Digital ledger software like blockchain has captured the interest and imagination of many. From researchers to everyone interested in the next big step in technology.
It is thus safe to say that blockchain has the whole globe buzzing. And, every sector is moving to be the first to use this technology and reshape their sector.
Transactions and trust
You might know or heard someone talk about it. Or, you may know nothing. Blockchain is a complicated system to grasp. But the idea is simple.
Through every transaction the most important element is trust. You see the item you want to buy, bring it to the cashier, they tell you the price, you pay and get your brand new item. A simple transaction filled with trust. Because? You were physically part of it and you know it happened. The cashier also knows it happened as he too was there and received the money in return. A trustworthy transaction.
Now, bring this transaction online. You see something you want online, you buy it. Then what? You don’t have your brand new item in your hand. In fact, you can’t know where it is.
On the other side, how does the cashier know if you are who you say you are. Or, if the money was actually sent? Without a doubt, online purchases are filled with uncertainties. Yet that is why we have a third party actor. A middleman acting as the mediator to ensure safe and secure transactions online. But this middleman comes at a price.
A typical online transaction using a card goes through six intermediaries. Before the payment reaches the seller’s bank account. The payment request from the merchant goes through an aggregator, like Authorize.net. Who sends a request to the card network like Visa. Visa initiates a payment request from the buyer’s bank which issued the card. Another intermediary is responsible to settle the transfer from the seller’s bank and the buyer’s bank. The actual transfer of money can take several days. Each one of these intermediaries take a cut of the transaction amount.
The third party will charge for their services. And, will take something of the total price – a transaction cost. Meaning every time you buy something online, a book, stocks or airfare, you will also pay the mediator.
So, why not have a system that is as trustworthy as a real-life transaction? Like the one where you are in the store, but online?
Bring in Blockchain
The appeal of digital ledger software is that it takes out the third party. Thus removes the transaction cost. Through its participants, a blockchain system can confirm all transactions within the network. The participants being a connection point for all the networks that are part of the system. And, have an identical copy of the entire ledger.
In the online shopper scenario, the payment transaction initiated by the buyer will result in a direct debit to the buyer’s account. Followed by a direct credit to the sellers account in the digital ledger. There are no intermediaries.
Each transaction will be processed by the participants. And, as soon as the majority of participants confirm the transaction, it is added to the digital ledger for good. This creates a system that is hard to cheat as everything is recorded by everybody.
A participant cannot sell a product twice. As the system will recognize the earlier transaction. Likewise, the same value cannot be sent twice, as it too is recorded. Thus creating a safe and transparent system.
Furthermore, removing the third party allows for transactions to be more efficient. Many settlements can take days to confirm which creates costs. Taking away the intermediate that has to make phone calls, negotiate, check credit etc., a distributed electronic ledger software will save both time and money.
Most commonly the blockchain system has been associated with money transactions. But, another favorable attribute to this system is that it can work for all sorts of “transactions”. Whether it is money, identity records, real estate ownership, car leasing or company licenses.
Though other sectors are moving to put in place blockchain, it is the banking sector that has a lot to enjoy this system. The blockchain system has already been tried and succeeded when it comes to money transactions. Bitcoin, the most used, is a form of digital currency based on blockchain technology.
Computer manufacturers Dell and overstock.com have about 20 percent of the payments through Bitcoin. So what does this mean for the banking sector in Uganda?
In Uganda, the telecom (telco) have given the banking sector a run for their money. With mobile payment systems. More than half the population has access to a mobile phone. Thus money transactions can easily happen without having a bank account. Therefore, what might have been a threat to the banking sector is actually a door of opportunity.
Worldwide the banking sector has been at a standstill. While new innovations and platforms are created daily thanks to technology. Now, the blockchain system has the whole sector buzzing. Major banks, such as JP Morgan, Goldman Sachs, and Barclays, are taking the much-needed initiative. Exploring how Blockchain can be used to better their systems and better compete in a mobile world.
A blockchain system offers a great opportunity to save time in all parts of a transaction. Something that would greatly benefit the banks in Uganda.
