How will Blockchain disrupt cross border payment industry?
Cross border payment is a huge revenue generator for banks & earn them over $200 billion. Originating or sending banks use SWIFT messages to send secure payment orders to foreign or receiving bank. Originating bank maintain a nostro account with foreign bank for payments in local currency. Using SWIFT for communication protocol and nostro account for money transfer, settlement has worked effectively for last 40 years. This type of banking is known as Correspondent Banking in the financial world. SWIFT plays an important role as it provides a secure collaborative network to more than 10,000 global banks and sends more than 26 million messages per day.
What are the challenges in Correspondent Banking?
· Lack of Transparency — Both of correspondent banks maintain two different ledgers, at originating bank and foreign bank. Reconciliation and settlement of accounts is done at the end of the day using these different ledgers. This causes lack of transparency and ineffective utilization of bank liquidity.
· Delay in Transaction Processing — In case of transaction discrepancy or dispute, investigation takes long time. It gets complicated if there are more than one intermediary bank and multiple jurisdictions. According to McKinsey research, average time taken for a cross border transaction is 3–5 days.
· High Cost of transactions — Each intermediary banks, SWIFT charge transaction fee for their services which is passed on to the end customer, increasing the total cost of payment transfer.
Can Blockchain solve the problem?
Recently, ANZ and Wells Fargo partnered to build a Distributed Ledger Technology (DLT) based prototype to address known problems of cross border transfers. They used Hyperledger platform to build the blockchain prototype. Their proof of concept concluded that Blockchain offers several benefits in correspondent banking –
· Elimination of manual reconciliation processes
· Acceleration of settlement
· Improved liquidity management.
After the Proof of Concept, banks also called out that SWIFT’s role as an intermediary should be redefined. With the onslaught of Blockchain, SWIFT has also tried to become more customer centric and running a pilot for its new initiative called GPI (Global Payments Innovation). GPI aims to increase speed and transparency of international payments. However, GPI does not use Blockchain technology to address payment industry challenges.
Will there be another Disruption?
While SWIFT aims to remove the inherent inefficiencies; Ripple has partnered with few leading global banks such as Santander, UBS and others. Ripple is using its platform named Interledger to transform the corresponding banking and cross border payments where SWIFT has no role to play. There is no doubt that banks & end customer are going to benefit immensely from Blockchain technology but role of SWIFT is not quite certain. So the big question still remains. After seeing disruption in past decade by Apple, Netflix and others; will SWIFT be disrupted by Blockchain in corresponding banking world? Only time will tell.
How do you see Blockchain’s redefining the Cross border payment banking?