Enter the Blockchain
As blockchain technology matures, enterprises realize that blockchain is not just for cryptocurrency. It’s a distributed ledger technology (DLT) which provides many real business benefits. The potential cost savings, efficiency gain, and improved customer experience the blockchain technology can create for the global financial market are so appealing that major financial institutions are investing millions in resources to research ways to harness the benefits of blockchain. They recognize the substantial opportunity for blockchain in the areas of the supply chain, trade finance, investment banking, and global payment services.
Blockchain for Global Payments Services
Blockchain is already transforming payments services. Consumers and businesses transmit hundreds of billions of dollars globally every year through traditional funds transfer - a cumbersome process, time-consuming and expensive. Many banks have started using blockchain technology as an alternate platform for transferring funds. In February 2019, J.P. Morgan tested JPM Coin based on blockchain-based technology enabling the instantaneous transfer of payments between institutional accounts. Wells Fargo made a similar announcement in September 2019 to pilot its currency dubbed as Wells Fargo Digital Cash powered by blockchain to help move cash across borders and between branches in real-time. Soon you may see more such mainstream banks relying on blockchain for their payment services.
How Blockchain Transforming Payments Services?
Let’s explore the building blocks of blockchain to understand its relevance to payments services:
Peer to Peer Networking – Blockchain is a protocol that operates on top of the Internet, on a peer-to-peer network of computers that all run the protocol to share data in real-time. From the global payments services perspective, if parties to payment are part of such a system, then payment information (like clearing & settlement details) sharing can happen in real-time, thereby eliminating lags in payment processing & settlement time. This resolves one of the major issues with global payments. Additionally, the network doesn’t charge anything; therefore, there is no network transmission cost associated with the transactions.
Distributed Data Storage – Blockchain is also an electronic shared ledger for building an immutable historical record of transactions. The ledgers are concurrently stored in multiple computers that are part of the network to ensure a shared view of the same data. This eliminates extensive & complex reconciliation process banks put in place to ensure transaction consistency across systems involved in payment processing. Additionally, it helps in improving customer experience by getting them useful information – exact timings, amounts, charges & fees collected by each party in a fund transfer – quickly.
Cryptography – The transactions in blockchain are cryptographically signed to prevent tampering, making it a secured & trusted platform. Additionally, an auditable trail of all the transactions is maintained in the ledger. These features remove the necessity of a trusted middle man or intermediary banks financial institutions rely on for global payments. The use of intermediary adds to the cost & causes a delay in payment processing.
Cryptocurrency & Wallet – Cryptocurrency (Crypto or Token) is a medium to exchange funds between parties in blockchain platforms. It is created & stored electronically in an electronic Wallet. Crypto, such as Bitcoin, has an intrinsic value based on supply/demand. Unlike that, financial institutions are categorizing Crypto used in their blockchain platforms as “Stable Coin,” having a 1 to 1 relationship between a fiat currency (i.e., USD or EURO) and the token value. In this example, one US dollar can be equated with one cryptocurrency.
Data Privacy – Unlike “permission-less” blockchain platforms, where transaction data is made available to everyone in the network, making it unsuitable for regulated financial institutions, from a data privacy standpoint. “Permissioned” platforms like Hyperledger, Ethereum & Corda are designed keeping data privacy laws, information security & regulatory requirements of the financial institutions into consideration. In permissioned blockchain, the shared ledger is fortified with access control to ensure transaction between parties is visible only to them.
Smart Contract – is a piece of software containing a pre-defined set of rules, as needed by the business process, that is executed during the transaction process to ensure all conditions are met in order to complete the transaction. From a payment perspective, any business validation to be performed outside of the payment system, for example, the permissibility of a particular type of transfers or possible duplicate check, can be achieved through Smart Contract.
Trust Systems – The consensus protocol is designed to guarantees the integrity and consistency of a transaction. The validity of a transaction is verified by executing a smart contract code. State of consensus is reached when all/more than one node agree that the transaction is valid & unique. This is important to ensure there is no forgery or double-spending of funds by participating in banking in the payment service.
