Blockchain technologies are increasingly enabling seamless transactions of a wide range of cryptocurrencies and enabling frictionless global trade. In the process they are gradually making conventional fiat payment systems obsolete. International payments made through traditional solutions can take several days to clear, but many blockchains can do so in a matter of hours, if not minutes.
The issue of protracted clearance times is not new. In the web2 world, companies like PayPal and Stripe have helped to alleviate our misery to some extent, but they’re not without limitations. Blockchain solutions are taking it to the next level with much lower costs, reduced risk, and efficacy. For example, a web3 version of PayPal will not be able to freeze a user’s account or withhold payment due to an expired proof of address.
Payment processing giants, like Mastercard and Visa, have been actively exploring web3 opportunities over the past few years. Both companies have announced partnerships with cryptocurrency exchanges and wallets. In Q4 2021, payments with crypto-connected Visa cards amounted to $2.5 billion compared to $47.6 billion in total payments processed by Visa. In April 2022, Mastercard took another step forward and announced the launch of the world-first crypto-backed credit card.
Yet, the reliance of payment leaders’ core business models remains firmly rooted in web2 with blockchain sitting as a side-line service. To enable widespread acceptance of central bank digital currencies around the world, further research, infrastructure investment, and government rules and directives will be required.
Curiously, a possible solution to developing a global public blockchain-based payment infrastructure could be to develop private blockchains for key players that need to frequently transact with one another. J.P. Morgan, for example, recently launched the Liink blockchain specifically designed for financial organisations. In its current form, it mostly enables an efficient and reliable exchange of information between its participants. At the same time, it is entirely possible that Liink – or a future competitor – could become a platform for instant and secure inter-bank payments, eventually evolving into a universal web3 payment system. A challenge for private blockchains though is their lack of transparency and the potential for cartels to form involving financial institutions whose reputations have already been tarnished by previous scandals and crises. There is no guarantee that the benefits realised by those within the “club” would be passed on to non-members i.e. consumers.
A similar concept of operating a private blockchain may flourish in the world of insurance companies, airlines, or other industries that incur significant cost, friction, and anomalies when transacting with multiple counterparties. As products and trade are becoming increasingly complex, revenue and liability recognition can become particularly challenging for these industries. For example, in the airline industry, the total revenue collected from the customer needs to be allocated to multiple parties based on nuanced code-sharing arrangements such as in-flight enhancements, seat selection fees, luggage upgrades, airport car parking, terminal throughput etc. Working out pay-outs to all the parties involved, especially in case of delays or cancellations, can rapidly descend into chaos with final outcomes potentially reliant on judgement calls. Having all the players operating within the same blockchain would completely automate the process and, thanks to smart contracts, remove dependence on trust and erroneous errors.
In all likelihood, we’re on the brink of the web3 payment revolution. Given their enormous budgets and resources, it is entirely possible the revolution is going to be driven from the top, initiated by web2 or even web1-based payment processing giants. At the same time, we cannot rule out a left-field start-up reinventing the playing field in an instant. Nor can we be sure that everyone will reap the benefits.