Is blockchain living up to its potential in revolutionising the cross-border payments space? Joy Macknight investigates how far the technology has come.

Jesse Lund

Jesse Lund

Sending money between countries has long been ripe for disruption due to complex and opaque operations fraught with friction and frustration for both consumers and corporates. International payments lack visibility as to when they will reach an end beneficiary, as well as the amount intermediary banks might deduct in fees. In addition, they are costly and slow, which does not satisfy today’s global e-commerce demands.

Take, for example, Booking.com, with property listings in 192 countries and territories. The travel e-commerce company must be able to make timely payments to its 28 million marketplace participants. “Booking.com is built on hundreds of millions of relatively low-value transactions. These are nuisance level international payments that are particularly poorly served by the current cross-border banking infrastructure,” says Daniel Marovitz, vice-president of global payments at Booking.com.

There is a growing demand to move money “as seamlessly as e-mail moves today”, says Jesse Lund, vice-president blockchain at IBM. “That is the target user experience being set by our customers.” But even the fintechs that have modernised cross-border payments from a user experience perspective, such as TransferWise and Currencies Direct, still use the 40-year-old rails.

The industry’s imagination has been captured by the potential of blockchain, or distributed ledger technology (DLT), to solve these pain points at an infrastructure level. “The holy grail of cross-border payments is to make the payment messaging and the settlement of value happen together in real time on the same network. DLT has the ability to store and transfer value, along with payment instructions and messaging, as an atomic transaction that moves as fast as e-mail does,” says Mr Lund.

Recent DLT initiatives

The past five years have seen a groundswell of global payments initiatives using DLT. Proofs of concept and pilots have abounded, with some projects moving into production mode.

For example, DLT-based global payments challenger Ripple claims that many of its more than 100 financial institution RippleNet members are already in production with its solutions. For example, SEB has processed more than $1bn in payments over RippleNet between Sweden and the US. “Ripple experienced a banner year in 2017, in terms of customers going live,” says Asheesh Birla, senior vice-president for product management at Ripple. He predicts even greater take-up this year.

And 2018 has started strong. In April, Santander launched One Pay FX, a real-time remittance service based on Ripple’s xCurrent product, which allows the bank’s retail customers in the UK, Spain, Poland and Brazil to send euro and US dollar payments across the four countries. Santander UK customers can access this service via a smartphone app, with international payments reaching their destination in one day, versus three to five days on average for traditional wire transfers.

DLT eliminates friction in cross-border payments and has the potential to reduce intermediary inefficiencies, cost and risk

Jesse Lund

IBM’s initiative, on the other hand, is still in pilot phase. In October 2017, it launched a DLT cross-border payments prototype, which is run on the IBM Blockchain Platform based on Hyperledger Fabric. “In this model, a digital asset, or tokenised representation of monetary value, is exchanged in real time as part of a series of operations that represent a transaction,” explains Mr Lund. “It then becomes possible to achieve settlement with finality across borders where foreign exchange [FX] is just an implicit part of the transaction.”

Expected to launch later in 2018, IBM’s solution will bring banks and non-banks, including money transfer operators, into a common network “where they can interface with each other in a consistent way and transfer money to each other without having to have pre-negotiated agreements in place”, says Mr Lund. The network will be open to money service providers and banking entities licensed in their jurisdictions.

Solving for liquidity

Mr Lund reports that IBM has been working closely with banks and central banks over the past 18 months around introducing more liquidity measures into its network through issuing alternative digital assets such as stable coins, which are bank-issued assets that represent a claim on fiat currency deposits. “We are exploring the ability to introduce the equivalent of digital cash, which is not issuing a pure-play cryptocurrency, but one that acts as a bridge asset,” says Mr Lund.

Ripple is also trying to solve the cross-border liquidity issue. While the xCurrent platform provides better information and processing for a payment, its xRapid product provides the liquidity for a cross-border payment by leveraging XRP, the digital asset, as a bridge currency, according to Mr Birla.