Will Blockchain Replace or Complement Global Payment Systems?
Although the rate of blockchain adoption is picking up, it is not likely to supplant traditional payment systems anytime soon. Enterprise payment systems usually process diverse payment transactions. These can range from low-value local payments to cross-currency international payments to instant payments in different markets, and they deal with complex regulatory, compliance, finance & operational requirements that are not easily replicable. Instead, the banks are likely to leverage blockchain to solve issues with cross-border payments and streamlining communication between financial institutions by connecting it with their existing payment systems.
Blockchain Integration with Payment Systems
There are many competing blockchain solutions available to the regulated financial industry. The most popular ones are Hyperledger Fabric, Ethereum Quorum & R3 Corda. Each of these solutions is taking different approaches for solving the business integration challenges and provide a wide range of options for network members to integrate their payment applications.
Integration is a critical success factor to enable existing payment applications to work with blockchain seamlessly. The diagram below depicts one view that includes the components often necessary for the successful integration of blockchain with payment systems.
Oracle’s Innovative Solution for Its Banking Product Customers
Oracle engineered Oracle FLEXCUBE Blockchain Adaptor (OFBA) to interface Oracle FLEXCUBE Universal Banking and Oracle Banking Payments platforms with blockchain solutions. Oracle Payments platforms supporting payments for over two decades for over 500 banks across 140 countries. OFBA enables these banks to integrate any version of Oracle FLEXCUBE Universal Banking and Oracle Banking Payments with blockchain solutions with minimal code refactoring and configurations.
Customers may choose a blockchain solution that aligns with their strategic vision. Each of these solutions is likely to function differently in terms of business process implementation and integration. Recognize the integration challenges, OFBA is designed to interface with the blockchain system through secure configurations. Let’s briefly look into the integration challenges and the way OFBA addressing them:
Unfamiliar rollout strategy: banks may take cautious steps in adopting blockchain. To begin with, they may roll out blockchain for a smaller set of payments, for instance, a specific payment type (e.g., inter-entity cross border payments or institutional payments) or a partner bank or a currency, and gradually expand to other areas as their solution matures. The expectation from the banks would be to define such payment routing criteria through configuration.
Varying interface format, pattern & protocol: the use of blockchain itself is evolving; there is no standardized format like ISO, which is heavily used in traditional payment processing. In the blockchain, the message formats, as well as patterns & protocols are likely to vary for each integration. For pattern & protocol, some may use JSON over ReST or XML over SOAP or ASCII over JMS or other combinations to exchange messages. Banks should be able to decide without having to worry about application-level change.
Interface authentication mechanism: different authentication & authorization mechanisms may be selected, for example, MASSL & role-based access control, to protect the blockchain APIs.
Creation of tokens or funding of Wallets: to start with, there should be sufficient funds (Tokens) in the wallet to be able to move it from one blockchain participant to another. Wallet funding is a separate flow from funds transfer flow & can be equated with the Nostro funding process in cross border payments. In some cases, the banks may want to leverage their Payment applications to handle this new flow.
Defunding of Wallets: at the end of the business day, the banks may want to destroy tokens remaining in the Wallets to avoid any misuse. This is different from funding flow and may need to be supported by Oracle Payment applications.
Oracle FLEXCUBE Blockchain Adaptor is designed using a robust enterprise integration framework that supports integration over multiple patterns, protocols, and formats. Its inbuilt flow framework – a unique component that simplifies the process of writing complex & multi-step integration flow – allows the creation of new or modification to existing integration flows in support of new use cases. This feature enables banks to define further integration steps unique to their business process, for instance, funding or to defund through configurations.
Blockchain emerges as an alternate platform for global payments service. OFBA helps banks running on FLEXCUBE Universal Banking and Oracle Banking Payments to connect these platforms with blockchain platforms of their choice to solve business problems, improve process efficiency, reduce risk and enhance straight-through processing with global payments. In addition to Payments, OFBA enables blockchain integration for varieties of other functionalities offered by Oracle Banking platforms.
To learn more, feel free to message me to explore more, or have a conversation.
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