Will blockchain make inroads in cross-border payment markets?
By Phyllis Li
Fuelled by rising international trade and an increasingly connected global economy, cross-border payments play a crucial role in enabling business between consumers and merchants. As a result, the cross-border payment market has been growing at an unprecedented rate and presents much room for innovation. Historically the SWIFT (the Society for Worldwide Interbank Financial Telecommunication) network and the “corresponding” banking system dominated this space. The complexity of the network makes cross-border transfers slow and costly. Participating banks must keep idle funds in foreign currencies to meet forecasted demand. Yet the system is not 100% secured: in 2018, an elaborate series of attacks allowed hackers to siphon off USD15–20 million from banks in Mexico.
According to McKinsey & Co., the cross-border payment market totalled US$230 billion in 2018, with a 4% increase from the previous year. 92% of cross-border payment transactions come from B2B payments, and the banking system transfers up to 90% of B2B payments. Banks’ annual cross-border transaction volume amounts to over 10 billion, which represents over USD400 billion in revenue.
Currently, the majority of the world’s cross-border transactions go through the corresponding banking system facilitated by the SWIFT network. Such set up creates a scenario that links up 6 parties in every fund transfer — payer, payer’s bank, payer’s bank’s correspondent, beneficiary bank’s correspondent, beneficiary bank, and beneficiary. As fund passes through this infrastructure, any intermediary bank that comes into contact with the fund can take a fee. Also, constrained by each bank’s technology capability, the processing speed at each intermediary bank varies and creates delay at the receiving end.
Fintech start-ups try to alleviate the pain points by creating innovative alternative solutions:
Ripple has created a cryptocurrency (XRP) it uses as an intermediary for payments between countries with different currencies hence fully bypasses SWIFT. Ripple’s payment network, RippleNet, connects banks, payment service providers, digital asset exchanges and corporate entities. When facilitating cross-border transactions, instead of converting currency A to currency B, battling exchange rate margins, processing fees and slow transaction times along the way, Bank A can transfer equivalent worth of XRP to Bank B’s Ripple wallet, which can then be converted to currency B. Typically, payments using XRP settle in four seconds. The network is also currently capable of consistently handling 1,500 transactions per second.
Circle Pay, a peer-to-peer money transfer app, enables cross-border transfers using either a contact’s phone number or email without incurring charges. Circle Pay uses Ethereum’s blockchain platform to enable free money transfers on its app. The app also uses a two-factor authentication process to ensure secure processing.
OKLink operates as a blockchain technology-based settlement platform for remittance companies around the world to connect, thereby avoiding set-up costs of establishing brick-and-mortar in other countries or opening multiple accounts at money transfer operators such as Western Union, Money Gram, and banks. It builds API for participants to gain access and uses bitcoin to move remittances cheaply and quickly across the platform. Recipients have various options including a cash payout through local pickup centres or to recipient’s bank account.
GCash, powered by Alipay’s blockchain technology, provides real-time remittance service between individuals in Hong Kong and Philippines. Once a user submits a remittance application, all network participants including AlipayHK, GCash and partner banks are notified. The remittance process’s segmented procedures can consequently take place in parallel, enabling the verification and execution of the transaction to co-occur.
Commercial banks are also going full steam ahead to develop their own blockchain-based solutions:
JPMorgan’s Interbank Information Network (IIN) has recently grown to more than 220 banks. Today IIN is primarily used to exchange data relating to compliance queries for potential problematic payments. When a payment detail is flagged for confirmation, different parties can interact simultaneously, request and share information. IIN enables all parties to share information using Quorum, the enterprise version of Ethereum developed by JP Morgan.
ANZ & Wells Fargo, both members of the Linux Foundation, used its Hyperledger technology to build a private, shared, distributed ledger platform that operated in parallel with existing infrastructure. It allowed both banks to move funds without centralised infrastructure and made it easier to audit the transactions and preserve confidentiality.
China Merchant Bank (CMB) has made a breakthrough by successfully incorporating blockchain technology into its business areas of global cash management, cross-border direct settlement, and account management. CMB’s platform streamlines cross-border settlement process and has processed more than 43,000 cross-border transactions with a total value of HK$7.7 billion (about US$1 billion). This now represents about 70% of CMB’s mainland-Hong Kong cross-border payments business.
WeBank has developed a cross-border settlement solution based on the open-source blockchain platform FISCO BCOS. Such move is a step up from WeBank’s prior success of using blockchain in interbank reconciliation for its micro-loan product Weilidai.
As illustrated in Figure 3, the consortium platform connects a number of participant banks and institutions and provides a blockchain ledger as the single source of truth. All transaction data will be recorded in the ledger and used for mid-day or end-of-day fund clearing and settlement. This solution is highly applicable among institutions and banks with existing corresponding relationships and can be expanded to a multi-ecosystem platform via inter-blockchain communication (see Figure 4). It enables cross-institution data sharing hence real-time remittance and highly efficient cross-border clearing and reconciliation.
The advancement of new technologies including blockchain will continuously enhance and upgrade the development of the cross-border payments market. The more innovative, the faster, safer, and more accessible cross-border payments to become for the end users.
To leanr more about WeBank’s blockchain solutions, please visit: https://fintech.webank.com/en/
