People have been expecting virtual currencies to disrupt the payment processing industry since May 22, 2010, when two pizzas were purchased for 10,000 bitcoin.
Since then, bitcoin and other cryptocurrencies have generally failed to steal market share from credit card processors, major banks and other incumbents in payment processing. Cryptocurrency transactions have proven too slow, expensive and inefficient to disrupt the industry. While the incumbents may have won round one in this battle, blockchain technology may still be a disruptive force in how payments are handled.
The “smart contract” capabilities of the Ethereum protocol are one aspect of blockchain technology that have real disruption potential. Smart contracts still aren’t ready to handle complex transactions with ambiguous outcomes, but they can streamline and reduce the cost of many routine processes.
One key area where blockchain can achieve significant cost savings is credit card processing fees. Corporations with large travel expenses are looking at blockchain protocols that can simplify the multistep booking process while cutting costs.
Instead of having employees book their own travel, pay for transportation, lodging and meals on a credit card and then submit expenses for reimbursement, blockchain technology offers a solution that can limit travel to options that comply with internal policies and eliminate or reduce the cost of processing reimbursements.
More important, blockchain solutions can handle payment through electronic funds transfers or otherwise eliminate credit card processing fees that typically apply when employees incur expenses directly.
Airlines, hotels and restaurants may further contribute to the savings that blockchain attains by offering incentives or discounts to businesses that utilize EFTs or other lower transaction cost payment methods.
A second wave of disruption could quickly follow the implementation of smart contracts and facilitation of EFT payments. It is hard to describe exactly what innovations this next wave will contain, but utilization of the predictive capacity of hyper-rich data embedded in blockchain transactions is one real possibility.
If consumers and merchants are able to accurately anticipate needs in advance, it may alleviate the pressure to process payments in real time. If payment processing times become less critical, it will erode the comparative advantage that credit card processors currently enjoy. Today, supermarkets, clothing stores and restaurants are still highly motivated to move customers through their checkout lines as fast as possible and traditional payment processing remains a critical component of their business.
The migration of retail away from physical locations is now expanding into food, clothing and other perishable or “just in time” purchases. As payment timing becomes less critical to consumers and the business model for merchants focuses increasingly on the bottom line, blockchain technology may yet provide the efficiency and cost savings that turn the tide against the incumbent processors.