The Blockchain: Real-Time Payment Processing

The secret is out; Blockchain, an emerging data recording technology introduced by the cryptocurrency Bitcoin, has burst onto the forefront of the FinTech scene and is here to stay.  The topic took center stage during the FinTech panel from JBIPL’s 2017 Symposium.  The panel members discussed the broad-based usages of Blockchain as well as some of the legal implications challenging the finance and banking industries without getting too much into the details.

Millions of people around the world are using real-time payments each and every day.  Although, most people don’t realize the significance of the technology they are using or how far money transferring ability has come.  “Most existing real-time payment systems offer an instant, 24/7, interbank electronic fund transfer service that can be initiated through one of many channels: smart phones, tablets, digital wallets, and the web.”  In this type of system, “a low value real-time payment request is initiated that enables an interbank account-to-account payment fund transfer and secure transaction posting with immediate notification features.”  It is not hard to see how this type of system is beneficial to all parties involved: the consumer, the merchant, and both of their respective bank.

So, how does Blockchain fit into all of this?  Well, wherever there is anything of value there will be someone or something in the background wanting to take it.  I am speaking of cyber-security issues. The contemporary methods banks and financial institutions are using are susceptible to cyber-attacks, and the emergence of Blockchain, and its seemingly endless possibilities, has offered a potential solution to this problem.

The legal and finance communities, along with the Federal Reserve, have taken note of the significant importance of the United States Payments system.  This led the Federal Reserve System to establish a “Faster Payment Task Force.” The Task Force’s objectives are to: represent views on future needs for safe, ubiquitous faster payments solution; address other issues deemed important to the successful development of effective approaches; and assess alternative approaches for faster payment capabilities.  There have been 19 different plans presented to the Task Force each with focus on speed, security, efficiency, international ability, and collaboration.

When one approaches the concept of Blockchain for the first time it is easy to get caught up in the complicated technical aspects of how Blockchain operates.  However, for the purposes of this article, a reader only needs to understand that a Blockchain is a peer to peer based decentralized network, and each transaction of value that takes place in the network is verified by a third party and recorded on an immutable public ledger.  Anything of digital value can be placed onto a Blockchain network and transferred between the network’s users.  This makes real-time payment processing a prime candidate for use on a Blockchain, because “the structure permanently time-stamps and stores exchanges of value, preventing anyone from altering the ledger.”  Blockchain is on the cusp of threatening to upheave the entire real-time payment industry, which is currently dominated by third party middlemen apps connecting users to their to banks with a debit or credit card.  These institutions in turn collect all the data put out by any transaction occurring on their network, which they can utilize to their advantage or choose to sell for a profit.  In the age of the internet and instant information, collecting and utilizing data are key drivers for economic growth.  Proponents of a Blockchain system argue against allowing the big financial institutions to keep collecting and monetizing consumer data.  Some believe that Blockchain is essentially a separate form of the Internet as we know it today.  Whereas now we have the Internet of information, “Blockchain brings us from the Internet of information to the ‘Internet of Value.’” Therefore, Fintech startup companies have been popping up everywhere to compete with the big banks to be the first to capture and utilize the potential of Blockchain.

There are some people who believe this could be the end to big banks as we know it. However, big banks have three things that these small Fintech start-ups do not have, customers, capital, and, most importantly, time.  Fintech companies are facing an uphill battle because these small startups continually run into significant regulatory problems. Big banks have been dealing with some form of regulation since the beginning of the banking industry.  They have the capital and resources necessary to navigate the complicated regulatory framework that small Fintech companies do not.  Founders of Fintech companies continually find themselves violating transmitter laws because they are not licensed and test their software using their own bank accounts.  Even though the transaction may only last for a split second, the transaction is still a violation, because once they take legal possession and control of the funds, even for a second, they become a transmitter.  These start-ups also pale in comparison to big banks when it comes to customer a base.  A small start-up could have the best Blockchain based application possible and go bankrupt because it does not have anyone using its network.  Think of it as a fax machine. If you are the only person in the world who owns a fax machine, then what good is it to you?  Lastly, big banks have the one resource that you can never get back, time.

Blockchain is still in its infancy and (arguably) all big banks need to do is wait.  There were many people who believed the discovery of Internet would doom big banks, and they would eventually fade away. However, big banks are still alive and well.  Over the decades it took time to develop the Internet into what it is today, big banks sat back and slowly adapted to the evolving industry.  They have perfected online banking with great Internet platforms, mobile deposits,  and this development has almost eliminated the need to ever go into a banking branch.  They adapted and evolved because they held onto the only three cards in the deck that mattered, capital, customers, and time.  All the big banks need to do is: (1) sit back and watch the Blockchain industry develop; (2) use what works and throw away what does not; (3) and then take what works and perfect it.  Meanwhile, these small Fintech start-ups will either get bought out, run out of money, or have obsolete technology.  The big banks do not have to beat the Fintech start-ups at becoming the first to harness the power of Blockchain; they just simply need to outlast them.

Thomas Gaffney is a third year law student at Wake Forest University School of Law. He holds a degree in Political Science and a minor in History from The Pennsylvania State University.  Thomas is also a published freelance equity research author on SeekingAlpha.  Upon graduation, he plans to practice in the areas of banking and finance law, with a specialization in Financial Technology and Banking Regulation.