Source: Getty Image

Source: Getty Image

Article from NASDAQ 

How Blockchain Is Being Used To Solve Cross-Border Payments Problems

It’s been nine years since Bitcoin came into existence, enabling fast, low-cost and transparent peer-to-peer transactions. Over these years, Bitcoin has seen both—glory and gloom. Today, it lives on and so does its underlying technology—blockchain—which has captivated various entities, especially financial institutions and banks. With the hope that the distinct advantages of Bitcoin can be replicated by imbibing the blockchain technology into their ecosystems, many monetary institutions have been exploring it.

Here’s a look at some of the projects and initiatives (focusing on 2017) related to the use of blockchain technology for cross-border payments.

Cross-Border Payments

Over the last few decades, there has been a steady rise in global businesses and international trade along with diaspora contributing to an increase in intricate cross-border payments. Cross-border payments account for about 40% of global payments transactional revenues with payment flows of more than $135 trillion during 2016 (as per McKinsey).

However, the current protocol suffers certain shortcomings, such as non-fixation of exchange rate until arrival of funds. Further, involvement of multiple financial institutions creates a complex web of procedures resulting in delays and inaccuracy in addition to accompanying fees and charges at each stage of transaction.

One crucial limitation of the system is its inability to cater to the unbanked population (38% according to the World Bank data) as well as those residing in regions where Corresponding Banking Relations (CBRs) have been withdrawn (such as Caribbean region). A report by IMF analyses such exodus, it highlights the fact that, “the cost of services has increased substantially, some services have been cut back, and some sectors have experienced reduced access.”

Blockchain Solutions

To overcome the current structural weaknesses, financial institutions and banks are adopting blockchain to offer near instant cross-border payments at lower costs, higher security and more reliability. With blockchain, payments are tamper-proof and accurate, thereby trimming costs associated with investigation of cases and litigation.

The year 2017 started with SWIFT launching a Proof of Concept (PoC) to help banks that are challenged with monitoring and managing their international nostro accounts—crucial for streamlined cross-border payments. This is a part of SWIFT’s global payments innovation initiative that is looking to set new standards in cross-border payments.

SWIFT, short for Society for Worldwide Interbank Financial Telecommunications, can be considered a synonym for international payments. To test and validate the PoC’s blockchain application, 22 additional banks joined the initiative in July 2017.

Meanwhile J.P. Morgan (JPM) launched blockchain-based Interbank Information Network (IIN) in collaboration with the Royal Bank of Canada and Australia and New Zealand Banking Group Limited. IIN leverages the distributed ledger technology, or simply blockchain, to minimize friction in the global payments structure by ensuing faster payments in fewer steps but more securely. IIN is powered by Quorum—an enterprise-focused version of Ethereum developed by JP Morgan. Approximately $5 trillion worth of business payments are processed every day by JP Morgan’s Treasury Services for its clients across more than 100 countries.

IBM (IBM), which recently ranked as the number one blockchain technology company, announced a blockchain banking solution designed to reduce the settlement time and cost of cross-border payments, customized for businesses and consumers. IBM’s blockchain solution is in collaboration with and KlickEx Group; it is already processing live transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom. 

The most recent announcement comes from MasterCard (MA), a prominent name in the payments industry, has opened access to its blockchain technology via its API for partner banks and merchants. MasterCard will begin to implement the technology for business-to-business (B2B) space to address challenges of speed, transparency and costs in cross-border payments. MasterCard has been exploring the blockchain technology for some time now and has filed for over 35 patents. It is a member of the Ethereum Enterprise Alliance (EEA) and is an investor in the Digital Currency Group.

Additionally, consortiums such as Ripple offer its customers the use of digital asset XRP to process payments anywhere in the world instantly, reliably and at lower costs. RippleNet, its decentralized global network of banks and payment, boasts of more than 100 financial institution partners.

Final Word

A cost-efficient, faster and secure cross-border payments system will boost international business, while ensuring that migrants aren’t charged exorbitant rates for sending money home and more people are included into the present financial system. The blockchain technology can make it all a reality.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.