Blockchain and payments have come to go hand-in hand since it emerged to power bitcoin, but the real pain financial institutions are looking to solve is enhancing global currency transactions and shortening settlement cycles.
With the World Bank estimating that global payment volumes are increasing at nearly 5% per year worldwide, an estimated $601 billion in 2016, there are still tremendous efficiencies to be gained from a centralized network with a straight through process for easier, cheaper and faster operations that would also minimize the need for liquidity reserves.
Global financial institutions thinking through their payment infrastructures should consider the following:
Remittances and the last mile: In remittances, banks can add value if they solve the last mile issue where money transfer operators and their global network of agents charge 10% to get cash in hand. Why should my fees be so high using Western Union to send money home to the Philippines? Blockchain-enabled payments can help create the infrastructure to transfer money more directly to the intended party while minimizing fees.
Currency conversion: Intra-bank currency conversions use a fragmented internal and external network of market makers for the currency conversion. Typically, cross currency transactions can cost the remitter on average 9%. However, by using trust lines and automated market making for the best rates, and eliminating 3rd parties like correspondent banks and Swift, the cost can be reduced to anything up to 3%. A 6% savings on all global remittance amount could be incredibly significant.
Real-time settlements: Why should a person, business or government organization in New York who wants to send Euros to Amsterdam have to wait multiple days for a transaction to settle? In today’s on-demand world, everyone else is working on real-time settlement for intra-bank payments. Whether for payroll applications where issuing payroll on the 13th to hit on the 15th means money is gone for 2 days or creating a better system than real-time gross settlement systems (RTGs) for central banks and other organizations to pay large, economy-impacting sums of money same-day – there is an opportunity to speed settlement cycles for significant operational and liquidity management advantages. With real-time settlements, banks would be able to better manage capital and liquidity across global operations.
The unbanked and underbanked: Blockchain can effectively address the unbanked segment and help to catalyze financial inclusion in 3rd world countries. In the same way MPesa did it in Kenya using mobile phone credit, blockchain can create a global comparative which is not tied to any one telecom provider to support domestic P-to-P payments.
Loyalty points: Being able to use loyalty points and air miles as transferable currency is a major focus for U.S. and Canadian banks. Blockchain would enable these organizations to ascribe value to these points and pay with them as if they were currency.
KYC, AML and Compliance: Blockchain could also be used to achieve enhanced know your customer (KYC), anti-money laundering (AML) and compliance with on-demand, verifiable information available across the entire value chain, from the initial money transfer request from the sender to the final verification and payment of funds.
The future of global banking will be one where payments occur instantaneously, anytime, anywhere and with anything. The internet of things will allow one smart object to pay another in new ways. Devices will be able to autopay each other in small amounts. Moving value will be as simple as sending an email. And while blockchain won’t be the only technology used for many of those applications, it will play a part in transforming the payments network that moves and converts currencies across countries for individuals and companies – whether they want to send money across the globe to relatives with the click of a button or effectively manage working capital.
There will be winners and losers. Those who don’t innovate will see start-ups take over the role that banks and intermediaries have played. Regulators will hold banks accountable to heightened compliance standards in this new world order, and customer banking relationships will be impacted so that people bank with banks they like rather than staying with a bank because it’s too much hassle to change. Improving these services with blockchain payments will help put one more puzzle piece into that future reality.
Selwyn Halbertsma is U.S. business consulting practice lead for Synechron.