Introduction

The payment business generates a lot of revenue globally, more than $1 trillion a year today, and it is expected to double in the next ten years. With that kind of current and future revenue it is a clear and present candidate for disruption. There are disruptors spending billions of dollars today trying to get a stake in tomorrow's revenue stream.

It's been over 50 years since we've experienced a massive overhaul of the financial services business. Technology was the enabler that led to the development of today's payment systems and networks such as ATMs, SWIFT, cards, and automated clearing houses. Many new financial service providers came along to satisfy the needs of this new marketplace.

Technology today again is creating another sea of change ushering in new wave of new business models. This time around technology will be the enabler of business model change at two level -- extension of existing business models and the creation of new business models

Extending existing business models

The entities currently involved in the payments business are looking to extend their reach and subsequent revenue by offering new services in adjacent competitive spaces. They're also involved in adjacent spaces trying to enter the formal core of the payment business. The players will compete aggressively by offering new value added services to consumers and merchants. At the end of the day the net result will be a market shift in who provides what services in the ecosystem.

Creating new business models

Are we ready for a radical change in what is offered to consumers, how it is offered and who offers it from a financial services perspective? The industry is at the cusp of considering the possibility of such a change. It is radical in that it can redefine the nature of banking and payments. The ecosystem as we know it today could undergo a massive transformation. A new set of players may evolve over time and displace many of today's industry leaders along with many of the industry suppliers. Suppose all the middle men were eliminated and we are left with just payers and payees with a new set intermediaries.

What could cause such disruption? It is a simple idea. Rather than using centralized clearing and settlement systems, the use of a shared ledger system called blockchain that is secure and constantly replicating itself.

Just as new payment networks have spawned a new ecosystem of players. The same phenomena could happen with blockchain but on a much larger scale. For example Faster Payments in U.K. which has been around for over six years has spawned new entities. Originally, the UK banks had to be coaxed into it. But, today it has enabled innovative services such as Paym, Pingit, and Zap. These services have changed consumer behavior.

The implications of a distributed model using blockchain technology are profound.

Step back for a second and envision how blockchain technology could be applied to the banking, payments and securities businesses. But, to do that let's examine the new and/or improved capabilities that Blockchain can enable:

 * Military grade crypto technology

 * Verification of assets/documents/contracts (including terms & conditions)

 * Verification of asset usage

 * Verification and identity of involved parties

 * Real time clearing & settlement

 * Multi signature support

 * Non-repudiation of events

 * Distributed registration of events and information

These new capabilities can yield benefits in the following areas:

* Less fraud

* Reduction of exposures/risks

* More efficient data exchange and business processes

* Fewer errors

* Irrevocable

* No single point of failure

* No data loss

* Auditability and traceability

Just think of all the billions of dollars that are spent on redundant systems, fraud detection, exception processing, data exchange, auditing and traceability. Blockchain could solve many of these issues and challenges.

Business application domains where blockchain can create favorable business impacts in the next few years include:

 * Payments (clearing & settlement)

 * Business to business payments with tie-ins to ERP systems

 * Cross border payments

 * Foreign exchange

 * Trade finance

 * Depository services

 * Securities clearing & settlement

 * Custody services

 * Derivatives

 * Loans & mortgages

        -  Syndicated

        -  Securitized

In summary, innovation in commerce and new accounting approaches offers the banking and payments business a new way forward in terms of new revenue opportunities for the next generation in ways that no one could have ever imaged.

The industry's experience with Bitcoin yielded a far greater diamond in the rough -- blockchain. A secure shared ledger that is constantly being replicated every time something changes is a simple idea with far reaching impacts on the banking, payments and securities businesses. The road to broad adoption of a new low cost payment networks and virtual currencies is a long one. One thing is for sure. The traditional payments value chain is poised for substantial change.

Note: The content expressed in this article is Gerard Hergenroeder's.