Blockchain: Good news for payments

Border controls have long been effective in regulating the movement of people and products. But the one area where these borders are not as effective is the transfer of money -- payments and remittances. Although governed by global and regional trade policies, trade across borders is often compromised due to loopholes in the system often resulting in security lapses or high transfer fees.

Low to middle income developing countries will account for about $466 billion of $616 billion worth of global remittances in 2018, according to the World Bank. Remitters will end up paying a stiff fee of 7.7% on these transactions on average, way higher than the 3% target set by the Sustainable Development Goal 10 last year. What’s worse, the charges, which can vary between 1% and 22%, are often the highest for those who can afford it the least.

But now, a solution is at hand in the form of blockchain technology, which according to one estimate, could save as much as $8-12 billion out of payment and remittance costs globally. No wonder then, that the venture capital community has committed $1 billion to blockchain fintech startups in the past five years.

Even banks are warming to the opportunity by investing in blockchain networks to carry approximately $3 trillion in blockchain-based payments and remittances by 2024.

Examples include the Finacle Payment Connect network between ICICI Bank and Emirates NBD, which has been carrying international remittances on the India - UAE corridor since 2016, the network that the Commercial Bank of Qatar has established with several banks in the Middle East, and Santander’s blockchain-based international money transfer service for customers in Spain, the UK, Poland and Brazil launched in April 2018, which is the first instance of any bank launching such a service simultaneously in multiple countries.

While cost saving is a big benefit, it is not the only advantage of blockchain. For one, the technology allows banks to expand reach without making heavy investments in physical distribution infrastructure, enabling them to compete against remittance heavyweights, such as Western Union and Moneygram, which have thousands of outlets in more than 200 countries. Also, banks can build correspondent banking networks using blockchain much faster and cheaper than the traditional way, thanks to its open source nature, and the easy availability of vendor applications.

Blockchain and other distributed ledger technologies (DLT) help banks break payment monopolies, and the high transaction fees they typically enjoy. In a market such as Russia, for example, where there is very little competition in payments and remittances, blockchain networks could dismantle the artificial barriers raised by monopolistic cartels and bring down the onerous fees charged from small remitters.

But the biggest benefit of blockchain is arguably, its ability to bring a high level of transparency, trust and confidence in payment transactions. The sheer volume of messages and transactions that take place in a day makes tracking up to the last mile nearly impossible.

Trust is the currency banks and financial institutions dabble in. And in the absence of a single source of truth for all parties involved in a transaction, snags or system vulnerabilities or human errors can highly jeopardize a network or service’s adoption among its users.

With blockchain the participants have access to the same ledger, which gets updated within minutes of a transaction, that too only after consensus among all the participants in that transaction. This also makes transactions irreversible, and no participant can deny or stake a false claim.

In the current regulatory climate, banks are burdened with the cost of complying with several regulations aimed at making payments safe and secure. Blockchain can eliminate most of these costs, thanks to its inherent features such as immutability, transparency, KYC-cleared users, among others.

The technology also offers regulators full visibility into payment and remittance transactions in real-time – as opposed to post-facto – to give them both a sense of confidence and
control.

A study of 200 banking regulators by the IBM Institute of Business Value found that 90% were interested in using blockchain to check financial fraud. From the Hong Kong Monetary Authority to the RBI, central banks everywhere are setting policies to encourage the adoption of DLT.

Clearly, DLT stands out amongst the current crop of emerging technologies which although powerful in their own way, do not offer all the myriad advantages of a technology such as blockchain. Given its versatility, the technology is not only making waves in banking, but has found abundant application beyond banking especially in ensuring integrity of products.

Last but not least, blockchain is a great platform for creating a vast payments ecosystem of banks and non-banks such as fintech companies, remittance providers, regulators, and various service providers such as insurance companies, credit card companies, KYC registries, credit rating agencies etc.

The inevitability of the rise of Blockchain platforms is undoubtedly ushering banking and payments into unprecedented digital disruption.

(The writer is VP & Global Head, Business Consulting & Product Strategy, Infosys Finacle on Blockchain Payments and Remittances)