Blockchain explained... The term ‘Blockchain’ seems to be popping up everywhere these day, but what is it, why is it getting so much attention and how does it impact the payments landscape? To explain blockchain we enlisted the expertise of Wayne Johnson, Managing Member, Payment Chain Consulting LLC.
What is Blockchain? At its core, Blockchain is a distributed database architecture for transferring digital assets of value between two parties in a secure and verifiable environment. It can be equated to an operating system. The specific application or functional code is embedded in the networks open source operating system and is visible to all network participants, which is the opposite of a traditional IT outsourcing or SaaS model.
The first distributed Blockchain was conceptualized in 2008 but it’s not known how it originated - if it was created by one person, male or female, or a group and it’s speculated that the author(s) may be using a pseudonym of Satoshi Nakamoto. What is known is that the best processes and procedures of foreign currency trading, logistics, and online security were combined to form this unique architecture in response to the financial crisis that occurred in the late 2008.
Why is it getting so much attention? This relatively new technology could be a market disruptor because it has the potential to threaten legacy infrastructure providers across a number of sectors. The open source architecture could empower corporations (the biggest purchasers of vertical specific software and IT services) to program customized, functionally specific solutions in-house. As a result, this could usher in an era of more user friendly IT capabilities, lower transaction costs, and improved data processing efficiencies. Additionally, the Blockchain protocol could streamline electronic document transference and transaction related processes in other industries including: legal, insurance, real estate, logistics and transportation, medical, rental, and leasing verticals which could benefit immensely from the transparent and incorruptible enhancements built into the Blockchain network. This would also affect proprietary software and communication networks servicing these verticals, disrupting established but fragmented supply chain systems by removing the IT middleman.
How does it impact the payments landscape? The original intent behind Blockchain technology was to allow consumers, regardless of geographic location, to easily exchange one currency for another or convert into other financial instruments representing innate value such as precious metals. Most consumers are aware of Bitcoin as the cryptocurrency of choice probably because it was the original application running on top of the first Blockchain operating system. Because some cryptocurrency transaction processing companies are charging a 1% merchant discount rate (MDR) to purchase goods or services (online or at the physical point of sale), which is dramatically less than current brick and mortar merchant processing fees of 2%+, this could have a huge impact on the way business is transacted. In fact, this discounted rate supports early industry research that this architecture could save end users approximately 50% or more on certain related functions where a dedicated electronic middleman now exists – such as, B2B payment card processors, software companies, and dedicated data processing/transaction networks. No wonder everyone is talking about it!