Blockchain Payments: Reshaping Transactions in 2023 💰

Blockchains are changing how we pay. They’re set to hold over $4.4 trillion in B2B cross-border payments by 2024. The crypto payment market is also growing by 16.6% yearly. While the US is the biggest blockchain payment app user, Asia Pacific is quickly catching up.

All these trends make one thing clear — banks must embrace blockchain technology or risk being replaced by it.

In this article, you’ll find out:

• What is blockchain?
• Understanding the dynamic market of blockchain payments
• Benefits of using blockchain for payments
• Infographic: How do blockchain payment systems work?
• Companies that are already using blockchain for payments
• Challenges of using blockchain payments
• Step-by-step of how to implement a blockchain payment system
• Understand the costs to create a blockchain payment system
• Cheesecake Labs’ development services for blockchain payments

What is blockchain?

In a previous blog post, we discussed what blockchain is and how it works, but today we’re looking at how it applies to payment services. 

At its core, a blockchain is a decentralized digital ledger that records transactions across multiple computers in a network. Its design ensures that data remains secure, transparent, and immutable. Transactions recorded cannot be changed or tampered with  — a feature that makes it ideal for financial transactions.

How big is the blockchain payment market?

Blockchains are quickly achieving widespread acceptance in the global financial industry. Fintech companies are fiercely competing to develop blockchain platforms, and the list of banks using blockchain payments is longer than ever:

• American Express has integrated blockchain technology into its customer reward system.
• Banco Santander uses Ripple for quick, secure blockchain cross-border payments through its mobile app, Santander One Pay FX.
• Barclays uses blockchain to streamline fund transfers, compliance, ledger reconciliation, and real estate transactions.
• Citibank developed an internal cryptocurrency called “Citi Coin” at one point. Though the project has been discontinued, the bank continues to explore blockchains to improve payments, securities transactions, and record keeping.
• Commonwealth Bank of Australia used a private Ethereum blockchain for a smart money trial and is exploring this technology for bond issuance.
• DBS co-created the Partior platform for swift multi-currency payments and launched a blockchain-powered digital exchange for asset tokenization, trading, and custody.
• Deutsche Bank joined the Interbank Information Network to improve cross-border payment processing and compliance verification using blockchains.
• JP Morgan Chase launched Onyx to enable seamless payment-related data sharing between financial institutions.
• Mastercard is also investing in blockchain technology to make crypto more accessible to billions of users, businesses, and governments.
• UBS implemented a project called Utility Settlement Coin with other banks to reduce the costs and lengths of transactions using blockchain.

Beyond banks, governments around the world are also using blockchains to streamline financial governance. The Netherlands is testing a pension blockchain system to lower costs and improve data privacy. Singapore’s Project Ubin explores the use of blockchains for clearing and settling payments and securities. South Africa has been successfully using blockchain technology for efficient high-volume interbank settlements. And in the Philippines, the blockchain-based i2i platform now links rural banks that were once disconnected from the country’s financial network.

Why use blockchain for payments?

Blockchain technology promises to transform domestic payments, cross-border transactions, trade finance, and tax payments by: 

Removing intermediaries

Conventional payment systems require gateways and issuers. While these mediators are critical for confirming payment validity, they add costs and slow down transactions. Blockchains remove these intermediaries to speed up settlements.

Enhancing transparency and security

Transaction records saved securely in a blockchain are visible to everyone and cannot be changed. Each block contains its unique hash and the previous block’s hash, creating a connected sequence that makes it tamper-resistant and easy to track funds.

Making cross-border transfers quicker, safer, and cheaper

Remittances form a significant portion of the GDP in several developing countries — 29% in Haiti, slightly over 10% in the Philippines, and 2.7% in Mexico. These fund transfers make up about 0.7% of the world’s total GDP each year, representing roughly $1 trillion.

Money transfer operators like Western Union have historically dominated remittance markets, with banks acting cautiously due to challenges in cross-border transactions. Now blockchain-based payment companies like Abra, BitPesa, and Circle enable secure, global person-to-person transfers. 

Blockchain technology removes intermediaries to allow quick international transfers while securing payments with its immutability. For banks, this is an opportunity to generate substantial revenue from handling both large and small remittances for a small transaction fee.

Improving security with smart contracts

Smart contracts can automatically pause payments if terms are breached, reducing the risk of fraud. They also ensure transparency between parties because the blockchain’s code — not a potentially fallible or biased human agent — manages enforcement. This ultimately minimizes disputes and allows efficient resolutions when disagreements arise.

Democratizing finance 

Blockchains can potentially extend basic banking services to underserved sectors. After all, around 1.1 billion unbanked people own a mobile phone — and their first encounter with financial services will likely be through a mobile blockchain platform.

