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Author: Santanu Mukherjee |09/24/18

Usage of Blockchain Technology in the Banking Industry

If you are a merchant acquirer or payment service provider (PSP), onboarding merchants is key to your growth, because, more merchants bring in more transactions. However, onboarding questionable merchants that authorize fraudulent transactions results in charges and losses that impact the bottom line. How can you balance the trade-offs, ensuring that you can quickly and seamlessly onboard good merchants while preventing bad merchants from hurting your business?

Merchant onboarding is a risk prone area and the following questions arise if you are looking forward to a proper risk mitigation approach:

  • What is the transaction level of the merchants and their network?
  • What industry and segments do they do business in?
  • What are the transaction amounts and range?
  • What channels are the merchants going to use?
  • What countries are they operating in?
  • What resources are necessary to properly vet and monitor the merchants?

As not all merchants are the same, the level of risk and amount of due diligence checks required, change accordingly. While there are differences in the level of due diligence, there are standards that must be met too like the legal compliance factors such as Anti Money Laundering (AML), Know Your Customer (KYC) and Know Your Customers’ Customer (KYCC). There are standards and rules of the card networks; they demand that there are specific legal contracts with all merchants that control the relationship with the third parties. There are also rules for credit underwriting, as the merchants are in effect offering unsecured loans.

Let us now look at the current state in which the industry is operating today.

When we understand the above existing flow, we know that we will require a model which is non-fraudulent, involving every party onboarded. This state can only be possible if we think of a solution which is well integrated and here is where the disruptive technology like blockchain comes and rules. Let us understand this in a simpler way.

Business Model Transparency:

Business model transparency is the key when submitting an application. To begin with clear communication between all parties, all relevant information should be provided up-front. In case a merchant website is under construction or in beta stage, it is required to provide the acquirer with a business plan or access to the beta website.

Merchant Risk Procedures and Policies:

Make sure to highlight internal AML and fraud policies together with other risk mitigating policies when applying. When a merchant institutes appropriate policies and procedures to mitigate transaction risk, it can score points with the acquirer, which could in turn lead to lower collateral requirements.

Cardholder and Affiliate KYC Checks:

Existing cardholder and KYC check procedures should be highlighted at the onboarding stage. Sound KYC checks on both cardholders and affiliates restrict fraudulent transactions.

Service Fulfillment Period:

Merchants with more than one fulfillment period arising from different services offered should provide a split in expected volumes by fulfillment period. For example, in the gambling space, volumes by percentages are split between Casino, Poker, Lottery and their respective fulfillment periods.

Let us map the problems of merchants and acquirer banks and how those will get addressed using blockchain solution.

Let us now understand how blockchain will works in this scenario:

  • As all banks are on same channel, they will be sharing the approval of documents shared to any one of them, keeping some information private (keeping private channel – peer – ledger – chain code, to update their own info which is not shared among any other organization).
  • Also, the credit bureau authorities may or may not be on the same network and same channel. They can be connected though they are on different networks. Dispute management organization, payment organization and all others can use the same public channel keeping their info private at the same point of time.
  • Risk of high valued merchant on-boarding can help to share info between all on-boarded acquirer bank consortium (concept of sharing the risk among banks). High security of data storing is achieved, though its default offering is from blockchain.

The blockchain ‘Standard Trust Framework’ provides the following features:

  • Individual identity privacy for banks and merchants, creating a wallet of private or public key identifiers depending on a private ledger. From this wallet, merchant can create public keys to share with the other banks. Banks will pass on to this framework to their own public key and merchant’s public key and get the access of the documents.
  • Hence, merchants will be enabled with the document sharing discretion
  • The documents will be verified by credit bureau organizations and banks can share their own review comments on the documents of the merchant.
  • Dispute management system will also use the same trust framework for raising any dispute.
  • Payment organizations will also use the similar keys to accept the payments.

Added here, the total process complexity will also be reduced. The red box area process complexity will also be removed using blockchain technology:

To conclude, in today’s global economy, the information shared across various entities and industries have to be 100% accurate, secure and transparent. This requires a robust, secure data transmission through a defect free network. In order to meet the customer expectation and for efficient financial management, banks are looking forward to a solution where:

  • Data can be transmitted within a secure network.
  • Data should not be manipulated at any time during transaction as well as after the transaction.
  • Transaction information should reach the correct beneficiary.
  • Faster sharing of information across all related parties.
  • Near real time onboarding of intermediaries.

The answer to all the above is effective usage of blockchain technology which will steal the limelight in coming years. Read here to know more about Mindtree’s banking services, financial services and capital market services and solutions.

Do you agree that blockchain technology is a much more effective solution to the banking sector? Share your thoughts with us at


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