Payments is increasingly seen as an area that is ripe for disruption, having the potential to enhance payment processing. To overcome the current structural weaknesses in the payments area including low speed, high expenses, financial institutions are increasingly adopting the idea of blockchain or distributed ledger technology (DLT). This in order to offer (near) instant cross-border payments at lower costs, higher security and more reliability. Up till recently most of these trials have been non-interoperable stand-alone solutions. But that may change!

Last month Blockchain bank consortium R3CEV and 22 of its partners announced that they were collaborating on the development of a cross border payments platform built using distributed ledger technology. This may be the first time a shared infrastructure has been developed that addresses the full payment workforce.

The question is: where are we now in the Gartner cycle, and will this R3 initiative be the breakthrough for a more massive adoption of this technology in the payments area?

Central banks:  still see hurdles

Also central banks are actively investigating and in some cases even experimenting with blockchain including those of the United States, Canada, China, U.K., France, Germany, the Netherlands, Singapore, South Africa, and Sweden. Central banks’ interest in blockchain represents further recognition of the technology’s potential to transform many aspects of financial systems worldwide, including international payments. They are generally positive about the technology’s potential for applications such as international payment solutions.

On the other hand central banks also note technical obstacles such as scalability and other concerns such as privacy, security and legal issues. They generally emphasize that the technology is still at an early stage and may be years away from widespread use for such applications.

In a recent published research paper, the Deutsche Bundesbank offers up some encouragement for DLT acceptance. They are highlighting the technology's ability to eliminate reconciliation processes, boost transparency and protect against cyber-attacks. The Bundesbank however dampened the blockchain enthusiasm, dismissing distributed ledger technology's prospects in retail payments, at least in the Eurozone,  which already boasts fast transfers and systems that require a minimum of reconciliation and can process millions of transactions with ease every day.

The authors concede that "it is still unclear whether DLT also has the edge over today’s technology in terms of security, efficiency, costs and speed".

Existing challenges

Although blockchain technology is promising, there are a number of challenges to overcome in using it for payments on a large scale. 

The feasibility of using blockchain technology for a high volume of payment transactions still remains the biggest question. From a technical point of view the processing volume of existing blockchain projects is still relatively low. May be a few hundred thousand a day. Especially compared with the global payment network SWIFT which processes as many as 30 million messages in a day.

Another issue is the following. Unlike current payment networks, blockchain is an open network (public blockchain), and hence would pose challenges for deployment of payment infrastructure. There is a possibility of using private blockchain networks, but the feasibility of such networks needs to be evaluated for the global scale.

International payments also need standards to work properly and is not designed to play with non-liquid private currencies. A blockchain-based solution could work only if based on as many banks as possible being able to use the same technology.

And last but not less important, there is the legal challenge. Whereas blockchain technology has rapidly evolved, the underlying legal framework is still developing (and uncertain), and lacks harmonisation across national jurisdictions.


Need for plug-and-play-ready systems

Common standards and a common legal and regulatory framework are prerequisites for large scale blockchain adoption. For a scalable adoption of blockchain in a shorter term period, not so much standards and a legal/regulatory framework are the dominant factors. Easier connection and interoperability with existing legacy systems could play a much more decisive role. There is however no one-blockchain-fits-all formula for applying the technology to foreign payments. A plug-and-play-ready solution to be connected to legacy systems is not there (yet).

I agree, plugging high-tech on such systems is very complex. If financial institutions want to take advantage of blockchain and DLT for payments across borders, they must first address the shortcomings of their legacy technology, one of which is the lack of real-time capabilities.

But new projects are showing that this is changing. Here’s a look at some of the most promised projects and initiatives (thereby focusing on the past few months) related to the use of blockchain technology for cross-border payments.

Recent projects and initiatives

A growing number of banks, big tech companies, fintechs and even central banks have confirmed their interest in DLT, testing blockchain technology with various trials and proof-of-concepts, thereby trying to overcome the various challenges. Current initiatives, especially those concerning international faster payments, where companies can settle international payments (almost) in real time, have been successfully prototyped. But what is more important is their growing focus on creating accessible and interoperable networks or platforms.

R3CEV (October)
The most recent example is that of the R3CEV Blockchain consortium and 22 of its member banks (including names like Barclays, BBVA, Commerzbank, DNB, HSBC, Intesa, KBC, KEB Hana Bank, U.S. Bank and others). The have collaborated on the development of a cross-border payments platform built using distributed ledger technology (DLT).

Developed on its Corda platform, the new product will facilitate instant international payments, offering an alternative to the current slow and costly payment systems. The platform will enable both existing Central Bank currencies (and any digital currencies developed in the future) to be transacted via the blockchain. R3 expects a prototype to be launched before the end of 2017. 

