By now, everyone in financial services has heard of the blockchain—the technology underlying bitcoin. Many of the biggest names in financial services have announced projects to research its potential uses ranging from accelerating the settlement of publicly traded financial instruments, to removing the friction in international trade, or timestamping and authenticating contracts or other identity documents. While the role of bitcoin itself is still in question, there is a growing industry consensus that the blockchain may become to value, what the Web has been to information.
So, what’s so exciting about the blockchain? It’s a ledger with unique properties that make it an excellent choice for a group of independent entities to track asset transfers they trade with each other. (See “Blockchain 101.”) Here are some of the pros:
- It’s a permanent record of asset transfers that is practically impossible to tamper with;
- It’s transparent, meaning publicly auditable, but still provides privacy;
- It guarantees that all entities involved agree on a state or consensus of the ledger at any given time;
- It enforces agreed upon asset transfer rules from the simple (“only the current owner of an asset can transfer it to someone else”) to the very complex, as found in business contracts or regulations. For instance, conditions under which an asset may pay interest or expire.
- It is resilient, as it is running on many computers, each performing the same task of ensuring accuracy.
Of course, because the blockchain is a collection of computers maintaining the same data, it is more expensive than a centralized architecture, and its use is only relevant to valuable data.
A blockchain can be thought of as a secure and trustworthy distributed database program. Security and trustworthiness is achieved by running the same program at once on several different computers, with its data protected by cryptography and kept in precise sync across all computers by a consensus algorithm. It’s called a blockchain because data are updated through transactions organized into blocks chained together, with the longest chain representing the data that all computers use to validate new transactions.
It turns out that retail gift cards, or closed-loop prepaid, is the kind of industry that could benefit tremendously from such a secure public ledger, which can solve two key problems.
- Security. The static codes used to protect gift card assets (balances) must be secured. Entities from merchant to processor to aggregator to reseller to apps to gift buyers and gift receivers, gift trading platforms, etc., all currently share with each other static card codes that are easily compromised. Because these codes never change, this process is equivalent to sending around the secret key of a lockbox hoping no one keeps a copy. The blockchain, on the other hand, doesn’t use shared secrets but instead uses public key cryptography: Assets are sent to the recipient’s public address that only the recipient knows how to unlock with his private key. Effectively, this is like using a different highly secure card number and PIN for each transaction.
- Fragmentation. Gift card APIs critical to providing an enhanced customer experience are functionally limited and fragmented. Unlike credit and debit cards, which require a standard infrastructure among thousands of financial institutions and millions of merchants, a gift card is a singular instrument typically redeemed only with the merchant that issued it. This has created an environment in which a much wider variety of dissimilar gift card APIs coexist. As a result, consumers may only get up-to-date balance, transaction history or real-time notifications for a limited number of cards they transfer to their digital wallets.
|Blockchain Won’t Replace Plastic|
|A physical medium, such as plastic cards, will continue to be an important element of gift giving, but the blockchain will give more flexibility and security to end users. For instance, customers will be able to buy gift card assets in a lump sum and decide later how to split it into different physical cards at home. A recipient of a gift card also will be able to check quickly that the card hasn’t been used yet and transfer its value to his digital wallet, emptying the original card in the process.|
It is difficult to envision all the merchant and consumer benefits that using the blockchain may enable. With the blockchain, merchants have the tools to “print” their own digital currencies, which likely will openly trade on secondary markets. They can use it to reward their best customers and attract new ones, to bolster their cash or practice better yield management. Merchants also can publish offers targeted to customers with particular assets.
For consumers, it means more flexibility, usability and value. Gift cards can be bought or reloaded in any amount, instead of in fixed denominations. Card balances can be reliably checked from any merchant in the world that’s adopted the blockchain. Consumers also can add up all their gift card balances into one balance and one transaction history, easily bought and sold instantly from issuing merchants or on secondary marketplaces with/for any other asset. Virtually any asset can be converted on the fly to any asset a merchant accepts.
Ultimately, intelligent wallets will be able to connect to marketplaces, identify arbitrage opportunities and perform operations in the background, such as complex chains of trade that maximize the consumers’ purchasing power without compromising their privacy or control.
Right now, the blockchain is still in adolescence, transitioning from enfant terrible to mature platform. Many in the industry do not fully understand the concept or its potential (people still argue about what to call it: the Blockchain or “a blockchain” or the “Internet of chains,” etc.). It took many years for the Web to go from research project to the way everyone does business. It will take many years for industry participants to connect into this global, interoperable fiduciary network, but as it catches on, it will transform the gift card marketplace.
Guillaume Lebleu is head of Gyft Block, the blockchain-based gift card platform developed by Gyft, a First Data subsidiary that specializes in mobile gift cards. He can be reached at email@example.com and @giyom.
In Blogs & Viewpoints, prepaid and emerging payment professionals share their perspectives on the industry. Paybefore endeavors to present many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.