Blockchain and payments: Lessons learned and future prospects
The past 12 months have seen initiatives across the globe further experiment with blockchain technology in pursuit of the holy grail of a production ready Distributed Ledger Technology (DLT) payments solution. Alongside FinTech initiatives, individual banks, central banks and SWIFT have confirmed their interest in DLT, testing the waters with various trials and proof-of-concepts. What are the key takeaways from these initiatives? What role will blockchain play in the future of cross-border payments? And how can we make the future happen?
Blockchain-based technologies are now seen under a much more pragmatic eye, no more as solutions seeking a problem but as an innovative technology coming with interesting assets like embedded cryptography, resilience, distributed data, and tamper-proof. While yet to be applied to payments, the financial industry is well aware of the potential applications and how game-changing this technology is.
International payments, especially outside the SEPA zone, have to evolve because clients are increasingly asking for faster processing, easier reconciliation, and greater transparency on fees. To achieve this, it is first necessary to develop capabilities to process faster or instant payments into worldwide networks. Technologies derived from blockchain – distributed ledger technology (DLT) – are now studied and discussed in the international payments sector because they could probably bring some improvements to the way payments are processed and therefore meet customers’ demands.
Blockchain is now a generic concept, it can cover different technologies and underlying tokens and is being implemented variously by Fintechs. Even if the market is crystallising around Bitcoin and Ethereum, there are still many other cryptocurrencies in the playing field; none of these offerings is compatible with the others. International payments need standards to work properly and is not designed to play with non-liquid private currencies. Additionally, one of the key elements of international payments and correspondent banking is reachability. To serve clients, banks must be able to process cross-border payments in any country they require. This is why SWIFT has 11,000 banks in its network; by using SWIFT standards, you can reach any of these banks. A blockchain-based solution could work only if based on as many banks as possible being able to use the same technology.
Another challenge with blockchain is that it is not plug and play ready to be connected to legacy systems. 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. Furthermore, when a bank processes a transfer, it is not just the payment that is involved. In the environment of increased regulatory scrutiny, many controls accompany payments transfers to ensure compliance with anti-money laundering, counter-terrorist financing, and sanctions rules. Deciding when these controls are implemented – before or after a payment on the blockchain – is a challenge and such controls will probably inhibit how real-time any payment will be.
I am convinced that blockchain can deliver better services for clients, but not on its own. All the other services that are baked-in to correspondent banking should be adapted to blockchain. This is the reason that developments are taking so long to come to market. Blockchain is one of the building blocks we will use in our digital transformation. One of the most challenging aspects is to ensure that all the building blocks, including blockchain, can work together and with our legacy systems. Internal legacy systems must be able to speak to external platforms and APIs.
Head of Marketing, Cash Clearing Services
The future of international payments on blockchain can emerge from brand new systems but needs to resolve the question “where is the cash?”. If the cash is on the ledger, it is equivalent to electronic money and except if central banks guarantee its convertibility, trust will rely on actors in the network. If the cash is not on the ledger, synchronisation with the cash on classic accounts will have to be strictly organised with clearing houses, not necessarily less complex than today.
Societe Generale looks at blockchain as part of its overall digital transformation process. We want to see how the technology’s potential is able to reduce costs and improve processes.
Head of Payment Innovation
Societe Generale is closely following blockchain and DLT projects in the financial industry. It is involved in SWIFT’s blockchain pilot for nostro accounts, for example. This project looks good as it should bring greater visibility of and security to nostro accounts but further tests are required to prove its viability. Some studies have been made to evaluate the cost of developing an internal payment solution based on Fintech technology. One of the key conclusions was that a lack of standards would hinder any extension of the solution. Initiatives are now everywhere and eventually if one solution evolves as the leader, it will be time to adopt it, if it makes sense. But at present the multiple systems that do not speak to each other will not improve customer experiences in correspondent banking and international payments.
Many of the early Fintech companies that wanted to disrupt payments have mostly moved to other areas of banking, including asset management, securities trading, and trade finance. They have realised that payments are not easy. Applications such as Bitcoin, which use private money in the e-money world, appear not to be the game-changers they were once thought to be.
In trade finance, DLT is one of the technologies that is being investigated, but it is not the only one. Societe Generale bases its developments on resolving clients’ pain points and then looks at which technologies might solve these. One of the main challenges for clients are the delays caused by manual and paper-based processes. Trade finance banks aim to bring trust between the parties to a trade and to finance receivables. Documents form the basis of this trust and Societe Generale’s goal is to digitise these.
Societe Generale is investigating whether DLT can be a solution for trade finance via the Digital Trade Chain Consortium, which also includes Deutsche Bank, HSBC, KBC, Natixis, Rabobank, and UniCredit. The Digital Trade Chain will connect all parties involved in international trade – buyers, sellers, transporters, banks financing the deals, etc. The aim is to launch a pilot with customers in early 2018. It is a challenging initiative, not just from a technology point of view. We are creating a brand-new solution that is not defined by regulators. The project has started with a restricted scope of seven banks in Europe, which is designed to help keep complexity to a minimum. The aim is to invite other banks to join the initiative to extend the geographical reach as much as possible.
The Digital Trade Chain initiative is helping us to understand the difference between a blockchain proof of concept and launching a real product. All of the banks involved are working very well together, but it is still a very complex and challenging project
Global head of product management & innovation – trade services & finance
A real game-changer for blockchain technology would be if a central bank issued a crypto sovereign currency. For the moment, we do not have any clues as to whether a central bank will do this. Some are investigating the possibility of having cash on the distributed ledger, which can be managed directly in the blockchain, with electronic tokens. If this becomes the case, banks will have to adapt to it and review the distribution model of these moneys; will not be resolved easily. At present, blockchain in payments is typically based on private assets, not central bank money.