Banks find a use for blockchain: cross -bor­der pay­ments

Fi­nally banks may have found a prob­lem that blockchain is able to solve now and at scale: cross-bor­der cur­rency trans­fers


The JPMor­gan-led In­ter­bank In­for­ma­tion Net­work is start­ing to work at scale

Fi­nally banks may have found a prob­lem that blockchain is able to solve now and at scale: cross­bor­der cur­rency trans­fers.

The bank­ing sec­tor has seen years of over­hype and ex­per­i­men­ta­tion sur­round­ing dis­trib­uted ledger tech­nol­ogy, but one pro­ject led by JPMor­gan Chase, the In­ter­bank In­for­ma­tion Net­work (IIN), is qui­etly pro­duc­ing re­sults at scale.

The IIN is es­sen­tially a more ef­fi­cient way for par­tic­i­pat­ing banks to trans­fer US dol­lars across borders and in­sti­tu­tions. Its el­e­va­tor pitch is that prob­lem­atic pay­ments, which are cur­rently be­ing held up for as much as two days for com­pli­ance is­sues or to re­solve er­rors, could go through al­most in­stantly un­der the new sys­tem.

The net­work does not have the wow fac­tor of other fin­tech in­no­va­tions like chat­bots and ro­bot traders, but its ob­scu­rity does not de­tract from its sig­nif­i­cance. A suc­cess would buoy spir­its in an in­dus­try that has spent $1.7bn on blockchain projects which have yet to meet banks’ “lofty ex­pec­ta­tions”, ac­cord­ing to an­a­lysts at mar­ket in­tel­li­gence ad­vi­sory Greenwich As­so­ci­ates.

“Cer­tainly from a size of ecosys­tem per­spec­tive and start­ing to do some­thing in pro­duc­tion, hav­ing [so many] banks [par­tic­i­pate] and some of the world’s big­gest banks is a big deal,” says David Treat, head of Ac­cen­ture’s cap­i­tal mar­kets blockchain prac­tice.

Un­til the end of 2017 “ev­ery­thing was ex­per­i­men­tal and pro­to­types, pro­duc­tion was some­thing small and safe in the cor­ner,” he says. “What we’ve seen this year is a move to real life pro­duc­tion. And now the first of those ecosys­tems is tak­ing on real life use cases.”

Mr Treat hints that while the IIN is out on its own now as the in­dus­try’s only blockchain pro­ject of scale, it will not en­joy that sta­tus for long. “More and more proof points are com­ing out that are build­ing con­fi­dence among lead­ers in this in­dus­try, that we’re ac­tu­ally at the point where real value is go­ing to hap­pen,” he adds.

There is still an open de­bate on what “real value” is. Blockchain’s early evan­ge­lists saw the tech­nol­ogy’s po­ten­tial for greatly re­duc­ing banks’ costs by elim­i­nat­ing man­ual rec­on­cil­i­a­tion work and other labour in­ten­sive database tasks.

Banks do not ex­pect IIN to gen­er­ate sig­nif­i­cant sav­ings, how­ever, ei­ther now or in the fu­ture.

“Blockchain is frankly a great tech­nol­ogy, how­ever, I’m not sure that the ini­tial hy­poth­e­sis that every­one had about sav­ing sig­nif­i­cant sums of money is where you’ll see a lot of the new prod­ucts be­ing de­vel­oped,” says Umar Fa­rooq, head of blockchain at JPMor­gan. “It will be much more about do­ing things that could not be done with­out blockchain tech­nol­ogy, cre­at­ing new prod­ucts . . . When you look at it purely as an ex­pense-sav­ing mech­a­nism that lim­its the po­ten­tial of the tech­nol­ogy.”

In­stead of fix­at­ing on costs, JPMor­gan has spo­ken about the po­ten­tial for IIN to help banks fend off com­pe­ti­tion from fin­tech start-ups which have ex­ploited in­ef­fi­cien­cies in cross-bor­der pay­ments to of­fer cheaper and faster so­lu­tions.

Whether IIN can be­come big enough to do that, and to have any sort of real im­pact in the mar­ket­place, re­mains to be seen. JPMor­gan es­ti­mates that IIN will han­dle more than 300,000 trans­ac­tions a day, a rel­a­tively small num­ber when com­pared with the 14.5m cross-bor­der pay­ments pro­cessed through the Swift sys­tem daily.

The num­ber of trans­ac­tions grows ex­po­nen­tially as new banks join IIN.

The net­work is grow­ing fast, and now has more than 100 mem­bers. The dy­namic be­tween the IIN and fin­tech is an in­ter­est­ing one. For years, banks have been in­sist­ing that fin­techs are friends, not foes, and Mr Treat says that spirit still gen­er­ally holds.

In the case of IIN, how­ever, fin­techs had min­i­mal in­volve­ment in the net­work’s de­vel­op­ment, and the pro­ject’s ob­jec­tives in­clude pro­tect­ing mar­ket share which fin­techs, such as Trans­fer­wise and

Revo­lut are tar­get­ing.

“If a fin­tech takes an ag­gres­sive stance against a bank and it’s not a two-way part­ner­ship, sure, there’s mas­sive com­pe­ti­tion and a very tough road,” says Mr Treat. “There are more (bank/ fin­tech re­la­tion­ships) that are ac­tu­ally flour­ish­ing . . . than where there’s out­ward com­pe­ti­tion.”

Mr Fa­rooq says that while fin­techs were “not cur­rently in­volved di­rectly” in the IIN, “we ac­tively par­tic­i­pate with fin­techs across all parts of the bank”.

In­ef­fi­ciency in banks’ le­gacy pay­ment sys­tems is ar­guably one of the tougher prob­lems for a third party fin­tech to ad­dress, since the so­lu­tion re­quires an in­ti­mate knowl­edge of the prob­lems, which most fin­tech out­siders sim­ply would not have. The next big blockchain ef­fort might be a more col­lab­o­ra­tive ven­ture across the banks-to-fin­tech di­vide.

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