Blockchain – A Path to Real-Time Payments

Author


Ron Mazursky

Director of Strategic Initiatives, Jack Henry & Associates and Founder and Board Member, NYPAY
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Attention Banks and Credit Unions: We have a new financial wild west at hand. What do we, in the financial services world, need to think about in considering what solution in terms of real-time payments to follow? If we don’t pay attention to it – will we be at risk of losing our customers?

Like all good strategic questions, the answer is both yes … and no.

We are early in the process of developing businesses around blockchain technology and definitions are not consistent. “Experts” in this field have defined terms related to the blockchain in many ways. Financial institutions, processors and vendors are currently experimenting with new products based on the blockchain technology.

Let’s start with the concept of real-time payments. Real-time payments are important to consumers, businesses and financial institutions. Without going into the details of existing market research, consumers and businesses want real-time payments for P2P transfer, for funds consolidation for large ticket purchases, for international remittances, and for emergency bill payment (consumers) and improved cash flow management (businesses). So market demand for real-time payments is here.

There is/will be options for financial institutions in providing real-time payments. The number of processors, payment networks and financial institutions developing real-time payment capabilities is mind-numbing. FIS PayNet is now functioning as a real-time payments network with several thousand financial institutions participating – and with real-time payments operating in the US and in several dozen countries. Fiserv NOW Network is attempting to replicate PayNet, but operating a bit behind FIS in development.

In addition, NACHA has announced the development of new rules surrounding faster payments (same day settlement), but hasn’t specifically talked about real-time payments. The Clearing House announced a week or so ago that they are partnering with FIS and VocaLink to build a real-time payment network. At the same time, Early Warning announced that they are purchasing clearXchange, a real-time P2P messaging network owned by 6 of the larger financial institutions in the US, comprising over 50% of the country’s DDA accounts.

The payment networks, MasterCard and Visa, have their own versions of P2P real-time payments in place. Their capabilities focus on real-time payments messaging and use batch processing for settlement.

To add to the confusion, the Federal Reserve has been working with a large number of financial institutions and vendors in the industry to map out a course for a US real-time payments network that might (or might not) include the players described above.

What is blockchain and where does it fit into the real-time payments process?

Blockchain technology is a mechanism for sharing transaction data that enables the tracking and movement of assets (note: it is not necessarily a currency). Think of each transaction as an agreement between two parties in the transaction – without a central authority overseeing or enabling the transaction.

The major benefits of blockchain technology are two fold: it substantially reduces the operational costs of a transaction and it enables real-time settlement. These benefits make this an interesting alternative to real-time payments networks currently in the US development cue.

Blockchain is the foundation of cryptocurrencies (such as Bitcoin) and enables the development of services based on the technology. Processors are beginning to research and develop new money remittance services, P2P services and other payment services. For example, D+H and Ripple Labs have recently announced a relationship to develop such services.

There is no doubt that other core system providers and payment processors are researching and developing new blockchain solutions for consumers and businesses – as well as individual financial institutions. In fact, recently 25 large banks have also taken to researching Bitcoin and blockchain services by investing in the R3 blockchain consortium.

So where are things heading?

Blockchain is a viable alternative to more traditional real-time payment efforts. It is very much the wild west in terms of the number of alternative versions of real-time payment systems.

What is most exciting is not that there are more expensive central authority solutions for real-time payments that is developing and within a few short years will be a viable real-time solution. But rather, this new type of distributed, blockchain platform for real-time payments is just being innovated.

This innovation is exciting to individual financial institutions, to processors, to networks and to vendors that are creating new protocols for how these new payment systems will work. This is where disruptive innovation will be situated – where community banks and credit unions will ultimately be successfully served in the real-time payments space.

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