Today, if someone wanted to move money from their bank account to their mobile money account, there are three different systems that must record this transaction. First, the bank has to update its ledger.
To access the telco mobile money system about this transaction, the bank has to go through an intermediary “aggregator”. Who has to record this transaction in their ledger as well. The intermediary will then request for this transaction to be recorded into the telco’s mobile money ledger system.
One transaction results in three different ledgers affected. Which leads to a long stray of delays and security vulnerabilities. As the transaction is propagated between the different entities. And, of course, accounting bottlenecks resulting from incomplete transactions at any one stage of the transaction. The latter can cause settlement and reconciliation to be an operational pain.
Today it’s common for banks, Telco’s, and other institutions to maintain suspense accounts. These hold billions of unsettled funds. This happens when the bank initiates a payment to a recipient e.g. Umeme on behalf of its customer electronically. If the recipient does not confirm receipt of this payment to the banking platform for whatever reason, the transaction will be considered incomplete. Therefore will be left in a suspense mode until settlement and reconciliation are complete.
This is very common since systems lose connectivity, servers malfunction and so forth. Very many times the systems banks are using are not built to manage these potential outcomes.
With a blockchain system, the transaction is recorded once and cannot be changed – ever. Any changes get recorded as blocks of new transactions. All subscribing entities to the platform are informed – in real time of the transaction.
The blockchain ledger is maintained by a network of computers – which all have a copy of all transactions. These computers will primarily be connected to each other over the internet. This means that a request to add a transaction must be accepted by all other participating computers. Which makes it hard to manipulate by one single person.
In practice, this means that a couple of financial institutions would be nominated to host the different nodes belonging to this network of computers and the rest i.e. utility companies like Umeme, National Water, and Sewerage Cooperation, small and large businesses, NGOs, SACCOS, Microfinance institutions, etc. will just be users.
Participants can move money from a bank account to a mobile money account and vice-versa. Regardless of telco network or bank. This gives mobile money users access to banks accounts and vice-versa. Which gives banks access to the millions of “unbanked” consumers that banks have been “drooling” about.
The telcos have a lot to gain as well. Some of their mobile money customers collect part of their revenues through the mobile money system. But, they have to pay suppliers with cheques or electronic transfers. Other customers, especially individuals, might want to enjoy the benefits that mobile money brings. Like a large agent network distributed across most parts of the country. To these customers, these agents are like ATMs. The customer moves their money from their bank account to their mobile money account and all of a sudden there is an endless supply of agents where cash can be withdrawn.
Figure 1: Using distributed digital ledgers like blockchain, banks and mobile network operators can all be participants in one distributed digital ledger that is transparent to all. This allows several possibilities to like instant transfer of funds from one bank to another or from one bank to a mobile money account
For the banking sector in Uganda changing from a paper based system to a fully digital one can seem as a scary undertaking. However, once the concerns are addressed there is no reason why Uganda can’t be a first mover. For better and more efficient banking systems.
Security is a major factor when talking about one platform that will store all transaction information between parties. But, a blockchain system has a major security factor in its favour as there is no human element part of this system. Each transaction will be processed and confirmed through trusted connection points (nodes) with no human interference necessary. This means that no one actor can exploit vulnerable information and manipulate the system.
Besides removing the human element from the process, there will be more transparency within the banking sector. Though the system is based on an open source platform, it can be tailored for each specific bank. Allowing them to protect not only their client’s private information but also their own. Without physically having to do it. No files will be hidden or lost yet they are still safe and private.
The future of Banking
Blockchain and digital ledger systems like it will change every sector that has transactions. Whether it is banking, finance, real-estate, retail or insurance. In fact, it has already started. Even so, there is still a way to go before such a system is fully operational and can be implemented into each sector.
The important thing is that there is no reason the banking sector in Uganda can’t join the efforts. To revolutionize its banking systems. Especially with qualified software companies easily available locally, and ready to be their partner in a brave new world of global banking technologies.
Timothy Musoke is Co-founder and Head of Consulting and Technology at Laboremus Uganda. This post first appeared on Laboremus‘ blog.