This is the first one in a series of posts I plan to write about Blockchain’s (NOT about Bitcoin) potential impact on consumer financial services. Instead of explaining the technology, my focus is to help average person see the real-life possibilities of Blockchain.
Recently I sold my old car. Since the price was too large for exchanging cash, we were trying to determine the cheapest way to exchange the money digitally. There is of course writing a paper check, but exchanging piece of paper seemed as antiquated as exchanging large amount of cash.
We could use Venmo or Zelle or another similar peer-to-peer service. One needs to have at least a bank account to use the service. Every one of the services has limit on amount of money that can be sent. All of the services take several days to complete the money transfer, while some charge a fee to send the money in near real time. So, the solution is to pay an intermediary to send digital money in real time or be stuck with cash. Since email or text from any part of the world can reach everywhere in seconds, it is counterintuitive why sending digital money (which are just 0 s and 1s like email) takes days and weeks.
In the current process of money or “value” exchange, each financial organization uses its own closed ledger or book of financial records, which talks to other closed ledger systems occasionally, intermittently (e.g., once a day), via intermediaries, often via one way messaging. This is like the days when one sent a fax and hoped and prayed that the right person saw it. Even though internet has been around for 20+ years, there has been no attempt from banks and the intermediaries to make this process better.
Payment, aka “value” exchange from point A to B, often goes through series of transfer points or intermediaries. All those intermediaries add their share of fee to the transaction. Wire transfer, international money transfer, digital bill payment may charge both senders and recipients even for slow service. Debit cards, just like credit cards, force merchants to pay a fee every time a consumer uses one of these cards. There are many transfer points or intermediaries between the merchant and a consumer’s checking or credit card account (the acquirer, merchant service provider, network operator, card issuer, to name a few) and every one of the intermediaries adds a fee to the transaction.
Collectively we, the consumers and merchants, are paying for this in the prices of our goods and services. But that’s just how things work, right?
So, what if, there is a way to exchange money or “value” with each other and merchants in a way that is secure, anonymous but public (like at the checkout in a physical store, everyone can see the buyer and what is being bought but no one at the store knows the buyer personally), real time (no more waiting for three days to get the money)? Being in public creates transparency because it gets harder to do shady business, while anonymity still provides privacy to individual user. This is an important concept which we will discuss in another post.
In fact, such a solution is just gaining steam. It opens up new future for many people who cannot afford to pay financial service fees and as a result stay underbanked or unbanked. The solution is called Blockchain. Do not confuse this with Bitcoin. Bitcoin is a cryptocurrency that runs on blockchain but there is no reason why traditional currencies like US Dollar or Euro cannot run on Blockchain.
In fact, it can and use cases are already available. Most widely accepted current use case is where financial institutions exchange digital money (in tech speak “value”) with each other in a standardized fashion, over a connected network, in real time to near real time, across the world, with less settlement risk, greater clarity about recipient and senders’ status and legitimacy. This is possible because of decentralized ledger, which is another key concept behind Blockchain.
In average person’s lingo, each financial organization is a node in a worldwide network (very similar to world wide web or internet) sharing the same ledger where each node can exchange value in real time with the other nodes.
The future, as envisioned in the implemented use cases, is more like real time video call with the recipient so one knows that the “right” person "got" the message. Everything is real time, with richness of data for authenticating recipient and sender identities. Now, wouldn’t it be great if individuals could do the same? Blockchain technology can make this possible anywhere “value” is exchanged; between two individuals, between an individual and a merchant, between two merchants, anywhere in the world.
This new network of “value”, built on blockchain, if implemented with greater good in mind, can eliminate the need for many intermediaries and bring down cost of financial transactions significantly. One may be able to send money overseas or within US with fraction of the current fees. So, what’s the catch? More on that later…….
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