Blockchain Technology – The ultimate solution to payment disputes for Africa’s financial services industry

Despite the progress banks have made in deploying digital solutions, the problem remains that there is a significant gap between the efficiency of legacy systems used by traditional banks and the efficiency of new innovative systems that are trying to disrupt the industry. Many legacy banking systems have been in operation for over 30 years, with trillions passing daily. With so much money dependent on these systems, changing them is understandably risky and complex. Any change risks disrupting critical operations as well as introducing defects and potential vulnerabilities, so many banks have taken a risk-averse approach. These older structures are now preventing the introduction of newer and faster technologies in these markets.

Older systems can cause problems for both the banks and their customers. These issues generally fall under two factors: maintainability and flexibility. The cost of maintaining older systems will increase depending on how long they have been without being updated. This is because the systems were developed with technologies that are no longer well supported and do not have large amounts of talent to handle them. This means that the costs of keeping the systems in operation increase, starving further new investment in more modern systems.

Second, since these systems are difficult to change, it becomes more difficult for them to keep up with industry changes and technological advances. Such inflexibility can seriously hamper the customer experience. For example, customers increasingly expect to be able to create an account on the spot without having to wait days or weeks for final approval. But by and large, banks still find this a challenge to offer, especially as many still rely on the paper trails and data found on their legacy systems.

Specifically, one of the main problems with legacy banking today is payment disputes, which occur when a cardholder discovers an invalid transaction on their account and contacts their card-issuing bank to demand their money be returned. Dispute resolution processes were introduced by card networks to protect cardholders from losses associated with fraudulent activities and payment errors. Disputes can arise for a number of reasons, including:

Why do payment disputes still arise?

In a comprehensive pan-African survey on reasons for maintaining banking relationships, 19.7% of respondents chose excellent customer service as the reason. It was second only to financial stability, which 21.4% had as a choice. In its analysis, the survey explained that “a difference of 1.7% points between the top 2 reasons for maintaining a banking relationship from the customer’s perspective indicates the value attached to these choices”. So much of what goes into earning bank customer loyalty comes down to one word: trust. No scenario tests this trust between a bank and its customer better than when a dispute arises.

Transaction disputes arise because existing traditional systems today only handle errors that occur with the bank and the payment processor. When a transaction occurs and there is an error at these points, it can be detected and corrected. However, unstable network conditions can affect the flow of information from a bank back to the terminal while a transaction is being carried out. When the terminal does not receive a response within a certain time period, it assumes that the transaction failed. We then have a discrepancy where the bank assumes one thing, and the terminal assumes another. Comparing, reconciling and harmonizing this information can sometimes take days or weeks because it is done manually. This result has a double impact on both parties involved.

For customers, disputes can be a source of frustration and inconvenience, leading to skepticism about payment channels and consequently limiting the use of financial services. The second impact is related to fraud where customers are sometimes reimbursed even when they submit false claims, resulting in financial loss for terminal owners. This affects transaction costs as these losses are factored into the fees customers are charged for products and services. In the first place, disputes are expensive for banks, retailers and individuals, making the need for a solution especially more urgent.

Globally, customers continue to move away from cash and checks to digital payments. Developing economies are not left out of this trend. The Central Bank of Nigeria has continued to make moves to further entrench its cashless policy, which it introduced into the Nigerian banking system in 2012 with the aim of reducing physical cash in an effort to cut cash handling expenses for banks, and get more of the money in circulation into the formal financial system, as well as tracking money laundering activities. These trends have significantly increased the volume of digital payment transactions.

Overall, these developments are positive for banks and card issuers, but as card transactions grow, so do the number of questionable transactions (as well as the incidence of fraud), putting pressure on dispute processes that are often already overstretched and leading to increased operational costs potentially hundreds of millions or billions of naira per year. If banks treat disputes simply as problems to be minimized, they may miss the best: the opportunity to strengthen relationships with customers and increase service adoption.

A case study on using Blockchain to eliminate payment disputes

Since Bitcoin entered as a cryptocurrency offering an alternative to traditional finance, blockchain technology has disrupted the financial industry through its unique capabilities and applications. The revolutionary technology is set to improve all segments of the traditional financial industry, including retail banking, capital markets and asset management.

In particular, blockchain technology has gradually advanced into the world of payments and traditional banking, driving efficiency and simplicity by establishing new financial instruments, processes and services. This technology enables the use of smart contracts and digital tokens to facilitate real-time settlement and currency conversion activities required for instant cross-border payments.

Blockchain and distributed ledger technologies (DLT) promise to solve major problems affecting the financial industry, including cyber theft, fraud and reliability. One of the most immediate problems that blockchain technology can help solve is the problem of failed payment transactions and associated payment disputes plaguing the financial services industry.

In Africa, Blockchain is still relatively early in its development, but it has enormous potential for the continent’s economy, raw materials and connectivity. A survey of 69 active projects or completed pilots using blockchain technology reveals that 57% are headquartered in Africa, with the highest number of projects headquartered in Kenya, South Africa and Nigeria.

In November 2022, Zone launched the continent’s first regulated blockchain network for payment processing, facilitating local payments in fiat with plans to support cross-border payments and enable the acceptance of digital currencies on traditional payment channels.

For payment disputes and settlements, Zone’s blockchain network, as a case study, allows transactions to be settled instantly, directly and keeps track of them better than existing protocols or systems. This provides a more efficient alternative for transaction scenarios such as a simple store or cross-border payment where the transaction must pass through a complex system of intermediaries, from correspondent banks to custodian services, before reaching any destination. Needless to say, it is this process that sometimes results in errors and failed transactions.

The inefficiency that leads to these failed transactions is caused by the lack of stakeholder visibility in completing a transaction. Blockchain technology, which acts as a decentralized “ledger” of transactions, disrupts this state of affairs. Instead of reconciling each financial institution’s ledger as it currently works with legacy systems, Zone’s blockchain network keeps a clear record of all transactions and records – both information about the status of the transaction on the originating payment device and information about the transaction’s impact on the payer’s account are retained: for example a merchant and an issuing bank can both see the final status of a transaction immediately after it is executed instead of waiting days and sometimes weeks, especially for disputed transactions.

Although Zone’s blockchain network provides transparent access to transaction information, this access is subject to strict permission requirements and limited to counterparties in a transaction who are participants in the network. Zone eliminates the costs of maintaining a network of intermediaries while bypassing unnecessary points of failure associated with legacy payment systems.

In conclusion, the growth of digital banking and the subsequent increase in payment disputes has put a significant strain on traditional banking systems in Africa. The limitations of these legacy systems have led to a lack of transparency, increased costs and a poor customer experience. Blockchain technology, with its decentralized nature and transparent ledger capabilities, offers a viable solution to these challenges.

Zone’s regulated blockchain network, as a pioneering example, demonstrates how blockchain can effectively eliminate payment disputes by providing a more efficient, transparent and direct transaction settlement process. With its ability to streamline transactions, reduce operating costs and remove dependency on multiple intermediaries, Zone is positioned to lay the foundation for the next generation of payment solutions in Africa.

As the use of blockchain technology in the financial industry continues to grow, it will not only help resolve payment disputes, but also contribute to the overall modernization and efficiency of the sector in Africa. In turn, this will lead to increased trust between banks and their customers, ultimately promoting greater financial inclusion and economic growth across the continent.