Blockchains can also serve as financial safeguards in regions experiencing economic problems. For example, when inflation levels soared uncontrollably in Argentina and Turkey, people explored stablecoins as alternative wealth storage options. 

How do blockchain payment systems work? [Infographic]

Now that we’ve looked at the advantages of blockchain in finance let’s illustrate the processes involved in general and cross-border blockchain payment transactions. 

Stellar-powered General Blockchain Payment Systems

Emma wants to send money to Brian via the Stellar blockchain network. 

1. Emma uses her local currency (say, US dollars) to buy Stellar’s native tokens, called Lumens.
2. The blockchain payment system creates a digital block representing Emma’s intended transaction to send a certain number of Lumens to Brian.
3. Nodes in Stellar’s distributed network validate that digital block, confirming the legitimacy of Emma’s transaction.
4. Once validated, the digital block — now containing the confirmed transaction details — is added to the Stellar blockchain. This creates a secure, unalterable, and transparent record of Emma’s transaction.
5. The system transfers Emma’s Lumens to Brian’s digital wallet. 
6. Brian can then use these Lumens within the Stellar network or convert them into his preferred fiat currency if he chooses.

This process allows for global secure, efficient value transfers without traditional banking intermediaries — and it only take a few seconds.

Stellar-powered Cross-border Blockchain Payments

Diego in Colombia wishes to send 1 million Colombian Pesos (COP) to his friend Peter in the US.

1. Diego pays this amount to an entity in the Stellar network called an Anchor (Anchor 1).
2. Anchor 1 accepts Diego’s payment, then issues equivalent digital credits — represented as Stellar tokens like Lumens — into Diego’s Stellar account.
3. These digital credits are then sent over the Stellar network to another Anchor (Anchor 2), which is based in the US. 
4. Anchor 2 receives the digital credits from Anchor 1 and converts them into US dollars based on the current exchange rate. In this case, 1 million COP equals approximately $220 USD.
5. Finally, Anchor 2 deposits the $220 into Peter’s US bank account, completing the international transaction.

Stellar allows for fast, affordable, and efficient cross-border money transfers, sidestepping many traditional barriers and intermediaries in international money transfers. 

Who is already using blockchain payments?

Once mainly a topic for Bitcoin fans, blockchains have gained interest from mainstream finance. Take a look at some of the companies and organizations using blockchain payment solutions to change how money is paid and transferred:

PayPal

PayPal now allows all eligible US customers to engage in cryptocurrency transactions. They can transfer supported digital coins into their PayPal accounts, transfer cryptocurrency from their accounts to external exchanges and hardware wallets, and send cryptocurrency to family and friends instantaneously without fees or network charges.

Moreover, PayPal facilitates crypto checkout at numerous merchant locations worldwide.

Mastercard

Mastercard offers go-to-market planning and commercialization guidance to help fintech companies expand into new markets. They also assist central banks in exploring CBDC development and implementation.

Coinbase

As one of the world’s largest cryptocurrency exchanges, the Coinbase platform lets millions of users securely buy, sell, store, spend, earn, and convert cryptocurrencies. This blockchain payment gateway also allows businesses to establish crypto wallets, create non-fungible tokens, and even earn interest and rewards on their crypto assets.

Stellar

The Stellar blockchain network is known for low remittance costs, mobile banking capabilities, instantaneous settlements (within two to five seconds), and automated currency exchange. It also allows global access to stablecoins like USDC.

What’s more, the Stellar Anchor Network offers new cash-out points (like ACH in the US, mobile money in Kenya, and SEPA in Europe) to let end-users convert their digital assets into local currencies. These features — along with simple onboarding and support for less liquid currencies  — make it easier for digital wallet companies to quickly expand their customer base.

No wonder the Stellar ecosystem is flourishing. Banks and fintech companies are using its ability to work seamlessly with other systems to create innovative products and services.

Cheesecake Labs is a proud Stellar integration partner. We have used the platform to build a digital currency management system for Mercado Bitcoin and help TASCOMBANK develop a digital token, among other exciting projects.

What are the challenges of using blockchain for payments?

Even with their advantages, blockchains must overcome some hurdles to truly reach their transformative potential.

1. Scalability issues  – Scalability (the ability to handle numerous users simultaneously) is a significant barrier to blockchain’s widespread adoption. Even major blockchain networks that host the largest user bases struggle with low transaction speeds. 

• Solution: Adopt side chains, proof-of-stake networks, and layer-2 blockchains to address scalability challenges. For instance, layer-2 scaling solutions can process over 1,000 transactions per second. Side chains also enable data exchange with different blockchains to enhance interoperability.

