It is hard to have a conversation about technology nowadays without talking about blockchain or some sort of distributed ledger technology (DLT). Depending on when you might have entered the cryptocurrency space, you might have a very different take and confidence level in this new world and its advanced technology. If there’s one takeaway I have from that period, it would be that blockchain and other cryptocurrencies are here to stay. They may not be in the form and method as seen in use today, but it will be the new baseline for future companies.
As someone who has been in the eCommerce world for over a decade, I am excited at the prospects blockchain and DLT technologies can have in my work – in a company’s revenue, profitability, as well as customer experience.
Blockchain is a type of distributed ledger. The technology powering it has several characteristics that makes its theoretical applicability to real-world problems very attractive.
Here are some of the immediate benefits for ecommerce businesses if blockchain technologies are adopted successfully.
Increasing Payment Acceptance, Reducing Chargeback Fraud
The ecommerce industry is estimated to reach $3.5 trillion this year. But a growth inhibitor to this statistic is the percentage of bank declines – which averages at 10% and can increase up to 27% if it is an international or high-value transaction.
This means an average of $340 billion will fail authorization in 2019. What is more astonishing is as much as 70% of these are genuine orders and can be saved. The reason this occurs is due to outdated payment processing infrastructure and systems. With up to 14 intermediaries involved in completing a transaction, it is not surprising declines are so high. A breakdown in any of these processes could cause failure. Ecommerce operators who don’t monitor this are leaving good money on the table, and upset customers in its wake.
On the flipside, banks are right to worry as a recent study shows fraudulent transactions have increased 34% per annum for the last 5 years, and this is expected to continue. What is interesting is even within the fraudulent orders, up to 41% of them (friendly fraud) can be prevented.
Payments built on a blockchain and orders transacted through smart contracts will reduce the number of wrongful bank declines and increase payment acceptance. If orders are transacted through smart contracts, it will also give confidence to merchants and customers that each will receive their end of the bargain.
If the merchant also engages a fulfillment partner who has built traceability on blockchain, this goes miles into reducing friendly fraud, or at least improving ability to fight chargebacks, as they would have undisputable proof delivery was made and received by the filing customer.
This overall puts more money back on the table for the merchant, allowing for a better business case in adopting blockchain powered systems and processes.
Savings in Costs for Cross Border Payments and Settlement Time
While ecommerce transactions typically get completed within seconds, but each intermediary in the process must be rewarded for their part. This is partly why payment processor fees ranges high between 2-6%.
If a merchant and customer are transacting in different currencies, fees are even higher. Customers can expect to pay up to 15% premium in their local currency when buying from an international site. Merchants enabling this purchase also pay higher processing fees, as it is deemed risker by traditional banks and payment processers.
Having payments transacted through the blockchain means the potential of reducing payment processing fees by up to 70%, as it removes intermediaries and simply relies on smart contacts. Utilizing stable coins, cross-border transactional fees can be reduced drastically and make it a more attractive value proposition for everyone.
Where international transactions typically take up to 5 workings days to settle, payments on the blockchain are settled faster, thereby improving much-needed cashflow for smaller merchants.
Together, enabling the blockchain technology in ecommerce payments will save both time and money going straight into a merchant’s bottom line.
Privacy and Permissions
Securing payments and protecting sensitive customer information has grown into a complicated web of compliance and expensive upkeep. Blockchain presents can help manage this data in a simplified and secure manner. As blocks of information are created and decentralized, administration and records of transactions are spread across millions of networks, reducing any single point of failure present in centralized databases used today. Any efforts to try to change information in a block requires least 51% control over the ever-increasing network, and at a cost that cannot justify itself – rendering hacks impossible.
Information stored in the blockchain is also anonymous. This allows for more security, and is only accessible by the owner and possessor of its private key. Evolutions in this space could empower individuals to gain more control over generated data, i.e. to keep to themselves or allow companies to gain access to it perhaps for a fee.
As our ecommerce industry continues to evolve, the upcoming challenges will be different. The problems DLT will help solve will also require evolving solutions – especially in the mobile payments space.
We’ve seen pilots or research in the technology by many incumbent banks and financial institutions, and it is bound to grow further in the next few years. These experimentations will definitely help merchants and retailers do online business in a faster, cheaper and more secure manner. While there are still some issues with merging the old and new world, it’s only a matter of time when DLT becomes the new normal in the ecommerce world.