Voice of the Industry

How blockchain might change cross-border payments

Wednesday 20 June 2018 08:39 CET | Voice of the industry

Shirish Wadivkar from Standard Chartered agrees that using blockchain for cross-border payments has received a “well-deserved” widespread public attention. Let’s see why.

In the past, the correspondent banking network was the primary channel to settle cross-border payments. In that way, a financial institution acted on behalf of another due to the lack of geographical presence of the latter. Given the very nature of the cross-border payments, at times, they go over multiple intermediaries before reaching the end beneficiary.

The perceived ease of any trade and commerce depends on how reliable and well-timed payments are. This explains the corporate clients’ demands for improving the certainty and timelines of transactions. As providers of payment solutions to corporates, financial institutions have the responsibility of making cross-border payments more efficient and effective.

The traditional correspondent banks have come under intense scrutiny from regulators and under competitive pressure from the upcoming fintechs. Banks themselves have been under cost-efficient pressures and have had their hands tied on major investments to overhaul decades of old payment infrastructures.

Given the need for immediate remediation from banks and regulators, the increasing popularity of cryptocurrencies and the promise of low-cost, quick and transparent peer-to-peer transactions, the using of blockchain – or more accurately Distributed Ledger Technology (DLT) – for cross-border payments has received a “well-deserved” widespread public attention. There are obvious benefits from DLT-based cross-border payment solutions, although they do pose challenges before being considered for mass adoption.

Benefits of DLT-based cross-border payments

1. Real-time payments

As the transacting parties are connected to the same DLT network, the transactions on a distributed ledger (DLT) will be settled instantaneously. With real-time payments, corporates can maximise the use of cash until the last possible due date while preventing the risk of late payment defaults.

2. Visibility and traceability

DLT enables end-to-end delivery confirmation, which is shared with the originator. Think of it as a courier parcel, which both the sender and the receiver can track until the delivery has been made.

3. Full transparency

Payment charges and FX rates used across the payment journey are made visible to customers prior to initiating the payment. Improved transparency means that corporates improve the efficiency of supplier disputes and reconciliation issues when payments not received in full are prevented.

4. Certainty

Cross-border payments are 100% pre-validated and hence guaranteed. DLT technology provides certainty regarding the location and the amount of money received by the beneficiary. If a corporate wants USD 100 to reach its end beneficiary/supplier, it can ensure that the right amount of money is sent out after taking any fees or FX charges into consideration.

5. Rich information

Distributed Ledger Technology aims to drive industry standards where financial institutions are compelled to transfer unaltered messages. This facilitates the reconciliation of payments, improves the working capital allocations and reduces the errors/ investigative times spent by back offices.

Challenges to gain market adoption

1. Interoperability & Scalability

The benefits of any technology are strong if it offers a connection to other similar technologies and gains mass adoption. Most financial institutions have an innovative agenda. That is why we see them building their own DLT solutions according to their specific needs. R3 Corda, RippleNet and Hyperledger are examples of consortiums working on the cross-border payments problem. However, these fragmented approaches to the same problem tend to create proprietary solutions.

2. Awareness and understanding

The main challenge associated with DLT is the lack of understanding in the market of the underlying technology. This is hampering a widespread investment or even the mere exploration of the idea.

3. Cost and efficiency

Distributed ledgers rely on cryptographic encryptions to provide security and to facilitate consensus over the network. In order to contribute to the chain, a user/miner must run complex algorithms. This requires an exorbitant amount of computing energy. Thus, given the integration costs, using DLT may not be cheaper than the total cost of ownership of traditional platforms.

4. Liquidity issues when using fiat currency over DLT

Currently, cross-border payments using fiat currencies over DLT have challenges to meet the inter-bank liquidity or payment funding requirements. One of the possible solutions is using pre-funding. This will however drive more bi-lateral banking relationships and will affect the scalability of such solutions.

Some DLT enthusiasts believe that cryptocurrencies may be used to tackle the fiat currency problem. However, this approach brings about another set of challenges, given the high degree of price volatility of the cryptocurrency asset and its current lack of transparency in ownership and control of usage. Hence, the overall costs on the transaction may be un-managed and unpredictable.

Though DLT adoption in cross-border payments has tremendous merit, institutions have to collaborate to create common standards and look at solutions jointly to be able to deliver any relevant scale using DLT in tomorrow’s world of payments.

About Shirish Wadivkar

For the last nine years, Shirish, the Global Head of Correspondent Banking Products, has been delivering value-added payment & collection propositions across a wide spectrum of institutional and individual clients of the bank. Shirish has 18 years of experience as a multi-region, multi-product professional. He has been working with Standard Chartered for over 14 years and has activated in emerging markets of India, Middle East, Sub-Saharan Africa and Asia. He is currently focusing on delivering commercial applications of distributed ledger technology.

About Standard Chartered

A global leader in correspondent banking with a unique network across Asia, Africa and the Middle East, Standard Chartered is focused on driving innovative initiatives in cross-border payments through our active involvement in DLT solutions including SWIFTgpi and RippleNet.

This editorial was first published in our B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2018. The Guide gathers leading solution providers, consultants, associations, banks and corporates that share their latest insights, technologies and best practices in B2B payments, real-time fraud prevention, instant payments business opportunities, and supply chain sustainability.

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Keywords: Shirish Wadivkar, Standard Chartered, blockchain, cross border payments, DLT, crypto, SWIFTgpi, RippleNet
Countries: World