The Next Generation of Payment Processing, Part I: Real-Time Split Payments
Tags: Blockchain, Distributed Ledgers, Payments, Payment Systems, Fintech

As we have all witnessed, the digitization of payments was a huge jump towards the goal of achieving an easy, convenient — not to mention fast, and secure — payment method. Some would argue that we have reached our destination. However, we are far from stopping when it comes to development.

In 2018 transactions conducted via eWallets alone were estimated to a total of 41.8 billion globally. And given the fact that digital payment methods have seen massive developments in the span of just four to five years, it comes as no surprise that we are about to experience even more changes in the foreseeable future.

Let’s come to grips with split payments

The EU is considering them for VAT fraud prevention, major payment processors are busily implementing them in their solution, but what does a split payment mean for you? No company gets to keep all their incoming cash flows — as lovely as that might be — there’s always liabilities towards tax authorities, suppliers, service providers, creditors, and the like.

Split payment is a way to split each incoming cash flow so that everyone owed is paid appropriately and instantly. Done right, this simplifies accounting, increases liquidity, and reduces system-wide financial latency. The very nature of profit-making businesses means that any incoming funds must be divided up among multiple recipients — split payments merely automate the process.

The very nature of profit-making businesses means that any incoming funds must be divided up among multiple recipients — split payments merely automate the process.

Given their benefits, why aren’t split payments universal?

Simple — before ubiquitous electronic payment processing, the accounting was not precise enough, and the communication was not swift enough for split payments to be possible. It’s this environment that created modern accounting methods and their delays. Today, however, with communication latencies between any two points on Earth measured in milliseconds — why wait 45 days?

End users have been asking themselves the same question and so there’s a growing demand for split payment solutions which the big payment processors are attempting to meet. Up-and-comers like Zift and Unipay are trialing their solutions. At the same time, the big players: Stripe, PayPal, and Amazon Pay differ in their approaches, some have offered split payments almost since inception, like Stripe, and some have moved in only recently like PayPal, while yet others like Amazon Pay offer no support for split payments as of yet.

What unites these solutions is limitations, specifically those of transparency, trust, speed, and cost.

The weakness of modern solutions

What unites these solutions are limitations, specifically those of transparency, trust, speed, and cost. All the weaknesses of routine transactions — the time they take to clear, the transaction fees applied to each transaction — are the transaction of split payments implemented by the big providers except compounded.

For each transaction that makes up a complex split, individual delays and costs apply, which strongly discourages the use of complex split payment structures even where they are possible. Reports considering their use praise their great power but flounder on just this issue of compounding costs and delays.

Furthermore, the system as devised has no transparency and requires that full trust be placed by all parties in the payment processor. There is no way for the exact terms of the split to be independently verified by any participants and any third party, and no way to prove that the money is being divided as it ought to be.

These are not the problems of financial software as implemented by PayPal or Stripe, these are the problems of financial software which does not leverage the power of distributed ledger technologies.

Blockchain as saviour?

The reason solutions produced by such prominent companies suffer from these flaws is fundamentally infrastructural. These are not the problems of financial software as implemented by PayPal or Stripe, these are the problems of financial software which does not leverage the power of distributed ledger technologies.

…this is not one of those articles and no ‘coin’ of any description is being sold.

It’s customary to, at this point, gesture wildly at the word ‘blockchain’ as if it is a cure for all ills, but this is not one of those articles and no ‘coin’ of any description is being sold. Implementing blockchain or to use the more general and more accurate term, distributed ledger technologies is a significant challenge and one suitable to a narrow range of problems — it’s just that split payments are one of such problems.

Delays and cost are tackled by leveraging the ability of distributed ledger technologies to do complex multiparty settlements very, very quickly.

Why is a distributed ledger solution the right fit?

The problem of transparency and trust is solved instantly by dividing the duties of computing splits and verifying the amounts among all interested parties. It’s impossible for anything to happen without universal consent and, furthermore, consent which is immutably registered in a way which permits easy audit.

Delays and cost are tackled by leveraging the ability of distributed ledger technologies to do complex multiparty settlements very, very quickly. These are not, generally, the swiftest of technologies, but this sort of operation is precisely what they are best at. This means that keeping track of who owes what internally and relying on banks only for final accounting is possible to do in a secure manner.

What comes next?

This is only the first in a series of articles. In the next, we’ll tackle information-rich payments, a considerable value-add which can be implemented with vastly less difficulty using the same fundamental infrastructure as split payments. This lets the development effort pay for itself twice-over.

The final article tackles the burning question we are now left with — it’s all fine and good to say that the problem is solved using distributed ledger technologies, but that still doesn’t explain how. The capstone article will explain why to avoid cryptocurrency, why private solutions are better than public ones, and why abandoning blockchain itself may be the best possible strategy.