Governments and businesses from a variety of sectors are being forced to consider how blockchain technology might have an impact on them.
Blockchain is the technology that employs a network of databases in various computers that keep records of transactions in “blocks”. These blocks give proof of who owns what and at what time. Every computer on the network has to approve a transaction just before it is noted in a new block and added to all the earlier blocks, creating a “chain” of computer codes.
Payment systems are generally still centralized. Banks have to keep a complex and costly web of “corresponding bank” relationships to facilitate the transfer of money across borders. Clearance of transfer is carried out through the central bank. Synchronization of internal bank ledgers always takes several days. Money can get lost and reporting is arduous and complex. All this increases risk, time, and cost.
Blockchain Technology reduces the cost of transactions and this has been noted in many financial institutions. According to the Spanish Bank Santander report that was published last year, banks could lower infrastructure costs for crossing border payments, regulatory compliance and the trading of securities by $US15 billion to $US20 billion every year by employing blockchains. Given the amount of potential savings, many banks have started to test blockchains.
This week Santander U.K announced that it will introduce blockchain technology for international payments using a new app that is currently referred to as a Staff Pilot. The app will only be available on Apple’s iOS. The bank plans to make the application available to its customers once it completes the pilot program. Santander is now the first bank in the United Kingdom to use blockchain for international payments.
The new Santander application connects to Apple Pay, allowing customers to confirm payments using Touch ID. It enables the users to send between £10 and £10,000. Currently, payments can only be made in British pounds, Euros, and U.S. dollars.
Globally, Santander is not the only bank that is exploiting blockchain technology. Citigroup, Barclays, and UBS are also striving to look for ways to use distributed ledger technology to cut costs and compete favorably with upcoming fintech companies.
In blockchain technology, the ledger is distributed and public, allowing all participants to check if a transfer comes from the real owner. Distributed ledgers come with two advantages. First, the security of payments is improved since the ledgers are shared by many parties. Consequently, it increases transparency and reduces fraud in payments. The second advantage is efficiency in payments: because the middleman is removed and therefore assets are transferred at a lower cost and a faster speed.
According to Gil Luria, Wedbush Securities’ Managing Director, payments processors such as Western Union perhaps should fear blockchain competition. Luria explained the reason why blockchain is a threat: Most processors charge fees when money is crossing jurisdictions. Decentralizing the network gets rid of all that.
Financial institutions are now trying to harness blockchain power, believing it could reduce costs, enhance efficiency, reduce fraud, and change the way the industry works.