By Ralf Gladis, CEO, Computop
The concept of smart contracts has been associated with blockchain and crypto for years, enabling transactions to be automated among disparate and anonymous buyers and sellers without the need of a bank or financial authority.
What has made this straightforward in a blockchain scenario is the distributed ledger, which allows records to be protected through encryption. If a smart contract or a smart payment is stored on a blockchain it will be automatically actioned as and when predetermined conditions are met.
But as demand for fast or instant payments grows worldwide, particularly in B2B transactions, smart contracts outside a blockchain are looking increasingly attractive.
House buying and selling is a good example. Current standard practice in conveyancing gives responsibility to solicitors for holding and transferring the purchasing funds of a property. As the money is processed by a series of third parties, including PSPs, it is also authenticated to ensure it is legal and that it comes from the correct source.
If this exchange were to be carried out using a smart contract on a blockchain, it would require authentication but not identification, anonymity being a crucial element in the popularity of the advanced database mechanism. This would make processing simpler and undoubtedly quicker and remove much of the financial stress of exchange and completion. While there are a limited number of us that would choose to purchase a house as part of a digital and anonymous transaction, some are choosing to trial this route according to recent reports. There are hurdles, in particular with HM Land Registry, however it would seem that even they are consulting on the rules that would allow this innovation to develop.
The importance of trust
This is the crucial point because smart contracts are usually understood to mean immutable agreements triggered by events that require no trust between the parties, since security lies in the cryptographic links that make up the blockchain. In essence a smart contract is nothing more than an automated protocol. Indeed, some commentators have likened a purchase from a vending machine to an early form of smart contract. The customer can see the price of the item they want; they put the correct money in the slot; and trust by doing this that the machine will be triggered to release the item to them.
Looked at in this context, smart contracts and payments don’t have to be part of a blockchain. Instead they could be considered as an automated trigger to make a payment when certain criteria are met. This has the potential to boost service delivery, cut costs, shorten processing time and eliminate the risk of human error.
If we are to introduce smart contracts into standard transactions, however, we will need to find a better balance between convenience, compliance and of course security. We will also need to optimise faster networks and dedicated software that can be used by banks, card networks, acquirers and payments companies, such as Computop, to program prompts for instant payments.
This is not unfeasible in B2B scenarios, where buyers and sellers are often known to each other and already share and store important financial data. The most important element of course will be trust. One use case is within industry buying groups. These are set up amongst independent distributors and suppliers to negotiate improved prices and to act for the benefit of the group, rather than individuals. Trust is already a key part of a group like this where all parties know who they are dealing with.
Shifting authentication
Whereas currently authentication is used to secure the actual payment transaction as it happens, a smart contract could be authenticated in advance based on the secure storage of accurate, verified data on the identity of the payer and the payee. Of course there would need to be a system of confirmations that determines when the payment could be executed, but these would be automated to ensure the transaction was fast and efficient.
Moving smart contracts off the blockchain and into standard usage would require a degree of digitalisation to be in place – which might make it challenging for public sector companies that are not fully digitalised – and would still require a bank to execute the automatic payment. This could be done using banking APIs before the funds are released by a PSP like Computop on behalf of the payer.
Undoubtedly there are regulatory points to consider. However, regulation is in the process of being applied to blockchain and crypto activities also, which may inform how this form of faster payment can work across all mediums. Moving smart contracts into everyday transactions certainly has the potential to transform the speed and efficiency of payments if we can put in place mechanisms that deliver confidence and clarity to businesses.
