Financial institutions that are considering technology to power digital and mobile payments have an unconventional choice—the underlying blockchain structure that enables bitcoin to hasten execution and cut costs.
Blockchain is a type of distributed ledger that is best known for powering bitcoin and other virtual currencies. Banks are interested in blockchain, but the use cases for the technology are still coming into focus. One of the more immediate ways to use blockchain technology is with another emerging payments technology, mobile.
"One of the things we're trying to do is … support the immediate payment schemes as well as any new technology that is emerging that can become a payment scheme," said Chris Zingo, executive vice president and global head of sales for D+H, a financial services technology vendor that is integrating blockchain technology into its global payment services hub.
"It can absolutely help mobile payments, for example," Zingo said.
D+H built its blockchain product as an extension of its GlobalPAYplus, which helps financial institutions manage payments—high value, mass and immediate payments in all currencies—through an integrated system. Financial institutions can use the distributed ledger to connect to bank networks, enabling business-to-business and person-to-person transactions in real time, Zingo said.
D+H did not name the financial institutions using distributed ledgers in this way, saying the technology is in "testing." The company also did not disclose its fees.
By using the blockchain, the transaction and the record of the transaction that aids processing and back office functions would reside in the same place and would require fewer intermediate steps, Zingo said.
"For mobile payments, if you have real time clearing, this removes the cost burdens and can also help with fraud management," he said. "Today these processes are fragmented. The follow up steps such as posting the funds to bank accounts and reconciliation are done outside of the actual transaction."
The use cases are not limited to mobile payments; Zingo also mentioned faster and cheaper execution for international bank payments, an example closer to other initiatives that want to use blockchain technology to avoid the expense of using local correspondent banks for parts of the transaction execution. The company also hopes to find users interested in upgrading to meet faster payment initiatives from the Federal Reserve and other organizations.
D+H has been pursuing blockchain technology for some time, and considers it part of its effort to convince banks to compete with disruptors in mobile payments and other digital services. At a recent D+H Connections, an internal company event, CEO Gerrard Schmid touted blockchain's ability to make payments more efficient.
"These transfers are slow and expensive, but there are several blockchain startups that are experimenting with these payments," he said at the event. "It will be fast, sub-five seconds and much cheaper. It's still early days for blockchain, but payments is one area where it can make a major difference."
Blockchain can help with P-to-P payments, though banks' use of blockchain to power mobile wallets may be more indirect, according to Nick Holland, a payments consultant.
"I think that banks will probably increase speed for their mobile wallets based on whatever the card networks do with their own blockchain initiatives," Holland said.
Whether blockchain-based payments can provide the necessary speed for in-person payments depends on how the payments are structured, said Zilvinas Bareisis, a senior analyst at Celent. "For example, the bitcoin network, while faster than many payment systems, is not real time and nor particularly suitable for high value in-person payments, partly because of a complex consensus process in the permissionless ledger."
For a formal bank-led blockchain-powered mobile wallet, there may also be regulatory complications, according to Tim Sloane, vice president of payments innovation at Mercator Advisory Group, adding Bank Secrecy Act responsibilities will be complex among the parties.
"If BSA issues are resolved, settlement remains," Sloane said, adding the wallet service must identify how the sender and recipients are discovered and how this identity is connected to a traditional account and settlement system such as the Automated Clearing House. "Blockchain technology itself does not provide a directory service," he said.
American Banker Editor in Chief Marc Hochstein contributed to this story.