Jason Simon explains how FinTech is helping revolutionize payment processing

The term FinTech has been defined by the Financial Stability Board as the process of innovation in the financial sector led by technology. As a result, new processes, applications, or business models are being developed that change the production or supply of financial services. New technology is modifying areas of established entities and new purely technological financial services companies are appearing. Jason Simon, an expert in the area of FinTech and eCommerce, explains how this method helps the payment process to be revolutionized.

Means of payment are one of the financial branches most affected. New technologies facilitate payments, reduce their cost and make it possible to cover segments of the population that previously had difficulty accessing them because they were far from traditional providers (mainly banks). “The growing demand for digital payment services stimulates the entry of technology companies that, through mobile networks, communication signals, and computing methods, become part of payment systems. Payment systems are seen as a market infrastructure (MI) that underpins the provision of many financial services,” says Simon.

Market infrastructures are hubs that facilitate transactions between economic agents, enabling multilateral relations between them. Their value lies precisely in their interconnection capacity, in their scope. But therein also lies their systemic importance, since a failure in one entity could spread to others, interrupting a multitude of financial exchange processes with serious consequences for the real economy. As mentioned above, payments are currently in the spotlight due to the wave of innovation they are experiencing.

Cash is being replaced by the use of cell phones for everyday payments, even for small transactions. To some extent, the innovation is simply in the way payments are initiated, in the instructions, but the current infrastructure is still being used to transfer money. However, the cell phone has facilitated an interesting innovation, which is the development of “direct debit” payment services, in which instant credits are made to the counterparty’s account, be it a private individual or the owner of a merchant.

Another important innovation is the use of cloud computing and storage services. On the one hand, financial institutions can outsource data processing and archiving services to technology providers that use digital cloud technology. On the other hand, the cloud facilitates the creation of digital portfolios that allow purchases in online markets and their access via cell phones. It is estimated that, currently, more than 15% of people use them. These digital wallets can be the embryo of new means of payment or currencies.

“Some online commerce companies have integrated payment mechanisms into their platforms. Their use is linked to the platform, but if the platform achieves considerable expansion or agreements with other companies, a virtual money circulation could be created, albeit specific and limited, parallel to legal money,” Simon explains.

In a world where online transactions are steadily increasing and extending to non-durable goods of daily consumption, the use of digital currencies linked to goods distribution networks looks like it will not be a fad. These currencies are different from cryptocurrencies or cryptotokens, whose expansion seems to require guarantee mechanisms or financial asset backing (stablecoins), and their evolution will bring them closer to being considered as a digital-financial asset rather than a means of payment.

However, what will take hold is the technology on which cryptocurrencies are based: the blockchain and distributed ledger technology (DLT). The blockchain is a way of processing bilateral transactions, the integrity of which is ensured by cryptography; transactions are aggregated chronologically in blocks, which are validated by one of the participants in the network (through proof of work) and, once validated and the register updated, form a blockchain. Distributed records, on the other hand, are a single but decentralized database, with several identical copies distributed among the participants, which is updated synchronously by consensus.

Blockchain or DLT networks can be public and private. In the former, anyone can participate, anonymity is guaranteed and there is greater decentralization. On the downside, a consensus is slower. In the latter, access implies meeting certain requirements, anonymity is less, but they are more efficient because consensus is faster.

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