Payment Methods: usability, security, Blockchain and Blockchain as a service

Introduction

How many sales are you losing online or in physical stores caused by a lack of payment methods? Today's consumer is gaining a preference for online payments, which are diverse and more popular than ever, creating challenges in applying these new methods and keeping them secure and safe.

In this article, the subject is going to be elaborated in: the challenges, the relevance of the subject, the difficulty to apply more security, the impact of fraud and the damage done to a business, and how new technologies (such as the blockchain) can help to reinvent the online paying methods.

Popularity caused by the pandemic

The growth in the popularity of online payment during the last years was slow and steady, but the pandemic brought an exponential rise in the department. Today 2/3 of the world's population do or receive online payments, growing from 35% in 2014 to 57% in 2021 on economic development.?

As an example, in Canada, digital payments accounted for 79% of all transactions in 2020, growing by 48% according to the annual report Canadian Payment Methods and Trends 2021. This shows the changing consumer behavior.

This significant increase in the use of online payment methods has popularized services such as digital wallets, virtual cards, cryptocurrencies, and QR codes. The State of the Union report revealed that 59% of consumers are using at least one type of online payment service, with one-third of them starting to use these services during this time, demonstrating the significant growth the sector has experienced.

The research conducted by Visa mentioned that two-thirds of consumers expect to use contactless payment methods whenever possible, which explains the popularity of digital wallets and QR codes. With these methods, it is possible to make contactless transactions using only a mobile phone, leading more companies, especially physical stores, to adopt these payment methods.

However, despite this trend, the majority of consumers view online shopping as a facilitator since they don't have to leave their homes to visit a store, and they can see numerous products at once, making customers prefer an online experience.

Thus, it is evident that online payments are an irreversible path!

Importance of security for customers:

The importance of security in online transactions goes beyond data privacy; it encourages new users to try these payment methods, especially for those who are skeptical. However, this concern diminishes as consumers use these payment methods more frequently, gaining more confidence and caring less about security.

However, according to Visa's research, one-third of consumers have stopped making purchases from stores that had fraudulent charges. Despite this, these consumers continue to use online transactions, but they avoid buying from places where problems occurred.

Fraud and its challenges:

Fraud has been a recurring problem that results in billions of dollars in losses for merchants worldwide. This is evident as fraud rates increase in parallel with the rise of new merchants. According to Juniper Research, this behavior indicates that many of the new merchants who entered the market due to the pandemic are not accustomed to the environment and are unprepared to face fraud challenges. Building and maintaining more secure platforms require resources.

However, it is a misconception to think that fraud is limited to new companies. According to a Stripe survey, even established companies struggle to combat these frauds due to the significant increase in attempts, as well as their increasing complexity. Moreover, these companies consider fraud to be more significant than growing businesses and startups, investing more resources in fraud prevention.

Regarding the impact of fraud, it is costly, not only due to losses in disputes with customers but also because companies end up reducing investments or delaying expansions to invest in fraud prevention.

Increasing security:

Increasing security, however, should not make the purchasing process more difficult for users. Merchants fear losing customers by adding more steps during the purchase process, especially in an extremely competitive market. The Stripe survey also showed that the more a company tries to prevent fraud, the higher the chance of blocking a legitimate purchase. This poses another problem since one-third of consumers would not return to a company after having their payment declined without reason. These two points are interconnected, depending on how effective the anti-fraud solution adopted by retailers is.

One way to increase security in online purchases is through virtual cards. The functioning of virtual cards involves the bank creating a "card" for each transaction. Even if the data is leaked, the fraudster cannot make new purchases with that card because it can only be used once. However, this method relies solely on consumers and adds an extra step to the purchase process, reducing comfort and speed.

Interestingly, places with stricter regulations for online payment methods have lower fraud rates. For example, Europe has significantly lower fraud rates than North America.?

This effect is caused by SCA (Strong Customer Authentication), which is a regulatory requirement in Europe to reduce fraud and enhance the security of online and proximity payments. SCA utilizes 3DS as a way to authenticate cards at the moment of completing a transaction.

Australia also implements a very similar regulation called AusPayNet (Australian Payments Network Limited), and like Europe, it has lower fraud rates. Additionally, other places require authentication from the issuing bank for online transactions, such as India, Malaysia, and Brazil.

Even though security needs to be stronger than ever, extra security checks should be incorporated in a way that is not noticeable to customers in order to avoid increasing steps to finalize purchases unless these additional checks are mandatory, as is the case with SCA.

The future of online payments

But what will be the future of online payments? The trend is towards the decentralization of transactions, which is one of the recent innovations revolutionizing payment processing the most. In this way, a financial system will not be based on banks as centralizers and their intermediaries. On the contrary, the idea is to decentralize information and facilitate direct financial exchanges between individuals.

However, this tool is closer to implementation than we imagine. Nowadays, it is no longer necessary for companies or organizations to be responsible for maintaining the blockchain. BaaS (Blockchain as a Service) is a way for third-party companies focused on IT to provide mass access to blockchain functionality (we will discuss this further ahead). Although the idea is good, there have been significant challenges in recent years in adapting the same technology and codes for each company to deliver the best service... and this is only possible with the blockchain.

