At present, Blockchain technology, as an underlying technology refined from Bitcoin currency experiment, has quickly become the most concerned new financial technology because of its characteristics such as weak-centered, trust-free, low cost and natural settlement. Almost all finance-related fields have started concept verification and application of Blockchain technology and especially pay attention to the combination of cross-border payment and Blockchain technology.
A large number of financial institutions and new financial technology enterprises have made bold attempts in three types of business cross-border payment, namely cross-border acquiring, cross-border remittance and foreign exchange settlement and sale. Among which, the applications of Blockchain technology in cross-border acquiring sees the brightest future and has much more powerful revolutionary potential.
The status quo of traditional cross-border acquiring
Traditional cross-border acquiring is always mainly realized through card organizations, such as VISA, Mastercard, AE and UnionPay, and has maintained relatively stable for a long time. C end customers are quite familiar with these card organizations, and even feel delighted to gain benefits by using their products. However, it is exactly the C end customer who bears most of the cost. The extremely high costs that B end customer suffers have been transferred to the C end customer.
There mainly exist four problems in traditional cross-border acquiring:
- High costs of transaction. The transaction fee acquired by card organization is about 1.8% to 3% or even higher, which is hardly affordable for the retail industry.
- High risks of fraud and chargeback. International credit cards have a 180-day period of chargeback, where acquiring merchants may face the risk of hostile chargeback. In fact, this is today’s reality, with many people using this rule to get goods without paying for money, to the dentriment cross-border e-commerce merchants. Under such circumstances, cross-border e-commerce merchants may resort to appeals and arbitration, which unfortunately offers limited respite, finally bearing the costs by themselves.
- Low success rate of transactions. In cross-border payment, banks and card organizations tend to set more stringent risk-control mechanisms. Requests from high-risk areas, multiple suspicious transactions in a single day, or large transactions may trigger the risk-control mechanisms and therefore be prohibited, causing the failure of payment. Sadly, in most cases, customers or merchants can do nothing about it.
- Long return period. At present, the card organizations’ separation mechanisms between transaction and settlement prolong the return period and degrade the efficiency of capital turnover.
These problems can hardly be solved or break through with traditional technologies since the dilemma of trust block the road. Among all third-party payment enterprises, only large companies like Alipay have the capacity to deal with it. However, the emergence of Blockchain technology has brought great changes to trust relationship, value circulation ability and settlement efficiency, and marks the real beginning of Blockchain’s entry into cross-border acquiring.
Changes brought by Blockchain
Before the existence of Blockchain, almost nothing can replace traditional card organizations as the central institutions in transactions. While with the emergence of Blockchain technology, its characteristics include decentralization, trust-free and natural settlement suddenly refresh payment settlement area. On the one hand, the use of digital currency turns real-time and low-cost value circulation into reality. On the other hand, user’s trust in Blockchain technology enables third-party enterprises to quickly gain user’s trust, and to establish a virtuous cycle between C end customer and B end customer.
At present, Blockchain technology are mainly utilized in two modes in cross-border acquiring, the first refers to acquiring end, and another called issuing end. These two modes actually aim at different scenarios, solving all kinds of problems and quickly opening up new prospects for cross-border payment.
1. Acquiring end scenario
- Basic process of acquiring
Acquiring end is a payment product for merchant’s acquiring, includes two scenarios, online acquiring (in-web in-app) and offline acquiring (in-store). When customer pay in digital currency, the merchant can simultaneously receive an equivalent amount of legal currency, during which payment enterprise acts as a third party to cash and pay for the merchant.
The customer can pay digital currency directly to the merchant through the digital wallet with payment protocol, and the payment institution, upon receiving payment request form the customer, will sell the corresponding digital currency at current price to ensure that there is no loss in the exchange, and pay the merchant in legal currency.
- Benefits brought by Blockchain technology
The above process has advantages that can improve cross-border payment:
- Transaction fee can be reduced to 1% or lower, which is much cheaper than that of card organizations;
- Efficiency improved in return period, merchants can receive money in short time;
- No chargeback exists, orders paid in digital currency are irrevocable, therefore eradicates fraud and chargeback;
- 100% payment success, risk-control mechanisms of card organizations or banks will no longer influence the payment;
- Transaction and settlement will be unified based on the real-time circulation of original value and value of digital currency chain;
- The organizational structure of acquiring institutions is simplified and compliance requirement is reduced. Institutions no longer need to set up overseas branches and open accounts (opening accounts abroad is also not easy). By using the settlement network of Blockchain can help merchants get rid of the constraints of card organizations, and lower threshold and costs of conducting acquiring business;
- Identity theft problem will be greatly improved, merchants and customers no longer suffer losses. Magnetic stripes of credit card are easy to forge and copy, chip cards can be cracked, even customer’s data in the bank can be leaked, all these push forward the development of fabricating counterfeit credit cards as an underground industry. While by using public keys and private keys, and relying on current computing capacities, Blockchain can ensure users’ payment safety as long as the user keeps his/her private key safe. Identity theft and capital losses that exist under traditional acquiring mode will not happen again.
