02 Aug Can blockchain scale for cross-border payments?
Banks and business would love to see blockchain solve their challenges of cross-border payments. At this early stage, it’s unclear whether blockchain can meet the three biggest problems of scalability, speed, and transparency, not to mention security.
Payments pain points
The speed of cross-border payments is one of the biggest pain points for business. McKinsey research shows the average time to complete cross-border payments ranges from three to five days.
Fees for cross-border payments are another big beef for business and they range from 3% for high volumes to more than 10% for lower volume transactions. Often, inaccurate or incomplete payments result because additional fees are added or deducted through the chain of international payments and the receiving bank.
It’s estimated that cross-border payments in 2015 totaled $150 trillion, generating more than $200 billion in fees for services provided to payers and payees. It’s no wonder traditional financial institutions, including the more than 10,000 using SWIFT in more than 200 countries, are resistant to change.
The other big barrier to blockchain technology is scalability. Bitcoin, Ethereum, and other blockchain solutions are not yet ready for prime time. They simply can’t yet handle the volume required to manage international payments today.
Pilot projects producing mixed results
Near-instant peer-to-peer payments solutions such as MobilePay, Venmo, and Xoom continue to grow and create consumer expectations for instant payments. It’s not surprising that business is looking for the same benefits from their banks.
Thanks to fintech innovations, there are possibilities on the horizon for better business banking services, including faster payments and lower costs with increased security.
There are many pilot projects by banks testing the possibilities of blockchain-based distributed ledger technologies to facilitate cross-border payments.
New payments providers & challengers
There are a host of new payments providers and challengers for traditional banks and cross-border payments.
Wyre, a San Francisco fintech, charges a 0.75% fee for international payments compared to 4-6% or more by traditional banks. It also claims transactions are completed in under six hours with transparent tracking and an easy to use dashboard.
Argentinian Banco Masventas (BMV) announced a partnership with Latin American fintech provider Bitex in May to test bitcoin for international payments. Bitex promises faster, more secure and strict KY seek compliance transactions.
Veem, formerly Align Commerce, now has more than 60,000 small business clients using its global bank services in 95 countries. It allows small businesses to send global payments simply, securely, faster and less expensively.
Many other blockchain-banking experiments are in the works.
Ripple is also making payments waves
Ripple has a growing number of banks testing xRapid, it’s tool for cross-border fiat transfers between financial institutions including, China-based payment services provider Lian-Lian, the Saudi Arabian Monetary Authority, and WesternUnion.
xRapid has claimed to reduce transaction costs between 40% and 70% across a number of pilot projects. It also said transaction times have averaged two to three minutes compared to standard transactions taking up to five days.
Asheesh Birla, SVP of Product at Ripple said “XRP’s utility lies in its speed and scalability, which makes it the perfect fit for cross-border payments. The XRP Ledger can send 1,500 transactions per second.”
Other bank participants testing Ripple solutions include the Canadian Imperial Bank of Commerce, Swiss-based UBS, Spain’s Banco Santander, and Italy’s Unicredit.
Santander launches blended blockchain solution
In April 2018, Santander launched OnePay FX, a blockchain-based payment network using Ripple’s xCurrent technology which uses a modified version of the traditional correspondent bank process to deliver faster payments and lower costs. The network is available for the bank clients in the UK, Spain, Poland and Brazil with new countries expected to be added soon.
Ripple says it now has more than 100 financial institution clients using or testing its blockchain and distributed ledger technology services.
Blockchain not yet ready for prime time
Despite the possibilities for distributed ledger technology, the Bank of Canada, the Russian Central Bank, and Dutch National Bank have each said blockchain is not yet mature enough to take over from the existing international payments system.
The experimentation with blockchain technology in banking continues but sooner rather than later, the code will be cracked in a faster, cheaper and secure new system for cross-border payments will emerge.