Beyond blockchain? Nanopay, Interac ramp up speed for cross-border payments

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Nanopay is planning to add bank, processor and accounting software partners for a B2B cross-border and domestic transfer service which it says exceeds the performance of blockchain-based systems.

The Toronto-based firm targets the rapidly growing international payments market. By focusing on the world’s largest B2B corridors including U.S./Canada and U.S./China, Nanopay hopes to cut into the substantial number of paper check-based transactions through its platform that digitizes fiat money to securely store it and transfer it instantly.

Nanopay’s only publicly named partner is Interac, Canada's debit network. The partnership involves Interac and Nanopay collaborating to add cross-border capabilities to the Interac e-Transfer P2P and B2B transfer service. This means Interac e-Transfer will support real-time settlement across different currencies for high-volume remittance corridors, such as between Canada and India. The two firms also plan to offer transfers from Canada to China and the U.S.

Nanopay is working with Canada’s five largest banks on integration for the Interac e-Transfer cross-border service, said George Lee, product owner for B2B cross-border at Nanopay. “We’re also in a private beta trial for our own B2B cross-border service and aim to move to a public pilot in a few months’ time,” he said.

Interac is open to collaborating with Canadian and foreign fintechs to enhance its product offerings. In June 2018, Interac said it is working with international payments service provider Bambora to enable Canadians to use Interac Debit for e-commerce purchases from merchants domestically and cross-border. In November 2017, Interac, which already has an agreement with Western Union, partnered with MoneyGram to support payments sent through MoneyGram's service.

In October 2016, Nanopay raised US$10 million in Series A funding from a group of investors including Goldman Sachs’ merchant banking division.

Nanopay's crypto roots
In 2012, the Royal Canadian Mint commissioned cryptography expert David Everett to develop a digital version of the Canadian currency called MintChip, which eventually became part of Nanopay. Everett had been involved in the development of the U.K.’s EFTPoS infrastructure in the 1980s and the creation of Mondex digital cash in the 1990s. He currently is CEO of U.K.-based consultancy MicroExpert, and his latest project is a digital microcurrency called Tibado.

MintChip is an asset transfer system which provides users with cryptographically secure value stores, and was designed by the Royal Canadian Mint to comply with AML and KYC regulations — a contrast to the less regulated roots of bitcoin and other cryptocurrencies. Users link their bank accounts to their MintChip wallet and move funds to other users in real time without an intermediary.

MintChip was originally intended to be used as digital cash for low-value point-of-sale purchases and for P2P transfers. In January 2016, after a pilot, the Royal Canadian Mint sold MintChip to Nanopay, which was then a retail payments technology provider.

Although Nanopay has an ongoing MintChip pilot with merchants near its Toronto office, it no longer promotes the MintChip Retail Platform. Instead, Nanopay has used the core technology behind MintChip to develop its global cross-border/domestic payments platform.

The original idea was that MintChip cash would be stored on a chip — e.g. on a smartphone or other Bluetooth-based device — held by the user, so they could transfer funds to other MintChip users in offline mode.

“Nanopay is only using MintChip in online mode, with the users’ secure asset stores being managed by Nanopay in the cloud,” said Everett. “The asset stores are held on a hardware security module [HSM] attached to Nanopay’s servers, which acts as a virtual chip.”

“Our users’ funds are stored in what are effectively ‘safety deposit boxes’ on our system, and our clients’ money is held at trust accounts with our partner banks,” said Lee. “We leverage as many banking partners and networks as we can, and are in the final stages of onboarding our Indian banking partners. In Canada, we partner with Interac and with B2B payments service EFT Canada, and in Australia, India, the U.K. and Europe we use the local real-time fast payment rails. To use the Canada-India corridor as an example, our Indian receiving bank partners have Nostro accounts in Canada plus accounts in our name in India which are prefunded for outbound payments.”

While Interac E-Transfer is used for business payments in Canada, it doesn’t include information on what invoices are being paid, Lee said. “Because we support ISO 20022, we can provide value-added services on top of the Interac rail such as enabling clients to check the status of their transactions, or to attach invoices to payments to help with reconciliation.”

What about blockchain?
Nanopay’s bank-to-bank transfer platform has several advantages over blockchain-based approaches, according to Nicko van Someren, a cryptography expert who is Nanopay’s chief security officer. Van Someren founded the HSM vendor nCipher, acquired by Thales eSecurity in 2008, and was formerly chief security architect of networking technology vendor Juniper Networks.

Nanopay doesn’t use an amorphous distributed ledger in the blockchain sense, van Someren said.

“We’re centralized but also replicated, potentially geographically, for resilience and scalability,” he said. “But we aren’t distributed to all and sundry, as we are a closed system. Instead of distributing a hardware-based secure asset store" — for instance, an HSM — "to every Nanopay user, which would be cumbersome, we provide a cryptographically secure centralized managed service. We move value between each of the stores in our system instantaneously for domestic and cross-border transfers, which is faster than any blockchain-based transaction.”

The irrational exuberance about the blockchain has reached a very high peak on the hype cycle, van Someren said.

“The blockchain has merits, but I have yet to see a compelling case for any of the cryptocurrencies,” he said. “Their backers make promises about transaction speeds and low costs, yet they tend to not deliver. Bitcoin costs $10 per transaction and it takes minutes. But, to change the world of payment processing, it needs to cost cents and take milliseconds, which is Nanopay’s aim.”

Speed meets security
Van Someren’s role is to ensure that, before Nanopay’s platform goes live, it has the level of security expected by the payments industry.

“Having a solution in place to detect and reverse bad behaviors is crucial,” he said. “This is a key value proposition that Nanopay has compared to cryptocurrency firms that are trying to get into this space. It’s all very well claiming that anonymity is a good thing, but anonymity makes it too easy for people to run off with your money.”

Being able to keep a transaction’s metadata in Nanopay’s overall transactional journal means that Nanopay can give clients auditability on their payments and enables it to provide fraud detection and prevention, van Someren says.

However, while Nanopay aims to offer real-time settlement to eliminate the risk of default due to counterparty failure, there is always a risk of fraud.

“You have to be sure that the person authorizing the transaction is authorized to do so and they are who they say they are,” van Someren said. “Unlike the cryptocurrency community who went out all out for providing anonymity, we have an indelible record of all transactions and, if there is demonstrable fraud, we can retrieve the funds from the recipient and return them, provided they haven’t cashed out these funds.”

Nanopay is looking at adding a capability to put restrictions on how soon a recipient can cash out, e.g. a time-lock. But van Someren recognizes the need to develop a clear contractual structure for clawing back payments.

“A buyer could put a stop on a payment, not because of fraud, but because of a dispute with a vendor,” he said. “We’re talking to regulators about the right way to handle this issue. It would involve putting the sender’s money into an escrow account and having an arbitration clause. The funds would be taken back from the recipient, but not given back to the sender, while the dispute is being resolved.”

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Blockchain Cross border payments Payment processing Interac Canada