Now that JPMorgan, the biggest bank in the U.S. based on assets, has launched its own cryptocurrency, it’s clear the blockchain is leaving its mark on global payments. The JPM Coin, which is the bank’s new digital currency, may be reserved for the firm’s clients, but it’s a sign that blockchain technology has disrupted the entire payments space. JP Morgan is the first leading U.S. bank to launch its own cryptocurrency, but it probably won’t be the last.
Meanwhile, IBM has also entered the blockchain-fueled cross-border payments fray using the Stellar cryptocurrency. The ease in which funds can be sent overseas makes blockchain increasingly popular for cross-border payments. This is particularly attractive for remittance payments in which migrants have sent an eye popping $574 billion to their families in other countries in 2016.
While payments are one of the leading use cases for the blockchain, the tech is spreading to all sectors. Research firm Gartner predicts “that blockchain’s business value-add will grow to $176 billion by 2025.” Even Facebook has caught blockchain fever. Mark Zuckerberg’s company is reportedly looking to raise as much as $1 billion from venture capitalists for a new cryptocurrency.
What is the Blockchain?
When you hear of the blockchain, you may think of Bitcoin. Indeed, blockchain is the technology that underpins cryptocurrencies such as bitcoin and Ethereum, for example. But it’s also a database on which transactions are completed and shared among a network of computers. It’s a public ledger that gives individuals and companies the ability to send peer-to-peer payments for a fraction of the cost without a centralized party, such as a bank, controlling the transaction.
So what’s so great about the blockchain for payments? Let’s explore some of the pros and cons.
Blockchain payments are cheaper than traditional bank payments because there are no fee layers involved with the transaction.
Blockchain startup Ripple is a leader in the cross-border payments space. Its main product uses the XRP cryptocurrency to send payments. According to reports, sending funds via Ripple’s xRapid product, whose customers are payment providers and financial institutions, slashes fees by 65% versus traditional methods. What’s more, the payment arrives in a matter of seconds.
American Express is also impressed with the speed in which blockchain-fueled cross border payments can be completed. American Express recently partnered with Spanish bank Santander and blockchain startup Ripple for cross border payments. The transactions, which involved sending funds “from one part of the world to the other one,” were completed “in a matter of seconds.” Not only that, but American Express’ customers found the transactions to be transparent and easy, which was a win/win for all parties involved.
- Transparent and Secure
One of the key features of the blockchain is transparency. Once a transaction is validated and recorded, it can be viewed by the relevant parties on the public ledger, which removes the risk of mistakes or discrepancies. The immutable nature of the blockchain ensures that the data recorded is secure and cannot be manipulated.
The greatest feature of the blockchain for payments in general is also its biggest risk—decentralization. If something goes wrong with a payment, there’s no customer service on the other end to help. Bitcoin wallet addresses, for example, have 34 characters. One mistake and your payment could end up in the wrong hands. Even if you are able to track down the funds, there’s no guarantee that the unintended recipient will cooperate with getting it back to you.
In one real-life example, the unintended recipient of CAD 495,000 in crypto funds died before being able to correct the mistake. The matter wound up in the courts, which ruled that the original funds should be returned to the sender.
Banks still have a grip on 95% of cross border payments. The blockchain is up against a SWIFT payment network comprised of thousands of banks. By way of comparison, Ripple has signed up approximately 120 banks for its cross-border payment product xCurrent. The ubiquitous nature of SWIFT gives it an advantage given the network’s foothold in hundreds of countries.
Leading blockchains such as Bitcoin can’t yet compete with payment networks such as Visa and Mastercard for everyday purchases. Bitcoin can process 4 transactions per second (TPS) compared to Visa, which can process more than 1,600 TPS. Bitcoin is integrating technology called the Lightning Network to make the blockchain more conducive for micropayments, such as coffee. For now, a typical bitcoin transaction takes about nine minutes.
Nonetheless, it remains early innings for the blockchain technology for payments and beyond. With companies like JPMorgan, IBM, Facebook, and American Express investing in the space, buckle up because it’s going to be a wild ride.