We all make payments. We do it usually in cash or using payment instruments such as debit and credit cards or electronic transfers. These forms of payment, looking similar, have, however, different characteristics.
When we make the payment in cash, there are two operations, the clearing and the settlement, that usually take place simultaneously and instantaneously. The clearing of a payment transaction corresponds to the increase of funds of the receiver and the decrease of funds of the one who pays. The settlement corresponds to the operation of moving the funds themselves.
There is no doubt that in a payment transaction made in cash in the presence of the parties involved, clearing and settlement take place simultaneously and instantaneously, since money is exchanged simultaneously and, at the same time, the payer ends with less funds and the recipient with more.
This form of payment is not practical, however, when it comes to payments of large sums or when the payer and the recipient are not in each other's presence or when the payment is subject to verification of some kind of payment condition, and can therefore be deferred over time.
This type of payment generally involves payment systems that facilitate the movement of money, and instruments such as debit or credit cards, electronic bank transfers, or, more recently, mobile payments.
In traditional payment systems, the time it takes for money to circulate prevents settlement of the payment to be made instantaneously, so clearing is not simultaneous either, ie, in general, the recipient does not receive the money the moment the payer makes the payment. For this reason, in the time period that elapses between the moment of the transaction and the time of its clearing, money becomes credit and the payment transaction becomes a risky transaction, the so-called counterparty risk.
Payment systems therefore exist not only to provide the technical infrastructure necessary for the movement of money but also to hedge the counterparty risk, that is, to ensure confidence in the successful completion of the transaction. The need to cover counterparty risk justifies part of the costs inherent in traditional payment systems.
Blockchain technology may introduce a fundamental change in payment systems. Traditionally, instant clearing of an operation required the simultaneous presence of the parties involved, but with Blockchain technology this requirement disappears. For the first time in financial history it is possible to carry out any type of payment by simultaneously and instantaneously clearing and settlement, regardless of the circumstances of payment.
In a payment system based on Blockchain technology the counterparty risk disappears, just as if it were a cash payment in the presence of the parties., but with the innovation of being a global and scalable system.
Disappearing the counterparty risk, the presence of an intermediate entity that covers the risk becomes unnecessary. In addition, since Blockchain technology is a decentralized point-to-point technology, the presence of a centralized payment infrastructure is also unnecessary from a technical point of view.
For these two reasons, a payment system based on Blockchain technology, which dispenses with the presence of intermediaries, can be an instant payment system and a more cost-efficient one.
Because it can be more efficient, Blockchain technology may reduce the cost of access to financial services, and therefore it has another advantage over traditional payment systems, that is, to reach segments of the public whose access was hitherto closed for cost reasons.
Because it can be more cost efficient, Blockchain technology allows, for example, for very low value payments, allowing the exploration of new markets of micro payments, markets that can not be explored with the payment system due to cost reasons.
There are many and varied advantages of using Blockchain technology in payment systems.
However, in addition to the comparative advantages that enhance the use of Blockchain technology in payment systems, there are unique characteristics of this technology that can determine its future preponderance over traditional technologies, even the reason for the complete replacement of the latter.
Blockchain technology allows the creation of so-called virtual currencies, or crypto-coins. This new form of money is a form of money that is native to the Internet in the sense that it uses the Internet as a communication and payment network in a totally decentralized way. Should this new form of money become the future form of money, Blockchain technology-based payment networks will replace payment networks based on traditional technologies.
This possibility is real not only because governments and central banks are beginning to realize the advantages of their use over current forms of money but also because this is the form of money that most easily allows the development of the so-called Machine-to -Machine (M2M) economy and Thing Commerce that we start to observe in phenomena such as Amazon Alexa.
The advantages of using Blockchain technology in payments and its potential for disruption over traditional business models have not gone unnoticed by the major players in the market. Large incumbent companies such as VISA, MasterCard, American Express and SWIFT are actively working to incorporate Blockchain technology into their networks, either through their own development or through the association with Fintechs and Ripple, for example.
Similar moves are also taking place with big Banks, of which the R3 consortium is just one example. It is very likely that in the medium term (3-5 years) we will begin to see the introduction of the first commercial solutions based entirely on Blockchain technology and a deep transformation in the payment industry.