The Future of Blockchain in Payment Processing (2024)

One of the most exciting and least understood developments in financial technology (fintech) is cryptocurrency; blockchain in payment processing, in particular. Let’s look at this secure ledger in the payment space.

What is a Blockchain?

Blockchain is a decentralized ledger of information. Its underlying premise is that it stores data. Most commonly, it is used to keep a record of transactions made using cryptocurrency. That said, several organizations are exploring the idea of using blockchains to store other types of information, such as medical records or information about supply chains.

Let’s go back a little bit. Break apart the word: blockchain is a “chain” of “blocks” or “nodes” that represent individual pieces of information. Sometimes, this information is historical, such as an event like a payment or transaction. Other times, these nodes might be involved in “minting” more digital coins. And other times, they might just store static pieces of information.

One of the most critical components of the blockchain is that it’s decentralized. This means that every person involved or having access to the chain can see the entirety of the chain. Not only that, but they have a copy. The “decentralized” nature of the chain creates an added layer of security because nobody can come along and change it.

That’s because the blockchain is not stored in “one” place. It’s “stored” in every place participating in the chain. Compare this to a centralized record-keeping system that could be compromised if an individual did something to the central authority where records are kept.

As you’re about to see, this idea of democratized access to the chain or ledger does have some limitations. Sometimes, chains are private or provide limited access to participants. In the main, there are four types of blockchain networks: public, private, consortium, and permission. Let’s take a look.

Public Blockchain Networks, Explained

Public blockchain networks are “decentralized” or “democratized” in that anyone can use them without permission (assuming they have internet access). However, if they want to participate in the blockchain, they may have to download something and join it as an authorized “node” (this part is not relevant if they’re just using it to make a transaction).

Cryptocurrency exchange and crypto mining applications often involve this type of participation in public blockchains. The most known ones are Bitcoin and Ethereum. These chains rely on a “consensus” modality with PoW (proof of work) and PoS (proof of state), whereby participants must validate their transactions and add them to the existing blockchain.

Public blockchains have several benefits. They are open to the public, transparent, and immutable. However, they may also lack privacy. Due to their size (in terms of the number of participants), they may be slower and more expensive to participate in.

Private Blockchain Networks, Explained

In contrast to the “openness” of public chains, private blockchains require permission to access and are controlled by a single organization (e.g., a business, bank, or service organization). For example, a bank might use a private blockchain to authorize payments. Access to the system would be internal, and customers would not be privy to its contents.

Select participants granted access to the chain may “read and write” on the chain and give access to other participants. Private chains offer all the benefits that blockchains offer, which we’ll discuss below. However, they are not transparent because they require clearance.

They are often faster and more efficient than public chains because they have fewer “nodes” and a more centralized, top-down infrastructure. They are a great way to confidentially store information, which in the case of payments may include sensitive customer financial information, like card numbers.

Consortium Blockchain Networks, Explained

A consortium network is like a hybrid of private and public blockchains. It may be owned and serviced by one organization or a collaboration of organizations, so in that sense, it is more centralized than public chains but potentially less centralized than private ones.

These types of chains are often used in settings where multiple parties or organizations need access to information. Let’s use an extensive hospital system as an example. Once upon a time, hospitals kept paper records. Now, some are switching to blockchain technology for record-keeping purposes.

Doctors in the system will have “read and write” access to the chain via their respective nodes. They may create and share “nodes” with patients, but these patients will have limited access to the chain. In plain terms, the hospital does not want patients to start accessing each other’s records, as that would undoubtedly violate HIPAA laws.

Permissioned Blockchain Networks, Explained

Permissioned blockchains can be private or public, but they require permission to access. That seems paradoxical, but let’s use some examples to illustrate. A network could be open to the public but still require permission to access it because the founders of that network want to minimize the amount of activity on that network.

In networks that involve mining coins, they may want to restrict access to prevent an oversupply of coins from devaluing the coinage. In this example, the network is publicly open, and they won’t turn anyone away, especially when they are laying down money to become stakeholders. The only reason they are restricting access is to prevent inflation.

Many private chains are also permissioned, especially in organizations where participants (e.g. employees) will need to use the chain to access information. Our example of a bank is a good example. This is a private network, but it is “open” to users beyond the people who set it up: they will grant permission to employees of the bank to access the chain.

Blockchain In Payment Processing Security

One of blockchain technology’s primary advantages is its inherent security features. Decentralized record-keeping and cryptographic protocols can secure transactions and make them tamper-proof.

Because the blockchain itself is an immutable structure, there is a significant reduction in fraud risk, unauthorized access, or data breaches. These endemic features of blockchain technology and their implications also instill greater trust among shareholders (for those companies that are publicly traded) and customers.

Blockchain In Payment Processing Can Streamline Payments

Payments need to overcome a number of hurdles as they travel from point A to point B, especially when those payments have to cross geopolitical borders. Regulatory, legal, and currency-related issues are just a few concerns that can lead to high fees, longer processing times, and less-than-desirable exchanges that may even be impacted by real-time market fluctuations.

