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Impact on Real-Time Cross-Border Payments

Published on - September 2018
Author - Navin Gupta, Managing Director, South Asia and Middle East & North Africa, Ripple

Since SWIFT established common standards for financial transactions and a shared worldwide banking network in 1973, it has connected more than 11,000 financial institutions in more than 200 countries and territories, facilitating cross-border payments and supporting economic development around the world. 

The system, however, is archaic, inefficient, unreliable and costly, especially with the advent of blockchain technology. For example, an average international payment takes 3-5 days, and 4% of payments using SWIFT fail right now. This leads to a lot of frustration for both corporates and their customers, especially in a globalized e-commerce era where every second matters.

To quote Mr. Narendra Modi from his World Economic Forum address earlier this year, “Disruptive technologies such as blockchain and the Internet of Things (IoT) will have a deep impact in the way we live and work.” There is an increasing consensus on the potential of blockchain, to solve these pain points at an infrastructural level. With blockchain, institutions can communicate information about a payment between each other in real-time, and settle the payment instantly - with no failures. And all this is done with lower transaction fees as well. Simply put, blockchain improves the cross-border payments experience for all.

Overcoming existing pain points with blockchain

Blockchain technology in cross-border payments can enable secure transfers between an infinite number of bank ledgers. This allows one to bypass banking intermediaries who serve as middlemen to help transfer money from one bank to another. The transaction is secure, quicker, and cheaper and has end-to-end visibility anywhere in the world.

The use of blockchain technology in cross-border payments is very different from existing methods such as SWIFT. Even SWIFT’s new GPI (global payments innovation) relies on the same unidirectional messaging, which means that it is not connected to any underlying settlement process. Such a system has its drawbacks, where individuals can manipulate the banking system to commit fraud. A case in point was the Punjab National Bank fraud case, where INR 14,356.84 crore was stolen because perpetrators of the fraud made unauthorized transactions on the SWIFT network, where payment messages sent were not linked to the system that actually settled the transaction.

There are no such issues for payments processed on the blockchain. Any transactions can be settled instantly. Using the bidirectional messaging and settlement component employed in blockchain solutions, such as Ripple’s, ensure that the transaction is validated on the blockchain before the funds are transferred across the ledgers of transacting parties. If for some reason the payment does not go through, both banks are immediately notified and no funds are transferred.

The use of digital assets (sometimes called crypto-currencies) such as XRP (an independent digital asset) can help financial institutions convert funds into the desired currency instantly. Given that India has the largest diaspora population in the world, this means that banks often deal with currency pairs such as SAR/INR to USD/INR. Sourcing liquidity for payments into and outside India can be onerous and costly, and the use of XRP as a bridge asset for currency conversions takes just minutes and is cheaper than what it would cost if one did a traditional fiat-to-fiat exchange. Additionally, the ability to do this in real-time would also reduce a financial institution’s exposure to forex volatility as well.

Blockchain - The Holy Grail of cross-border payments for India

Blockchain can help India’s financial institutions develop world-class payment platforms. Banks and payment providers are aware of the pain points in facilitating cross-border transactions, and have made some progress in addressing them. In India, blockchain technology has been adopted by banks to help improve the payments experience for its customers. For example, last year, YES BANK has signed a partnership with Ripple to help facilitate inbound remittances from North America, the Middle East and the United Kingdom.

Apart from facilitating greater efficiencies in existing payments infrastructure, there is much to be said about what blockchain can do for India and its people. Let us consider its benefits at a more human level. For example, let’s say an Indian construction worker in Dubai urgently needs to transfer funds back home for a medical emergency his family is experiencing. If his bank used blockchain technology, the remittance transfer could be completed within minutes, with fees that are significantly lower than existing methods of transferring money. Had the conventional means of cross-border payments been used, it would have taken 3-4 days, with the money going through multiple intermediaries and incurring extra fees, before finally reaching the worker’s family.

Blockchain can also allow a bank’s customers to use their more efficient cross-border payments service and reduce their dependency on hawala brokers, where fees can also be quite high, while improving financial inclusion amongst the Indian populace as well.

Such instances highlight the centrality of remittances to India’s economy, where the World Bank has stated that India is the world’s largest recipient of remittances worldwide (at about INR 4.6 trillion a year). From a macro-economic perspective, inbound remittances are often used by families for household purchases and investments. The rise in consumption levels will in return create a ripple effect, driving growth in other industries as well. Therefore, the importance of cross-border payments cannot be understated in India, and it is imperative that financial institutions look closely on leveraging blockchain technology for the broader purpose of socio-economic development.

Although much of the current debate on blockchain revolves on its ‘disruptive’ element and focuses on how it seeks to challenge the status quo, innovative cross-border payment solutions built on blockchain technology are not here to replace financial institutions, nor do they seek to circumvent financial regulations. Blockchain technology can enable banks to improve and future-proof their cross-border payments services.

Going back to Mr Modi’s address to world leaders and global CEOs at the World Economic Forum, he said: “This technology-driven world has influenced every aspect of our lives ... Technology has the ability to bend, break and link...” With blockchain technology, we bend and break the existing system, and link the world more seamlessly through cheaper, faster and better cross-border transactions of funds. Blockchain can have a transformative impact on how cross-border payments are conducted, augmenting and reshaping entire financial infrastructures of countries.

The financial ecosystem needs to be looking at implementing thoughtful regulations that can encourage innovative solutions for cross-border payments. At the same time, any implementation of blockchain technology should be done responsibly, with a careful amount of deliberation over the security, risk and stability of cross-border payments solutions. This is the right way on how financial institutions and policy makers can reap maximum benefits with blockchain.

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