2. Security – Despite blockchain technology’s inherent security strengths, it’s not invincible. One of the most significant threats today is the aptly-named 51% attack, where hackers that manage to seize more than half of the network’s computing power can interfere with transactions and stop the addition of new blocks. 

• Solution: Carry out regular network audits to identify and rectify vulnerabilities promptly. It’s also important to establish robust backup protocols to ensure network resilience and integrity in the event of a security breach.

3. Lack of adoption and awareness – Since distributed ledger technologies are relatively new, the public needs to be made aware of their practical uses and advantages. 

• Solution: Companies planning to use blockchain payments can create easy-to-understand resources and host webinars or events to highlight blockchain benefits, clear up misconceptions, and build user confidence. These efforts can drive broader acceptance.

4. Skills gap – Because of rapid advancements in blockchain technology, there is a need for more developers with up-to-date skills. This makes it hard for companies to find the right people or get expert advice for building complete blockchain systems. 

• Solution: Work with blockchain development firms that have the expertise needed to develop robust blockchain infrastructures. Cheesecake Labs is one of the top blockchain developers in LATAM and is a trusted nearshoring partner for companies in North America and Europe. 

Find out more about our blockchain development services.

How do you implement a blockchain payment system?

Below is a simplified look at the steps to building a blockchain payment system.

To dive deeper, read our previous blog on how to create a blockchain payment platform.

1. Choose a digital asset 

Decide whether to create your own cryptocurrency or use an existing one. Both approaches have their advantages and drawbacks. Creating your own cryptocurrency gives you complete control over its features and specifications, but it requires a lot of time and resources. Using an existing cryptocurrency like Bitcoin or Ethereum is quicker and simpler, but you have to adapt your business to the rules and conventions of that currency.

2. Strategize 

Define your objectives, identify your target audience, and outline how the blockchain payment system will fit into your existing business model. This is the time to consider legal and regulatory requirements, as blockchain transactions are subject to various regulations depending on your location.

3. Assemble your development team 

This team should ideally include blockchain developers, project managers, business analysts, and quality assurance professionals. If you don’t have the necessary skills in-house, you can partner with a reputable blockchain development firm. At Cheesecake Labs, we can provide you with a dedicated team to fit your requirements.

4. Execute and monitor your project

Your development team builds the blockchain payment system according to the project plan. Regular monitoring and adjustments keep the project on schedule and within budget. 

How much does it cost to create a blockchain payment system?

Building a blockchain payment system presents both potential cost benefits and challenges due to its multifaceted nature. But it’s crucial to understand the key characteristics that make blockchain-based payments more cost-effective compared to traditional systems:

• Lower transaction fees – Blockchain payments involve fewer fees than wire transfers or credit card transactions because there are no intermediaries.

• Faster speed – Blockchains process transactions almost instantly. Unlike traditional banking systems, they are not bound by geographical limits, mediators, or banking hours.

• Global – Blockchain technology is a universal platform, whereas traditional systems cater to specific regions or countries.

• Scalable – Blockchain networks can handle large transaction volumes without significantly increasing costs or reducing speed. Traditional payment systems tend to slow down and cost more as transaction volumes rise.

• Transparent and secure – Blockchains resist tampering because they use transparent ledgers and cryptographic techniques. This lowers fraud detection and dispute resolution costs.

• Inclusive – Blockchain technology makes extending financial services to unbanked and underbanked populations easier. This lets financial companies quickly broaden their user base. 

Does Cheesecake Labs develop blockchain payment systems?

Cheesecake Labs brings a wealth of experience in building blockchain applications, wallets, and exchanges utilizing Ethereum, Polygon, Optimist, Arbitrum, and our specialty — Stellar. 

We’re working with Tascombank on Ukraine’s CBDC pilot to make public sector payroll more efficient. CBDCs combine the security and convenience of digital currencies with the reliability of a traditional banking system. 

We were also involved with the Stellar Aid program, which uses the stablecoin USDC to distribute aid directly to refugees at a large scale. Recipients can then exchange their USDC for local currency at MoneyGram outlets, reducing the risk of fund misuse often observed in traditional aid systems. 

Aside from these great projects, we’ve spearheaded several proof-of-concept projects showcasing Stellar’s benefits and practicality in areas like general payments, bulk payroll disbursements, and blockchain cross-border payments.

Contact us for a comprehensive consultation on your blockchain payment project. Our team can help you achieve your goal, whether you want to build a blockchain service platform or enhance your internal processes with blockchain technology. We can’t wait to hear about your ideas!