Traditional payment systems use Payment vs. Payment (PvP), but PvP systems bring high settlement risks, inefficiencies, and high costs. Due to these issues, blockchain gained momentum in BFSI over the last few years.
According to a report by Deloitte, 53% of financial service providers prioritize blockchain, this shows the growing interest in blockchain technology in the BFSI sector. As threat actors are getting more sophisticated, blockchain adoption in finance in payment security is non-negotiable. In this blog, we’ll explore what is blockchain, its role in payment security, and more.
What is Blockchain
Blockchain is a decentralized, distributed ledger that securely stores data across a network of computers known as nodes. Unlike traditional payment systems, where a single authority holds the information, bitcoin works in a peer-to-peer system, meaning every participant has an entire copy of the ledger. This makes blockchain highly secure and resistant to tampering.
Each records are cryptographically linked to the previous one, forming a continuous chain of data. This provides transparency, traceability, and accountability for all participants in the network. These features make blockchain ideal for applications such as secure payments, supply chain tracking, and digital identity verification, where trust, transparency, and data integrity are essential.
Role of Blockchain in Payment Security
Blockchain can significantly enhance payment security by addressing common problems in traditional payment systems. These problems include fraud, data breaches, cyberattacks, and payment delays. Blockchain’s decentralization, immutability, and transparency make it well-suited to solve most problems plaguing traditional payment systems.
1. Fraud Reduction
Traditional payment systems use centralized institutions, such as banks or payment processors, to verify and authorize the transactions. These central institutions are vulnerable to cyberattacks and fraud and can be manipulated by malicious actors to authorize transactions or steal sensitive information.
Meanwhile, blockchain operates on a decentralized network, so there is no single and central point of failure. Transactions are validated by a network of nodes, and each node holds the whole copy of the blockchain. Manipulating the blockchain is nearly impossible as the majority of the nodes need to be comprised due to the large size of well-established blockchains.
2. Transparency
One of the powerful and unique features of blockchain is its transparency. Every transaction on the blockchain is visible to all participants in the network. This makes it easier to track and establish a money trail, meaning all parties can view the complete history of a payment from initiation to settlement. This level of transparency can prevent fraud, money laundering, and other illicit activities.
3. Immutability
Once transactions are recorded on the blockchain, it cannot be modified or deleted. This immutability of the blockchain prevents unauthorized parties from tampering with the records. For example, in traditional systems, fraudulent chargebacks or reversals can occur if a payment is disputed. In blockchain, once a transaction is recorded, it cannot be reversed unless all participants in the network agree to it.
4. Cryptographic security
Blockchain employs advanced cryptographic techniques to secure data and verify transactions, which is not available in traditional payment security systems. Each transaction is signed using a cryptographic key that acts as a digital signature. This ensures only the rightful owner of the account can initiate a payment when it is authenticated.
Moreover, each block in the chain is linked using a previous hash, making it hard to alter the data once it is recorded. Cryptography also addresses the privacy concerns of the users. Public and private keys are used to decrypt and encrypt transactions, so sensitive payment data is never exposed to the network.
5. Reduced Payment Costs
Blockchain’s P2P nature eliminates the need for intermediaries, such as banks, payment processors, etc. In traditional payment systems, these intermediaries are the main cause of increases in costs and delays due to the time it takes to process the transactions and additional charges banks levy for their services. Traditional payment system needs more resources to operate, as per a PwC study, blockchain could reduce 30% on infrastructure costs on infrastructure.
Benefits of using Blockchain in Payment Security
The potential for blockchain to enhance payment security is not just theoretical is already being implemented in several real-world scenarios in payment security. Here are some key areas where blockchain is utilized to improve payment security.
1. Cross-Border Payments
One of the important use cases for blockchain in payment security is in cross-border payments. Traditional international money transfers involve multiple intermediaries, foreign exchange, and payment networks. This introduces various security risks, and there is a high chance of MITM attack and fraud.Blockchain-based solutions like Ripple(XRP) and Stellar(XLM) have been developed to address security risks and reduce costs.
2. Blockchain for identifying verification
Traditional identity verifications used in the BFSI sector are often time-consuming and prone to security breaches. Using blockchain, individuals can create and manage their digital identity in the blockchain. During payments, users can authenticate their identity using blockchain-based digital ID, ensuring the transactions are handled safely and securely. This can prevent identity theft, which is a massive problem in the payment industry.
3. Tokenization of payment systems
Blockchain is ideal for tokenization due to its advanced cryptographic security and immutability. Tokenization replaces sensitive data such as credit card numbers or bank account details with unique identifiers called tokens. These tokens can be used for transactions without exposing sensitive data to the network. Even in the worst cases where the tokens are intercepted, they cannot be reversed or decrypted to get the original data without an appropriate cryptographic key.
Conclusion
Blockchain is revolutionizing the way payments are made with its decentralization, transparency, and security, blockchain offers significant advantages over traditional payment systems. From reducing fraud to addressing the privacy concerns of the users, blockchain can address almost all the challenges faced by traditional payment systems.
As the BFSI sector continues to evolve using modern technologies, we can expect we can expect blockchain to play an important role in shaping the future of payment security. While there are still hurdles due to regulation and scalability, the blockchain can bring back the trustworthiness of the payment system.
Related Reading: The Essential Crypto Security Tools