BLOCKCHAIN

In essence, Blockchain is a distributed ledger technology that enables the secure storage and transfer of information, in a transparent, and immutable way. Instead of relying on a centralized authority, such as a bank or government, blockchain decentralizes control and validates transactions through a network of participants called “nodes.” To work this way, the technology is composed of a chain of blocks, with each block containing a set of verified transactions and being connected to previous blocks through cryptography. This creates a sequential and chronological record of all transactions.

“Blockchain” comes from English, and means literally “chain of blocks,” which essentially explains the meaning of the concept. When having the first contact with this word, many only relate it to cryptocurrencies, but it goes far beyond that. Imagine a world where financial transactions or contracts occur in a secure and transparent way. Notice that at no point was a bank mentioned? That’s one of the main advantages of this technology: it removes intermediaries, such as banks, eliminating the bureaucracy of these institutions and providing greater reliability and data integrity.?

How is it used on online payments?

An example of its current usage is the recently established partnership between JPMorgan and Indian banks to introduce a blockchain-based platform that enables interbank settlement of transactions in U.S. dollars.

One of the key characteristics of blockchain is its security. Advanced encryption and consensus algorithms are used to ensure data integrity and reliability in the decentralized environment. Additionally, since the network is distributed among multiple participants, there is no single point of failure, making it more difficult to manipulate or hack the information transmitted. In this context, its security can be used in various areas beyond those already mentioned, such as online payments, which will be explained next.

According to Oberlo, 33% of the world’s population makes online purchases. At the same time, according to a survey conducted by PSafe, the largest digital security company in Latin America, “three out of five Brazilians are concerned about having their data leaked when buying a product online”. Additionally, according to Paysafe, a multinational online payment platform, 62% of consumers see fraud as inevitable when purchasing a product online.” In this context, blockchain plays an essential role in ensuring more security in online payments. Its main way of achieving this objective is through the use of advanced cryptographic techniques to secure transactions. As explained earlier, each transaction is digitally signed and linked to previous ones, forming a chain of blocks. Encryption protects the integrity of the data, preventing interception or alteration by bad intended individuals.

Despite looking extremely futuristic, such technology is already being used even by world powers. According to Forbes magazine, recently, the State Bank of China has already issued 200 million yuan (China’s official currency) completely digitally, using the Ethereum blockchain network. This technology enables the creation of famous cryptocurrencies, globally recognized currencies like Bitcoin utilize such a system.

In addition, there is also the presence of distributed consensus algorithms such as Proof of Work (PoW) or Proof of Stake (PoS) to validate transactions and reach agreement among participants. This decentralized process ensures that all transactions are verified and approved by the network, preventing fraud. In this context, there are also other contributions of this technology to online payments. One of them is transparency: By using this resource for payment records, the transactions become permanent and cannot be altered anymore. This provides transparency since anyone can access and verify the transactions reliability.

Another issue is the elimination of intermediaries: its decentralization allows transactions to occur without the need for control by banks or payment processors. This reduces costs and eliminates the need to rely on third parties to facilitate transactions, increasing the efficiency and speed of online payments. It even enables the use of smart contracts (self-executing programs that record and enforce digital agreements without the need for intermediation.)

In conclusion, it is possible to assure that blockchain significantly contributes to the security, transparency, and efficiency of online payments, becoming a facilitator for its users in the scope of transactions by eliminating intermediaries, who often charge fees.?

With the continuous growth of e-commerce and the demand for more secure transactions, the adoption of blockchain as a payment solution promises to bring significant benefits to businesses and consumers. However, it is important to reiterate that despite the advantages, the widespread implementation of blockchain in online payments is still under development and requires appropriate infrastructure, regulations, and user acceptance.

Current News: Blockchain as a Service (BaaS)

Today, it is no longer necessary for a company or organization to be solely responsible for the entire blockchain that is crucial for its secure online functioning. Blockchain as a Service (BaaS) is a way for third-party companies, focused on IT, to provide mass access to blockchain functionality. Although the idea is good, there have been significant challenges in recent years in adapting the same technology and codes for each company to deliver the best service.

With cloud-based infrastructures, several companies, such as Bloq or Dragonchain, offer various tools involving blockchain. Among the most sought-after are security solutions for connections between different blockchains, as well as security and rewarding systems for the company's customers.?

A notable example is Dragonchain's recent TIME patent, which rewards and prioritizes clients and blockchains based on their time in the market or possession of a currency.Below, Jonathan Olson talks a little about:

?"Tenure-based protocols elevate entities whose contributions have withstood scrutiny over time. They enable Dragonchain to allocate privileges wisely among diverse participants to minimize the need for sluggish subjective validation and thereby provide a quantum leap in administrative decision speed. The patent office approved our application with unusual speed. Dragonchain continues to expand its status as a primary nexus in blockchain innovation." - Jonathan Olson, Patent Attorney of AEON Law.

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