While many similar DLT projects have focused on specific use cases within the international payments market, this project  “is the first time a shared infrastructure has been developed that addresses the full payments workflow”.  "This marks a significant milestone for distributed ledger technology as we work alongside our bank members to harness its unique attributes to build the world’s first true international payments system." "This solution will be a game-changer for any bank or company whose business relies on making or receiving cross-order payments.” R3 chief executive David Rutter

Gates Foundation: Mojaloop (October)
Another interesting project is that of the Bill & Melinda Gates Foundation. They have launched an open-source blockchain-based payment platform, named Mojaloop, as a payment service of the poor. Mojaloop’s mobile payment software, built as part of the Foundation's Level One Project, is powered by the Interledger technology, which in turn was built by distributed ledger technology (DLT) startup Ripple.

“Mojaloop establishes a blueprint for connecting today’s financial services sector, and can be used as a solution to barriers that banks and providers seeking interoperability have traditionally faced.” Bill & Melinda Gates Foundation

Aside from Ripple, the Gates Foundation also worked with other financial technology companies to make Mojaloop easily accessible. An open application programming interface (API) for mobile systems companies developed by Ericsson, Huawei, Telepin, and Mahindra Comviva will make it easier for mobile money providers to integrate their services with, and build products for, Mojaloop.

 “Interoperability of digital payments has been the toughest hurdle for the financial services industry to overcome.” “With Mojaloop, our technology partners have finally achieved a solution that can apply to any service, and we invite banks and the payments industry to explore and test this tool.” Kosta Peric, Financial Services for the Poor deputy director at the Gates Foundation

Mastercard (October)
Mastercardhas announced opening up access to its inhouse blockchain technology platform to banks and merchants for wider use, to enable partner banks and merchants to make cross-border payments faster and more securely. Mastercard is encouraging companies to begin settling transactions through its blockchain APIs, build on MasterCard’s existing payment network, which (it says) can ease some of the friction experienced during cross-border payments processes.

This will alleviate them from having to build out their own distributed ledger server nodes. Once a part of the blockchain network, banks and retailers can add their own internal nodes to scale capacity. Furthermore, the company intends to combine its blockchain APIs with other services to allow partners to develop their own use cases and create unique transaction types.

“MasterCard’s blockchain solution provides a new way for consumers, businesses and banks to transact and is key to the company’s strategy to provide payment solutions that meet every need of financial institutions and their end-customers,” Mastercard press statement.

The platform has been engineered to address non-card payment transaction such as B2B payments and trade finance transactions complemented by built-in proof-of-provenance to authenticate products across the supply chain. Mastercard will initially implement the technology in the B2B space.  The Mastercard blockchain service can be used to clear credit card transactions, eliminate administration tasks using smart contract rules and thus, speed transaction settlement.

JPMorgan (October)
JPMorgan Chase launched a new interbank payment processing network powered by its enterprise-ready distributed Ethereum ledger and smart contract platform Quorum. The so-called Interbank Information Network (IIN) leverages the distributed ledger technology, or simply blockchain, to minimize friction in the global payments structure by ensuing faster payments in fewer steps but more securely.

Quorum is an enterprise-focused version of Ethereum, developed by JP Morgan, designed to support any application requiring high speed and high throughput processing of private transactions within a permissioned group of known participants. JP Morgan believes Quorum has the potential to revolutionise the interbank payments business and is inviting other banks to join the newly-formed Interbank Information Network (IIN) alliance to try out the platform.

ANZ and the Australian arm of Royal Bank of Canada are the first to sign up. Other banks are expected to join in the coming months, with a specific focus on the correspondent banking market.

"IIN will enhance the client experience, decreasing the amount of time - from weeks to hours - and costs associated with resolving payment delays. Blockchain capabilities have allowed us to rethink how critical information can be sourced and exchanged between global banks." Emma Loftus, head of global payments and foreign exchange for JPMorgan Treasury Services

IBM (October)
IBM is leading a project that uses blockchain technology to create a new cross-border payment service to make international payments in developing countries more efficient and less expensive. IBM is using the technology to help farmers and other small businesses in underdeveloped countries participate in global trade. The IBM universal payments system is intended to simplify the way funds are exchanged around the world, and to reduce settlement time and cost of cross-border payments, customized for businesses and consumers.

The companies will use IBM’s blockchain technology to process financial transactions across borders and currencies and provide clearing and settlement of trades on a single network in real time. A process which is often prohibitively slow and costly for small business owners, especially when they are in developing regions with smaller banking infrastructures. Settlement instructions are provided via smart contracts on Hyperledger Fabric .

