By Neil Smith, Regional Head, Issuers – EMEA, Verifi
In today’s realm of hyper-connectivity, making purchases has never been easier. In the UK, consumers have a huge number of options to choose from, whether that be one-click, contactless, mobile, voice and more – all of which are designed to help streamline the path to purchase, making it easier for consumers to spend money.
While this multitude of payment options has huge benefits for both consumers and businesses alike, it has also brought about issues – the key one being fraud. Indeed, as payments become increasingly easy to make, the subject of fraud has risen to the top of every agenda.
In this growing, connected commercial landscape, merchants and issuers are expected to have fraud solutions in place to protect their revenue and consumer details, while entrusted with the management of cardholder verification and transaction authorisation. With the introduction of the Payment Services Directive 2 (PSD2) and General Data Protection Regulation (GDPR), regulators have implemented strict data management regulations on processors and controllers to protect consumers’ personal information, while maintaining multifactor identification and opening systems to third parties via APIs. A melting pot of requirements and consumer expectations has led to one outcome: fraud prevention strategies are vital for merchants to survive.
Over the years, new security layers (such as biometrics, artificial intelligence, and advanced payment encryption) have come to the fore to help deal with new payment methods, but with each innovation, hackers and fraudsters learn how to outsmart the technology and breach these systems and networks. And it seems that the more layers that merchants and banks add, the more room for error and disruption.
But what if these layers were streamlined, removing the need for human checks and balances? Decentralising the way all transactions are stored, tracked, and approved could be the solution.
Enter blockchain banking
Blockchain has the potential to revolutionise payments by making them faster, cheaper and more secure. Blockchain uses a shared, secure ledger to track and approve each component within a transaction. It is essentially a list of transaction records, otherwise known as blocks.
Each block contains a cryptographic hash of the previous block, like DNA. It also contains a timestamp and the transaction data. Blockchain has been designed as an open ledger that records transactions between two parties in a verifiable and permanent way. Instead of the numerous layers of approval and review that are required in the payment processing environment, the transaction is packaged in a single linear chain of request and approval. Not only does this end-to-end process make it almost impossible for potential fraudsters to move in, it also creates a complete record of any type of asset transfer.
All blockchains work on a state of consensus, whereby all network participants must verify a transaction by agreeing that it is the one and only version of the truth. This “selected endorsement” means only members with the appropriate access and permissions can maintain the transaction ledger, eliminating third-party approval and making it extremely difficult for fraudsters to make a transaction without alerting the entire network. By linking each block to a real person, identities cannot be concealed or buried in paperwork, leaving no room for fraudsters to hide.
Two types of blockchains are available – public and private. Public blockchains, for which everyone can have access, do not enable deletion of data, making public blockchains non-GDPR compliant. Yet private blockchains, those created explicitly between trusted entities with limited access, can meet the GDPR data erasure requirements. The hybrid approach will enable personal data required for a transaction to be stored off-chain and the reference to the data (hash and metadata) on the blockchain.
How can blockchain help the chargeback process?
If you have experienced a fraudulent transaction in your bank account, it is likely that the bank used the chargeback process as a means to recover the funds.
Chargebacks are the reversal of an outbound transfer of funds from a customer’s bank account or credit card. Chargebacks may also be referred to as disputes or claims and can only be issued in accordance with the rules and regulations set by the card schemes or payment brands. Chargebacks are a time-consuming and costly component to everyone in the payments ecosystem.
As paths to purchase are becoming increasingly automated – through methods such as contactless, one-click, in-app and voice payments – consumer confusion over what may be a valid transaction can result in unintentional “friendly fraud”. This can occur when consumers simply cannot remember what they have purchased, or the goods or merchant are unrecognised on bank statements. Also, there is intentional fraud, when consumers take advantage of companies that are less organised and better able to win chargeback disputes.
When done right, the visible nature of blockchain can eliminate vulnerabilities for merchants by:
- Providing real-time information – timestamps fix a traceable timeline, featuring the how, who, when and where of accountability
- Replacing paper with digital data – proof of purchase, approval records, receipt of items, and other payment data is stored in the blockchain. The merchant, issuer, acquirer, and consumer all have access to the same secure data – saving time and money in the event of a chargeback claim
- Error and complexity are thwarted – fake data, errors in approval, double purchases, etc. are prevented with the linked blockchain process. Fraudulent data cannot be inserted into the blockchain
By forming a secure chain of data approval and transfer, blockchain is changing the way information is exchanged. The pressures and insecurities experienced by consumers, merchants, issuers, and acquirers can be alleviated within this new level of communication and data storage. Simply removing the expectations on each participant in a purchase means the risk is eliminated, and everyone has access to a more secure way of doing business.
To move beyond the theories of an operational, scalable blockchain network for everyone, it will take a seismic shift of global reach throughout the payments infrastructure. Investments will be significant, and collaboration will need to improve across the ecosystem to build a blockchain payment reality. Until such a time that blockchain becomes mainstream and widely adopted, what can the payments industry do now to make a difference and build a strong foundation when blockchain is ready? Merchants, issuers and all payment service providers are even now building collaboration networks through third parties to connect the right data at the right time to the right parties. Working together to provide valuable insights on how connected commerce is changing the consumer experience will lay the foundation for when blockchain can revolutionise payments.
This article first appeared on bobsguide, May 10th, 2018.