How Blockchain is Changing Cross-Border Payments
The global payments industry is undergoing a fundamental change, and it’s all thanks to bitcoin’s distributed ledger, the blockchain.
Since entering the market in 2009, bitcoin has enabled low-cost and transparent peer-to-peer transactions. Today it lives on - amid its highs and lows - as does the blockchain, which is gaining the attention of various industries who are realising the benefits it can provide. Arguably, it’s the global banking system that could benefit from the blockchain whether that’s through settlements or cross-border payments.
According to a McKinsey & Company 2016 report, in 2020, the global payments industry will generate an estimated $2.2 trillion in revenue, over $400 billion more than 2015’s $1.8 trillion figure. Looking ahead, digital innovation is expected to continue being a primary disruptive element in the payments arena. However, in order for banks to remain competitive in this changing landscape they will need to drop their back-office costs for international payments by 90-95 percent, the report states. At present, for a bank to execute a cross-border payment via legacy correspondent banking agreements, the average cost is between $25 to $30, 10 times more than for a domestic automated clearing house (ACH) payment, the report adds.
Traditional payments companies such as Transferwise, Moneygram and Worldpay are also being used to transfer money abroad. Granted the fees involved to send money overseas via these platforms are considered lower than banks; however, the speed at which the transfers take is still relatively slow: one to six business days.
With remittance payments to developing countries amounting to $429 billion in 2016, according to figures from the World Bank, how cost-effective and how quickly the money is transferred are becoming important factors.
As a result, a number of industry players are already exploring the possibility of using a distributed ledger to cut down on cross-border costs and help speed up transactions. With consumers requiring faster payments and improved customer service around international transfers, the blockchain has the potential to change the global payments market and end the expensive system we are currently forced to use.
One of the main players in the blockchain sphere that is working at reshaping the banking industry is blockchain firm Ripple. The San Francisco-based company is a real-time gross settlement system (RTGS), currency exchange and remittance network. Powered by the blockchain it provides global financial settlement solutions, enabling banks to transact directly with each other and lower the costs of settlements. Ripple’s XRP token is currently the third most valuable digital currency on the market, valued at just under $8 billion. Consumers can use ripple’s token to process payments anywhere in the world quickly and at low costs.
Ripple is continually expanding its services in the banking sector. For example, at the end of June, Thailand’s Siam Commercial Bank and Japan’s SBI Remit teamed up to launch the first blockchain-powered payment service using ripple’s blockchain. The intention is to improve the speed, cost and efficiency of remittances between both countries, which sees around $250 million transferred each year, largely due to the 40,000 Thai nationals that live in Japan.
Elsewhere, ripple’s blockchain is being employed by some of the world’s biggest banks. Last September, ripple launched the first interbank group for global payments called the Global Payments Steering Group. It will oversee the creation and maintenance of payment transactions rules and formalised standards for activity using ripple’s blockchain. The founding bank members include Banco Santander, Bank of America Merrill Lynch, Royal Bank of Canada, Standard Chartered, UniCredit and Westpac. RippleNet, is the company’s decentralised global network of banks and payments, which has over 100 members. In September, ripple expanded its services into Asia by opening a new office in India and Singapore. It has also laid claim to matching the transaction output of Visa, with 70k transactions at an average time of 3.7 seconds.
At the beginning of 2017, SWIFT launched its proof-of-concept (PoC) to determine if the blockchain could aid banks to improve the management of their nostro databases in real-time. This is considered important for cross-border payments.
Short for the Society for Worldwide Interbank Financial Telecommunications, this is part of SWIFT’s global payments innovation (gpi) initiative, which aims to deliver a new standard to cross-border payments. In July, 22 global banks joined SWIFT’s gpi to test its PoC blockchain application.
San Francisco-based blockchain startup Wyre is a cross-border payments firm that claims to be the industry’s fastest money transfer platform. This enables businesses to move money across borders from country-to-country at a competitive foreign exchange rate.
By leveraging Wyre’s blockchain-based technology platform businesses can deliver faster and more cost effective services. By 2018, Wyre is hoping to become one of the largest cross-border payment platforms.
In April, the company acquired Beijing-based platform Remitsy making it the first acquisition by a U.S. company of a Chinese blockchain business in the corporate payments space. As a result, it helped strengthen the company’s move into the $500 billion U.S.-China business payments sector.
Red Belly Blockchain
New to the scene is the University of Sydney’s Red Belly Blockchain. Back in July, it was reported that researchers at the university had created a new type of blockchain that could process 440,000 transactions per second on 100 machines. In comparison, Visa’s network can process 56,000 transactions per second. Bitcoin is limited to seven transactions.
New figures, however, show that the Red Belly Blockchain is even faster than originally thought. An announcement from the university states that as it scales up its performance gets better. Tests show that on 300 machines it can process 660,000 transactions, making it 11.5 times faster than Visa and 94,000 times quicker than bitcoin’s blockchain. Constructed to avoid problems currently facing cryptocurrencies such as double spending, the Red Belly Blockchain is different from proof-of-work (PoW) blockchains in that it offers a scaling performance without consuming much electricity.
Just as same day automated clearing house transactions are changing the face of business-to-business payments, the blockchain is working at reshaping the cross-border payments sector. At present, sending money abroad is unnecessarily expensive and slow; however, the blockchain can change this enabling more people to access the financial system and the money they rely on in a timely manner.
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