IBM thereby partnered with KlickEx Group, a United Nations-funded, Pacific-region financial services company, and Stellar.org, a fintech non-profit organization building an open source blockchain network for financial services on the new system. National Australia Bank, TD Bank, and other financial institutions are lending their support, by collaborating and advising in the system's development with the intent to help expand its use in other regions around the world, says IBM.

Advanced Pacific Financial Infrastructure for Inclusion (APFII) members, a public-private partnership initially funded by the United Nations and Swift is using the network, vowing to process up to 60% of all cross-border payments in the South Pacific's retail foreign exchange corridors by early next year.

It is already processing live transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom. The technology is already in production supporting transactions in 12 currency corridors across the Pacific Islands and Australia, New Zealand and the United Kingdom.

SWIFT(October)

Swift and 22 additional global banks (including names like ABN Amro, BBVA, China Construction Bank, Deutsche Bank, Erste Group, FirstRand Bank, JP Morgan, Rabobank and Santander) have joined its blockchain proof of concept (PoC), designed to explore whether this technology can help banks reconcile their international nostro accounts in real time, optimising their global liquidity. (Currently, it is difficult for banks cannot to effectively monitor their account positions in real time due to lack of intraday reporting coverage).

They joined a group of six founding banks (who are ANZ, BNP Paribas, BNY Mellon, DBS, RBC and Wells Fargo) are working since January this year to test and validate the new blockchain application - based on Hyperledger Fabric v1.0 technology - and evaluate how the technology scales and performs.

The PoC is part of the Swift Global Payments Innovation (GPI) initiative “to re-arm the correspondent banking system for a new age of technological disruption”. The overall aim of the GFI is to make cross-border payments more efficient.

Results of the tests were released at the SWIFT’s annual user meeting at Sibos in Toronto in October.

“The SWIFT Nostro DLT Proof of Concept (PoC) leveraged blockchain technology to provide real-time visibility on the liquidity of nostro accounts, easing reconciliation and allowing liquidity savings while meeting key industry requirements such as governance, data privacy, standardisation, security and identity.” Damien Vanderveken, Head of R&D, Labs and UX Swift

And what is Ripple doing?

And of course there is Ripple, one of the main players in the blockchain payments area (see my earlier Blog: Ripple and blockchain: did it ripple?, …). Ripple recently announced that more than 100 financial institutions now have joined its enterprise blockchain network RippleNet.

"Now more than 100 financial institutions are looking to Ripple as the solution to the problem. Updating their payments infrastructure with Ripple has become the equivalent of a retailer choosing to build an e-commerce business in the year 2000 — it’s a no brainer." Brad Garlinghouse, CEO, Ripple

A host of major banks including names like Santander, UniCredit, UBS and Royal Bank of Canada amongst others view Ripple's payment protocol and its decentralised global exchange network RippleNet, as a valid mechanism for offering real-time cross-border payments. Many financial companies have subsequently announced experimenting and integrations with Ripple.

Ripple is very active in the Asia-Pacifica region. Next to their existing ones in San Francisco, New York, Tokyo, London, Luxembourg and Sydney, they recently opened a new office in Singapore to support their growing customer base across Asia-Pacific markets. As a leading trade and fintech hub, Singapore offers Ripple leverage in the region as they expand their global footprint. Ripple also opened up a new office in Mumbai, India. This comes at a time when the country is increasingly making efforts to embrace blockchain technology.

Are we nearing the Gartner Slope of Enlightment Phase ?

From the recent developments in the blockchain arena and the various projects and initiatives related to payments, it is arguable that  we are moving further on the Gartner cycle and that we are now ending the Through of Disillusionment phase and even are at the start of the Slope of Enlightment phase.

"Global payments are undeniably going through a sea change, led by financial institutions adopting blockchain to fix their customers’ broken payments experience.” 

And that for various reasons.

First, there is a growing pressure for international payments to evolve. Clients are increasingly asking for faster processing, easier reconciliation and greater transparency on fees.

Second, blockchain and/or distributed ledger-based technologies are now increasingly seen from a more pragmatic point of view. “They are no longer seen as solutions seeking a problem but as a real innovative technology. “

Third, these technologies are now studied, discussed and trialled in the international payments area  to bring improvements in the way payments are processed thereby meeting customers’ demands.

Fourth, blockchain is now increasingly seen as a generic concept, that can cover different technologies and underlying tokens and be implemented variously by fintechs.

Finally, and may be the most important, banks are increasingly looking for blockchain-based solutions that can be easily connected and are interoperable with legacy systems.  That could make it much easier for them to adopt this technology for cross-border payments.