For example, Cuallix, a US non-bank financial institution, is now using xRapid to make payments from the US to Mexico. Cuallix can send a payment in US dollars, which gets converted into XRP through a digital exchange such as Bitso in Mexico, and then locally converts that XRP instantly into Mexican pesos to make the payment. “The whole process takes only a matter of minutes, down from a week or several days for a traditional overseas payment,” says Mr Birla. “Cuallix also saw significant savings, as it is much cheaper to use the digital asset to source liquidity than through conventional means.”

xRapid is seeing greater traction among payment providers, including Currencies Direct, Mercury FX and Viamericas, whereas the banks are not quite ready to take the plunge into the nascent cryptocurrency space. However, Mr Birla reports that some banks using xCurrent are now looking to use xRapid for the second phase of their projects.

Mr Marovitz is interested in the idea of using a stable coin-type digital asset within Booking.com’s marketplace to solve the FX issue. “There are many [things] to solve for FX, such as a consumer-focused FX forward or by securing US dollar-based asset in today’s price with minimal FX variability. Or maybe there is a stable coin/reward points structure that could be used. It’s a very real and complex problem, and there are no silver bullets,” he says.

Governance and scalability

Despite recent advances, several issues need to be solved before DLT will see mass adoption in international payments, according to Jost Hoppermann, vice-president, principal analyst, at research firm Forrester. “Competing heterogeneous DLT payment initiatives are an obstacle to quickly reach the necessary critical mass. As DLT initiatives will mature and expand beyond the limited and limiting scope of a more proprietary ecosystem, another question comes into play,” he says.

“At a high level, DLT is also about installing some kind of technology-based trust relationship. Will the industry need a version of Swift for the governance aspect, for defining and agreeing on a common set of data and process standards and rules and for running the network?” he asks.

Another issue is scalability. “Proven scalability concerns me because most pilot implementations are at very low transaction levels. I have yet to see any DLT implementation that scales up in line with the typical millions of transactions in payments,” says Mr Hoppermann. Likewise, Mr Marovitz is reserving his judgement on DLT’s applicability in cross-border payments until the proofs of concept move into production and scale up.

Compared with Bitcoin or Ethereum’s speed of less than 20 transactions per second, Mr Lund reports that IBM is seeing numbers around 4000 transactions per second, which is impressive given the few years of development. And he is optimistic that the scalability characteristics of DLT will improve as the industry matures and develops next-generation DLT-based payment networks.

Mr Birla says that Ripple developed its technology with scalability in mind. “To deploy something for Standard Chartered, Santander or Bank of America, our solution needs to scale to hundreds of thousands of transactions per second – this was in the design from the outset,” he says.

Targeting the underserved

Many believe that DLT could help address the gap in cross-border payment services created by the withdrawal of correspondent banks ‘de-risking’ their operations. Mr Lund says: “DLT eliminates friction in cross-border payments and has the potential to reduce intermediary inefficiencies, cost and risk. So, financial institutions that may not want to set up shop in certain jurisdictions because of economic risk are more able to participate as lenders, liquidity providers and payment service providers in those countries.”

DLT also opens up market access to new entrants, such as BitPesa, for example, which uses Bitcoin as a bridge currency for cross-border payments to and from Africa. In January 2018, BitPesa purchased TransferZero, an online money transfer company, and recently launched a white-label product that will leverage BitPesa’s compliance, processing capabilities and pay-out network across Africa. “We are looking to work with tier-two and tier-three banks in Africa that aren’t connected to Europe and other remittance destinations,” says CEO Elizabeth Rossiello, adding that this will help address the correspondent banking gap.

Ripple is also looking to expand in these jurisdictions. Mr Birla says: “E-commerce and digital marketplaces want to send payments to emerging markets because that is where growth is. Banks want to develop new businesses and grow their pie. And regional banks are important components of our ecosystem.”

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