At the Payments Innovation Alliance meeting in Berlin in June, blockchain was unsurprisingly a major topic on the agenda. But while much of the talk around blockchain continues to center on payments, it actually has the potential to disrupt a multitude of areas.
This begs the question, why the continued focus on payments? There have obviously been a number of developments in payments over the past few years, but what is really new? The underlying payment rails haven’t changed. There has been a tremendous increase of payment platforms and applications, but they all still use legacy rails.
For example, when you talk about mobile payments, what is new is really the way card credentials are stored and carried. When a mobile payment is made, it still goes through the card network systems. Granted, mobile payments add security features like biometric authentications, but the underlying structure remains the same.
The advent of bitcoin and the underlying blockchain technology proved that payments could be done outside the existing legacy structures, and this is what really started the idea that disrupting the entire payments infrastructure was possible. But as payments is a heavily regulated industry, there is more to upending it than just the technical capability.
One payments expert went so far as to say that there is not too much potential for blockchain and distributed ledger technology (DLT) in funds transfers from a central clearing and settlement infrastructure perspective. His reasoning was that the infrastructure is simply too big for a DLT solution to handle. And even if DLT could handle payments on that scale, building out a national or international payments system that uses the technology would be a massive, costly undertaking.
But while I can understand this sentiment, I’m also not sure I would completely agree with it. Technological advancements are moving very quickly, and what was unheard of just a few years back is a reality now. So I’d like to keep an open mind, but also focus on realistic implications for our corporate members. For new technology to be successfully implemented it needs to be practical, especially for corporate end-users. As always, there needs to be a solid business case.
There are many different ideas regarding financial technology and particularly distributed ledgers. There have been many questions regarding the possibility of connecting blockchains to legacy systems, and this is a concern I definitely share. I have in previous blogs talked about the importance of interoperability, and I have a difficult time seeing how to solve that.
I have to admit, I do believe legacy systems will be around for a while. How they can work together with new technology is certainly going to be a very important issue to bridge. Maybe it is as another expert mentioned—that DLT will become very useful in other areas such as messaging and contracts. “Anywhere there is a stack of paper and a third-party middleman is charging you fees to move it, there’s an opportunity for blockchain,” he said.
Going forward, here are a few factors to consider:
- Blockchain and DLT have the potential to disrupt multiple areas—not just payments.
- There are serious questions about whether blockchain could actually handle the scale of a central clearing and settlement infrastructure.
- There are also questions about whether blockchain/DLT could connect to legacy systems. For the technology to truly catch on, it has to work with at least some older technology, because there is no way to replace everything.
- Blockchain may prove useful in areas such as messaging and contracts.
This October at AFP 2017 in San Diego, AFP MindShift sessions, speakers and exhibitors will offer practical solutions to make new technologies work for you. Check out the AFP MindShift line-up and download the AFP 2017 full brochure for complete event details.
Magnus Carlsson is manager of treasury and payments for AFP.