Cross-border payments are a complex and global system, so it's no surprise that modernizing this process would require a partnership that spans multiple continents and a relatively new and experimental technology.
D+H, a Toronto-based financial services technology company, is collaborating with Rabobank, a Utrecht, Netherlands-based bank that's active in 40 countries, on use cases for blockchain, which is best known as the distributed ledger technology that powers bitcoin.
In the past couple of years, banks have attempted to adapt blockchain tech with the goal of streamlining traditional financial services such as payments and commodities trading. Rabobank and D+H earlier this week finished a proof of concept that D+H's payments services hub is able to execute cross border payments in near real time. The bank and D+H also worked with Coin Sciences, a U.K.-based blockchain technology company.
"Cross-border payments are one of the more painful areas [for banks]," said Eran Vitkon, payments, platform and cross product management lead at D+H. "There are more uses for global banks that wish to transfer assets, currency or any other commodity between them."
However, the companies are nowhere near a formal rollout of the system they are building. As a proof of concept Rabobank and D+H's collaboration is a precursor to a formal pilot test, which is itself a necessary step before a product rollout. There would also need to be more IT work at the bank, with the scope of any technology project yet to be determined
"A pilot and further tests will be necessary, in part to gauge how specific use cases fit into the blockchain, and what kinds of changes to the bank's core processing system may be required," said Heimen Schuring, head of channel support and payment engine for Rabobank.
Rabobank has been experimenting with the technology since 2014 and sees its potential for trade finance, smart contracts and administrative tasks.
In international transactions, blockchain is seen as as a way to avoid currency complications, make compliance easier and remove third parties that handle disparate processes that differ from one country to another.
These third parties often include banks, which have offered correspondent banking services to process international payments and extract fees for themselves. Startups are aiming to reduce costs by cutting banks out, replacing banks' role in whole or in part with blockchain technology. Remittances in particular are attracting attention from startups.
But banks are also taking advantage of blockchain, with institutions such as Santander making investments in distributed ledger technology companies such as Ripple.
Processing speed has been one of the earliest dividends, with ATB Financial in Edmonton, Alberta, recently executing a payment to ReiseBank in Germany in eight seconds. Rabobank's proof of concept has also shown the technology can complete end-to-end transactions immediately to any of the members of the bank's closed user group, and the payer and payee can agree to the payment before it is committed, preventing non-settlements or rejections after processing.
The speed can largely be attributed to "smart contracts," which don't have a universal definition but generally refer to using code and other forms of automation as trigger mechanisms for transactions. It's these smart contracts that can enable numerous financial use cases, since many of the steps in the agreement can be performed automatically.
The transparent nature of the distributed ledger that powers the blockchain ensures the conditions of the smart contracts are being met, Schuring said. "Just as in traditional contracts you can't change the terms once the payment is made, but you can change terms going forward if all parties agree," he said.
Blockchain would benefit from being more open, according to Vitkon.
"Any closed user group can find benefits with the blockchain," Vitkon said. "Although ultimately blockchain will fit best if financial parties outside the user group can use the same blockchain."
If the implementation is open to multiple banks in multiple geographies, then the operation of the overall system must be incorporated into a system that banks and regulators are comfortable with, said Tim Sloane, vice president of payments innovation at Mercator Advisory Group.
"Both the technology and the business structure will need to pass regulatory scrutiny," Sloane said. "If my review of other blockchain solutions are indicatives, it is likely that these business structure and regulatory issues will require changes to the technology. Combined it is likely these issues will delay general launch of a blockchain-based product by two or three years or more."