FINANCIAL SERVICES

Blockchain Enabling Faster, Cheaper Cross Border Payments:

Blockchain Use Case in Cross Border Payments

The big disruptor is here. Many industries have witnessed Blockchain introducing new ways of thinking and providing new values to their customers. Financial industry is the first to be hit by Blockchain in a big way. New revenue models are emerging which are more customer centric and that leverage technology to provide low-cost solutions which are faster and more efficient. Cross-border payments is one area which has seen the new comers challenging monopolistic incumbents, completely transforming the existing ways of transferring money through international borders. 

 

What is Blockchain? 

 

Blockchain is a network of many distributed parties who verify transactions. This eliminates the need for central authority. All parties can interact with each other and all interactions are public and pseudo-anonymous. The information stored on blockchain is unchangeable once it is recorded.

Currently there are not many businesses that do not see Blockchain restructuring the complete value chain.  It is the most talked about technology and some early starters have already rolled out full scale Blockchain implementations and proof-of-concepts. 

How Cross-Border Payments Happen Today? 

 

Assume a customer of a Bank in Canada wants to send money to his friend who uses services of a bank in China. The customer will walk into his Canadian bank branch and submits a request to transfer funds to his friend in China. The Canadian bank will send a payment transfer message to the Bank in China over a secure network. Once the bank in China receives the message about the incoming payment, it will clear and credit the money to the Chinese friend’s account. 


Cross-Border payments are increasing with the increase in global trade. A McKinsey & Co report says that by 2020, the global payments industry will generate an estimate of $2.2 Trillion, following an average yearly growth of 5%.  

SWIFT Explores Global Payments Innovation on Blockchain

 

SWIFT and a group of major global transaction banks are developing a Proof-of-Concept (PoC) application to test whether distributed ledger technology (DLT) can be used by banks to improve reconciliation of their nostro accounts in real time, optimising their global liquidity. SWIFT is conducting this PoC in partnership with a start-up in Blockchain space called SmartContract.

Australia and New Zealand Banking Group, BNP Paribas, BNY Mellon, DBS Bank, RBC Royal Bank and Wells Fargo are among the banks participating in the PoC; working with SWIFT to identify the challenges, define the specifications, build the application and ultimately test the concept. A further 20 banks will join the programme at a later stage to further validate and test the DLT concept. 

SWIFT provides financial messaging services that are used by over 100,000 financial institutions globally. SWIFT standardizes the interbank transfers while enabling seamless and automated financial communication.  

 

SmartContract provides solutions to connect smart contracts to any web application or API and accepts USD payments. It can also create cross chain connectivity between different Blockchains. In this PoC, SmartContract uses its Oracle, ChainLink v1.0. 

 

The Business Problem in Cross Border Payments

Under the current banking model, banks need to monitor the funds in their overseas accounts via debit and credit updates and end-of-day statements. The maintenance and operational work involved represents a significant portion of the cost of making cross-border payments. Member banks using SWIFT have identified nostro accounts reconciliation as a significant pain point.  

 

How can banks reduce costs incurred due to nostro-accounts reconciliation? 

 

Can Blockchain Help Reduce the Cost? 

 

Blockchain has proved to be instrumental in cases with involvement of multiple parties, complex & inefficient processes and requirement of trust & transparency. Blockchain can provide solution to these situations, and deliver them in a secured and immutable environment.  

In this case, there are multiple parties involved in a complex process of nostro account reconciliation. There are trust issues and the process takes a log time. Blockchain seems to be the right way to go ahead.  

Blockchain Solution to Reduce Cost 

SWIFT is working with SmartContract to develop a PoC to solve this issue of high cost in nostro-account reconciliation. SWIFT is leveraging the Hyperledger Fabric v1 technology, and combining it with key SWIFT assets, to ensure that all the information related to nostro accounts is kept private and seen only by the account owner and its correspondent banking partner.  

 

The PoC application will use a private permissioned blockchain in a closed user group environment, with specific user profiles and strong data controls, and user privileges and data access will be strictly governed. APIs would be used to query the data stored on the ledger and update it. 

 

How Blockchain Solved the Problem:

 

The distributed ledgers help banks reconcile the nostro accounts more efficiently and in real time, lowering costs and operational risk. 

 

“Distributed Ledger Technology holds the potential to dramatically reduce the need for reconciliation in a shared ledger environment.”  

Christopher Mager, Head of Global Innovation for BNY Mellon Treasury Services 

 

References: 

 

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