- Key technology Bitcoin payment protocol BIP70
Bitcoin payment is inefficient and takes a long time to be recognized. Moreover, users have to enter a long and complicated string to finish the payment. In a word, Bitcoin payment is not that convenient for daily transactions, let alone for commercial use.
In fact, Bitcoin protocol is constantly evolving. BIP is a series of protocol improvements, in which BIP70 is an improved protocol for Bitcoin payment that defines payment protocols of digital currencies and increases the efficiency and friendliness of payments, so as to enable BTC network’s application in cross-border acquiring scenario.
Compared to traditional operation method that user has to filling in payee’s address and transaction amount, and then wait for confirmation, new process has improved user experience in many aspects. For example, payment address has been replaced by words that can be easily understood by human being, and other practical functions such as payment notes, validity period and refund address are involved. More importantly, the new process has optimized itself from the perspective of security and efficiency.
BIP70 designs a receipt that has been digitally signed and can prove the completion of payment without waiting for six confirmations. The receipt will be immediately sent to payer, providing a mechanism for preventing repudiation of payee. At the same time, BIP enhances the capacity of defending man-in-the-middle attack, which means preventing attackers changing the payee’s address to their own.
This protocol improves the efficiency and friendliness of traditional Bitcoin payment, while continuously keep its basic character like decentralization. Such improvement is of great significance for the application and development of Bitcoin in payment field.
At present, BTC block’s low capacity limits its payment concurrency acceptance performance, while BCH has a higher block capacity and is less restrictive than BTC that will enable its later development to meet the demand of payment industry. Therefore, from the point of view of technical characteristics, BCH is more suitable to be the digital currency for cross-border acquiring than BTC.
2. Issuing end service
Yet issuing end product will directly expand their customers into all merchants that accept card organization payment, that is, so long as merchants accept credit cards, customers can pay in digital currency.
In this scenario, customer still imports digital wallet through payment institution’s APP, open card organization’s virtual card, and pay in digital currency. Same to the aforementioned scenario, payment institutions will convert digital currency into legal currency, and pay the merchants though card organization’s virtual cards.
To a certain extent, this product depends on card organizations. Yet in such a scenario, the full use of infrastructure built by card organizations is a good way to rapidly cultivate C end customers’ habit of using digital currency.
Summary and outlook
We can find from the aforementioned two scenarios that using Blockchain technology in cross-border acquiring can solve all kinds of problems under traditional card organization mode. It can rapidly develop C end customer’s using habits though reasonable arrangements, and then gradually explore into B end merchants. It is a mode that meets the fashion and represents the future development. In fact, experienced cross-border payment institutions like Bitpay are adapting such mode and have gained massive successes.
As to traditional card organizations, using Blockchain technology will effectively accelerate their transformation and adaptation to the new development, and will also boost their businesses. For example, the overall transaction amount of UnionPay has exceeded VISA, yet UnionPay’s overseas businesses still lag behind other foreign counterparts since most of its businesses focus on domestic market.
However, if this technology is used in UnionPay, UnionPay can issue virtual cards that support digital currency, lower the cost of cards and explore its global market through issuing cards over the air, which will undoubtedly promote its internationalization and cross-border businesses. Actually, UnionPay has already cooperated with financial institutions like China Everbright Bank in 2017 to explore and develop Blockchain technology.
Of course, payment institutions are facing a major risk, that is the fluctuation of digital currency value, which, when there comes a large fluctuation, may create a currency exchange risk for the digital currency exposure that payment institutions have not hedged.
This situation will be greatly improved with the withdrawal of legal digital currency. By using the value stability of legal digital currency and possible future supra-sovereign stable currencies, payment institutions will be able to become more resilient to this risk, thereby further reducing the overall cost of cross-border payment.
Author: Li Wangjian, Founder and CEO of UQPAY, angel investor in financial technology, serial entrepreneur
Featured image via Freepik