Deloitte’s and SETL’s successful blockchain-based card payment test provides a glimpse of a more efficient electronic payments system.
Blockchain technology has been the subject of extensive experimentation in the fintech community, with applications for all areas of financial services, including currency trading, cross-border bank-to-bank payments, and now consumer payments at the point of sale. Fintech company SETL and consultancy firm Deloitte have produced a contactless payment card that uses blockchain for identity verification as well as payment processing. The card was designed for UK-based retail bank Metro Bank, and subject to regulatory approval is expected to be commercially available in 2017.
The term “blockchain” refers to a digital ledger that records all transactions made on a network. All participants in the network have a copy of the ledger, which is automatically updated with the details of any transactions made, which participants were involved, and the amount of money that was moved between accounts. Any participant can review the details of any given transaction, making it simple to detect and remedy fraudulent activity. Transactions on the network can be processed in real-time, as once the ledger is updated the transfer of funds is complete – no additional steps are required.
The implications of this product are extremely significant for the payments industry, since it presents the possibility of a viable alternative to the four-party model that has dominated card-based payments to date. By cutting down on the number of parties involved in processing a transaction and therefore the number of fees that need to be deducted from a transaction to sustain those parties, this new system is potentially very attractive for merchants, many of which have voiced their displeasure with card fees in the past few years.
On the consumer side, little difference will be detected by the end user, which allows this system to seamlessly build on ingrained customer behaviors. Consumers in the UK are quickly becoming accustomed to contactless cards, with 67% holding a contactless card according to our 2016 Consumer Payments Insight Survey. By building an innovative new system behind a familiar form-factor, SETL and Metro Bank will be able to deploy their product without having to fight consumer inertia.
However, like any new payment system, in order for these cards to function at a national or international level SETL will require as many issuing and acquiring banks as possible to be part of its blockchain network. Considering the potential loss in interchange revenue this system represents, this could be a tough sell (although the efficiency savings of no longer needing to run existing legacy systems will likely outweigh the cost of lost revenue). This issue could be tackled gradually by enabling the cards to be used via the traditional infrastructure if the accepting merchant’s bank is not yet on the blockchain network.
It will take time for blockchain to fully integrate itself into consumer payments, but with this proof of concept blockchain technology is now poised to radically alter the composition of the payments industry.
By Samuel Murrant, Senior Consumer Payments Analyst