Can blockchain help the cards and payments industry?

Image credit: epSos .de

Blockchain has been for many years a synonym for bitcoin. Whenever people talked about blockchain they thought of bitcoin, and vice versa.

Things have quickly changed in the past few months as shown by the number of banks racing to harness the power of the blockchain technology, in the belief that it could cut up to US$20 billion off costs and transform the way the industry works [1].

What is Blockchain?

If you still think that blockchain and bitcoin are the same, think again. Blockchain is the rail, and bitcoin is the wagon. You may not know how bitcoin works, but you all know is that it’s a cryptocurrency.

So, what is blockchain? According to my own desktop research, the most common definition of blockchain is that of “a distributed transaction ledger of immutable transactions.”

It is called block chain because this distributed ledger is made of blocks and each block is made of a group of transactions recorded in chronological order. Once a group of transactions is verified and securely recorded through cryptographic tools, the block is closed and added to the chain in a linear order.

This is where it gets a bit geekier.

Every block, about 100 lines, contains a timestamp, the hash of the previous block as a reference, the block’s own hash and the difficulty statement. Depending on the protocol, a block can be created, added to the blockchain, and quickly published to all nodes.

This allows the blockchain software to automatically determine when a particular amount has been spent, which is necessary to prevent double-spending in an environment without central oversight.

The validation takes place by full nodes – computers connected to the network which fully enforce all the rules of the network – and transactions are confirmed either by miners or by alternative solutions aimed at reaching consensus on the latest blockchain version or ledger balance.

In exchange for this proof of work, miners receive a reward and possibly fees. Once transactions are recorded in the blockchain, they cannot be removed and become immutable.

How does this apply to cards and payments?

A report by GrowthPraxis (a payments-specific research and consulting firm) has identified about 50 technology start-ups that are developing ideas to make blockchain work for non-financial services.

These applications span from proof of ownership for digital content storage and delivery to modules in app development to prove digital identity. From decentralized prediction platforms dedicated to market shares and politics to points-based value transfer for ride sharing. From the ownership and transfer of digital security trading and companies incorporation to home automation.

The key characteristics of blockchain – automation and decentralization – are geared towards removing the middleman and enabling a direct contractual interface between the two parties involved in any transaction. This technology thereby has the power to democratize payments and make any exchange of value quicker, safer and also cheaper.

A transformational technology