Is the dollar up? Down? What about the pound? Blockchain-powered transactions transcend politics (literally) by moving across geopolitical boundaries unhampered by the currency exchange issue and its regulatory and legal corollaries.

Blockchain In Payment Processing is Transparent and Traceable

This one may seem initially ironic, given the fact that many consumers are drawn to cryptocurrency for its anonymity. However, keep in mind we are talking about the blockchain, specifically, which is the systemic distributed ledger technology (dlt) for these transactions. Because it’s decentralized and immutable, real-time tracking and auditing of transactions are readily available.

Shareholders and participants in transactions can see the entire process unfold with greater visibility, from initiation of the payment to settlement. The ledger transparency creates more trust and a perception of accountability, limiting potential disputes and even effectively enforcing legal and regulatory compliance.

Blockchain In Payment Processing Can Reduce Transaction Costs

Typically, payment processing has involved multiple intermediary parties: your bank, the customer’s bank, the card networks, and your payment processor (there may even be more for certain transactions). Each of these parties has service costs and overhead to cover, which they do so by charging fees.

Ultimately, these fees are wrapped up in the merchant discount rate. By contrast, accepting payments via P2P (person-to-person) transactions utilizing blockchain technology eliminates some of these middlemen, resulting in lower processing fees.

Blockchain In Payment Processing Can Benefit Customers Too

Several of these benefits will pass through to your end users. For instance, the lower fees that result from eliminating middlemen can be passed on to your customers. They will certainly appreciate the reduction in pricing points. Whether or not you can advertise differences in prices may be up to the legal codes in your state or city.

For instance, some states require you to post clear signage in stores and on receipts if there are convenience fees for credit card use, or if you offer cash discounts. As crypto and blockchain are still evolving landscapes, requirements may seem unclear, but your local chamber of commerce is a good resource to find out what may apply.

Another benefit that can be actualized from the others outlined above is increased trust in businesses that leverage blockchain technology. Nielson polls found that 72% of consumers assess transparency as important or even “very” important. Consumers want to know where products are sourced and how businesses work on the back end (e.g., if they are operating along ethical lines). These consumers will appreciate the transparency that is offered by blockchain-built transactions.

Challenges With Blockchain In Payment Processing

Like any business, technology has its pros and cons. Regulatory compliance is one issue, especially for blockchains in the crypto space. Federal and state legislatures are still scrambling to adopt a set of regulatory mores for the crypto space, sometimes overshooting with punitive measures and other times creating seemingly unenforceable codes. Eventually, everything will even out, but until it does, the legal seas of crypto and blockchain are choppy waters.

Interoperability is another challenge. This essentially refers to the nature of different blockchains and/or cryptos to integrate or provide opportunities for exchange. The benefits of blockchain, particularly the one about circumventing currency exchange, mainly relates to transactions operating along the same blockchain.

What if a customer wants to pay for something with a crypto that operates along a different blockchain? This means they’ll have to do some exchange, or you’ll have to take that burden on yourself.

Some crypto-fueled online businesses choose to handle the exchange themselves in return for a fee. Others guide the customer to a particular swapping point, but this can lead to some confusion and potential cart abandonment.

Another solution is to accept transactions along several different types of blockchains, but this will necessitate more engineering and maintenance on your end. With over 1,000 blockchains out there (as of 2023), this could be a challenge you’ll need to grapple with.

Blockchain Trends: Cryptocurrency Payments

In the years ahead, digital wallets and payment gateways may increasingly offer “decentralized payments” that occur in the crypto-blockchain space. Already, consumers show an interest in peer-to-peer transactions via mobile devices like Zelle, Venmo, Cash App, and PayPal.

Some consumers in particular are interested in blockchain innovations and view crypto as the future of payments. They are already engaged with investing in crypto or transferring funds with their mobile wallet applications to pay their bills or send money (e.g., coins) to friends.

As mentioned, payment processing efficiency will face several challenges in the blockchain space. Blockchain integration with multiple chains, blockchain compliance, and scalability solutions are just a few of the hurdles to overcome.

But also, as mentioned, there are many benefits. For payment gateways handling international payments, there are cross-border blockchain payments that can avoid currency exchange issues. The encryption and security offered by private blockchains, facilitated by tokenization, can maintain payment security while also facilitating excellent transaction speed.

The Bottom Line: Customers Want Decentralized Finance (DEFI)

Small business owners do not need to worry about any of the particulars of peer-to-peer payments in the crypto-blockchain financial system. What they do need to pay attention to, however, is that 44% of consumers believe crypto will become a primary payment option in the future, and 40% of them would be willing to use it more often if given the chance.

Blockchain technology and crypto payments are a confusing, so-far (highly) unregulated space. But there is no denying that accepting crypto will have B2C and B2B appeal. Accepting digital payments through blockchain can increase efficiency and transaction speed, without compromising on the security enjoyed with traditional card transactions.

Frequently Asked Questions About Blockchain Technology in Payment Processing