.”

While modern technology companies are built entirely around the ability to deliver many small changes quickly, legacy systems are typically based on legacy ways of working with long development and release cycles. Ultimately, leveraging broader industry investments in new technologies will be challenging because they are difficult to integrate or are incompatible with legacy systems and architecture. Newer systems can support the latest digital products, services and applications that banks seek to offer their customers. This means that banks can more easily please their customers by switching to such systems, especially in a world where customer expectations are very high.

Finally, banks should ask themselves whether their legacy systems can survive the barrage of increasing external pressures, not only from the fintech sector, which is driving many of the advances in agility and innovation – but also from regulators who have increasingly high expectations on the speed, quality of service and responsiveness of the banks based on assumptions that they have adopted modern technologies as standard. Not surprisingly, many observers believe that these outdated systems are reaching breaking point. Whether assessed based on customer, regulatory or internal cost structures, it has become an urgent requirement for banks to adapt and update their technology stacks and strategies.

So how can banks begin to modernize their legacy systems?

On technological disruption and efficiency in payments: the case of blockchain technology

In his study entitled “Financial Services Technology 2020 and Beyond: Embracing Disruption”, PwC identified a handful of key priorities financial institutions must recognize to succeed in this increasingly digitized landscape, such as simplifying their legacy systems, updating their IT operating models, taking their software-as-a-service (SaaS) credentials beyond the cloud, taking using robotics and artificial intelligence (AI), and preparing the architecture to connect to “anything, anywhere”. For the banking industry, solving the problem of payments and payment disputes through blockchain technology can provide a fast, cost-effective and efficient method to reduce transaction errors or mistakes.

Simply put, Blockchain uses peer-to-peer communication to run a decentralized database similar to a diary or spreadsheet with multiple copies residing on multiple computer systems in different locations, but connected over a network. It contains information about transactions recorded in a specific order, where each transaction generates a string of numbers and letters (digital signature) that depends on the previous transaction. A list of such transactions is referred to as a block, and computers can run complex algorithms using the digital signature to validate the information entered into each ‘block’. A series of blocks is the blockchain and Blockchain can serve a variety of functions, all based on the core ability to record transactions in a way that guarantees correctness, transparency and immutability, as famously used by Bitcoin. Blockchain platforms also use smart contracts which are specialized computer programs to automatically enforce obligations without human intervention.

In 2022 zone was launched as the continent’s first regulated blockchain payment processing network, facilitating local payments in fiat and digital currencies. On a deeper dive, Zone appears to form the basis of plans to build Africa’s first decentralized payment network, which will allow transactions to be processed directly between banks and OFIs without the involvement of any middleman.

Zone’s blockchain network also keeps track of all transactions transparently and with permission. This will help alleviate the high costs of maintaining a network of intermediaries and reduce the points of failure, which usually occur due to the number of intermediaries a transaction has to go through in legacy payment systems.

CONCLUSION

The conclusion is that the integration of blockchain technology into the financial industry has the potential to solve the long-standing problems of payment disputes, fragmented digital payment infrastructure and operational inefficiencies associated with older systems. By leveraging the unique capabilities of blockchain and distributed ledger technologies, banks and financial institutions can achieve real-time settlement, faster transaction times and improved payment transparency, all while reducing transaction errors and mistakes.

The emergence of companies such as Zone, Africa’s first regulated payment processing blockchain network, exemplifies the transformative potential of blockchain technology to revolutionize the payments landscape. By supporting decentralized payment networks, this technology enables direct transactions between banks and other financial institutions, minimizing the need for intermediaries and reducing points of failure.

As the financial sector continues to face increasing external pressures from fintech innovations and regulatory requirements, modernization and adaptation of legacy systems is becoming increasingly urgent. By embracing blockchain technology and prioritizing digital transformation, banks can unlock the enormous value hidden in their operational systems and ultimately maximize value for users in the ever-evolving financial landscape.