By Marcos Nunes, CEO of Gnosis Pay
The global payments infrastructure is inherently archaic. Critical payments authorization processes are based on standards dating back to the 1980’s, while 80% of transactions are powered by Common Business Oriented Language (COBOL), a coding language created in the 1950’s.
But the extent that the global payments system is out of date is largely masked by updates to the consumer facing front end. Paying with your smart watch certainly doesn’t feel like using twentieth century technology, but the reality is that the layers of processing middlemen that every payment must go through most certainly are.
On the front end, payments have gone through a number of changes in recent years, from magstripe payments, to chip and pin, to mobile pay. But the backend technology underpinning payment transactions between buyers and merchants is outdated and inefficient. When you pay for something with your debit or credit card, the process seems straightforward from the user’s perspective. However, the backend technology that makes these transactions possible is made up of many layers that make processing payments convoluted and expensive.
‘But if it isn’t broken, don’t fix it.’ While the present-day payments system is not entirely broken, it’s been patched over and cobbled together layer by layer, decade after decade, for half a century now. No one individual actor is willing to take on the responsibility of overhauling such a sprawling system, so it hasn’t happened despite how badly it needs to. It’s understandable though, given that when the Commonwealth Bank of Australia replaced its core COBOL code (in part due to a growing lack of programmers who can even work in such an antiquated language) it cost them $749.9 million.
Even integrating newer, more modern systems into this infrastructure comes at a price. Communicating with such outdated technologies means more inefficiencies and intermediaries, the costs of which are passed on to users: the average Apple Pay or Google Pay transaction goes through an average of ten providers before settlement; when you make a cross border transfer using the SWIFT network, it takes a costly 1-4 business days. Such inefficiencies are now a widely accepted feature of the system.
These problems don’t exist simply because we haven’t come up with a better way of doing things, they exist because of an unwillingness to change the way we do things. That’s why we need outsiders, players from other industries such as blockchain, to bring a fresh perspective. Things can, and should, be better.
Over the past two decades, we’ve seen the steady development of technologies that offer us a feasible alternative to the current payments system. Unlike the traditional mainframe systems which were invented in the 1950s, which are still used by 92 of the top 100 banks today, blockchain is decentralized. This means distributing transaction records across multiple nodes, making the system more secure and resilient to system failures and cyber attacks. Perhaps more importantly for day-to-day users, the way blockchain technology streamlines transactions both within and across borders eliminates the need for intermediaries, reducing transaction times and costs. To give an idea of just how big that reduction would be, the fastest transaction speed using traditional methods, completes in around 24 hours, while the slowest of blockchain transaction networks can do the same thing in just 1 hour.
The biggest problem with the current payments infrastructure isn’t just that it’s slow, expensive and inefficient. The real issue is that people don’t have a choice but to use it. Adopting blockchain technology doesn’t mean that the only payments options available are from new blockchain payments companies or online neobanks, it means the tools to process payments efficiently and securely are available for all kinds of financial institutions and payments providers. When a traditional bank, a neobank, or a crypto bank can all process payments as quickly and securely as each other, customers have more freedom to choose the options that are right for them, rather than being dependent on one default option.
Blockchain empowers individuals with self-custody over their funds, providing an alternative means of payment and financial control. This is particularly important for those seeking more autonomy over their finances, promoting financial independence and transparency within the tools people use to manage their money. For those who can’t rely on traditional financial institutions in their region, self-custody means people don’t always have to rely on unstable financial institutions or currencies, providing an insulation of sorts from volatile markets. It mitigates scenarios where people are prevented from being denied access to their funds, from having their money lost by rule-breaking banks or centralized exchanges, and increased protection from fraud and hackers. While we can quantify things like faster transaction times and lower (or no) fees, it’s hard to put a price on the human impact.
Inefficiency is not inevitable. It’s time to stop with patchwork solutions to systemic problems and start thinking seriously about the underlying infrastructure of our payments system. By combining the security of self-custody with the efficiency of blockchain technology, we can open our financial landscape up to new possibilities for a cheaper, more accessible, more secure payments infrastructure. Until this happens, we’ll continue to be confined to paying more money for less choice, even though we’re capable of better.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
