Blockchain, the distributed ledger technology commonly associated with bitcoin, is getting a lot of attention as a way to jettison fee-snagging correspondent banks from remittances, but Align Commerce insists blockchain has even more uses.
One such use is circumventing the antiquated financial infrastructure surrounding money transfers received by businesses in Mexico. Align contends old-school wire and batch processing are slowing the movement of money south of the U.S. border.
"Transfers work slower in Mexico. It's big and complex and a lot of it has to do with the banking infrastructure and the way that correspondent banks work," said Align Commerce CEO Marwan Forzley. "It just seems longer to get things done."
Align, which has been adding small business technology talent as it enters new markets, executes transfers largely via email—senders and receivers email each other to communicate the transfer and to send links account information. The blockchain technology, which Forzley likens to "plumbing," handles the transfer and currency conversion without intermediaries—blockchain technology directly connects accounts through a distributed ledger. Through emails, parties in the transaction immediately know when the transaction occurs, enabling faster reconciliation.
"The experience is totally different. A business in Mexico gets an email saying there is $5,000 coming from the U.S., you click to bring up the transaction," Forzley said. "You don't have to check your account from time to time to make sure the money is there, then try to reconcile that deposit to make sure it matches the original invoice."
Align, which recently launched business-to-business corridors in Brazil and China, is attacking older technology in Mexico, Forzley said. Much like mobile operators use their wireless networks to build financial services in areas with virtually no banking infrastructure, Align says distributed ledgers can bypass relatively old bank processes and general malaise to directly connect payers and recipients.
"If you're sending from the U.S. to the U.K. or Europe, these markets are not perfect, but they're much more streamlined than Mexico," Forzley said. "In Mexico there are layers where the money can get stuck in transit, often for days."
Some Mexican banks also still use batch processing for international business payments, which means the bank's core system is updated nightly after the close of business instead of the near-constant updates that digital and mobile payments require. "So every time a transaction goes through a new bank, such as a correspondent, you lose a whole day," Forzley said. "You send money and you don't know what happens to it."
Blockchain also removes intermediary fees and makes it easier to understand what a transfer costs since there’s just the basic transaction fee, Forzley contends. Aligns fees are based on the size of the transfer, but are generally under 2%. It also doesn't charge wire fees.
International transfer companies such as Western Union are warming to blockchain technology as a way to enhance their existing brick and mortar networks.
The Align deployment shows the disruptive power of blockchain, and its versatility, according to Andy Schmidt, an executive advisor at CEB.
"Given the fact that batch is resoundingly slow, this deployment will be able to do this quickly and will be validated," Schmidt said. "A big part of cross border payments is timing. You want to know when the payment is available."
Ripple is also active in this market; its recent demo of cross border payments not only displayed fast execution, but also pinpointed exactly when it would happen and how much it would cost, Schmidt said.
"It creates both a threat and an opportunity for banks," Schmidt said, adding banks have the relationships, but will also lose fees associated with the intermediary tasks they perform with conventional cross border business payments. "The writing is on the wall for takeout of fees for cross border payments."