Anyone who has transferred money between countries recently realizes the process has evolved little in the last decades. Too slow, too opaque and too expensive are the pain points. This is sparking debate among banks worldwide whether cross-border payments could be faster and more affordable, reliable, and transparent if a 21st-century digital solution was deployed.
The prize is a hardly small change; global payments are looking to be a $2-trillion industry by 2020, according to McKinsey. And as more of us become part of the globalized economy, the money changing hands is set to head skywards.
Blockchain is marked as one solution. Roughly 90 percent of top European, North American and Australian banks are experimenting with it, and recently it has reached peak hype.
Even though blockchain is potentially entering Gartner’s “trough of disappointment” in its so-called “hype cycle,” it still offers answers to the current pain points in international remittances. It’s all about getting rid of the middleman. When two business parties involved have a single shared view of the transaction, there is a paradigm shift.
The requirement of banks to hold and process funds temporarily for transactions that they might otherwise have no vested interest in could diminish with blockchain.
Currently, payment providers need to pre-fund accounts on either side of a transaction in local currencies. This can be expensive and lead to a poor deal for customers. Blockchain negates this need. That is because trust is hardwired into the design of blockchain. Everyone has a record. The ledger does not lie. Shared record-keeping also boosts efficiency and reduces data discrepancies.
Those that do millions of international micro-payments, from hotel booking engines to auction sites, also have an issue.
However, putting all the world’s transactions on one blockchain is impossible. Institutions also have diverse needs when it comes to payments, and one single blockchain is not capable of serving all of these, let alone in the public domain.
This is the reason many companies are developing inter-ledger protocols that can be adapted by all. Banks in different countries often run computer systems that cannot talk to one another. When the international financial plumbing is standardized, then this technology could come into its own and in the process strengthen the global financial system.