While there are numerous points of friction in cross-border payments workflows and infrastructure, much of it can be summed up as "too many chefs in the kitchen."
The traditional correspondent banking model relies on multiple intermediaries to get funds from point A to point B in a timely manner, and as a result, transactions can be costly and lack transparency.
As payments innovators explore how to tackle these issues, some are developing tools that sit upon existing rails and infrastructure to mitigate friction. Others, however, have decided to start from scratch, with blockchain an increasingly attractive technology to operate as an entirely new rail to move money across borders.
Value transfer network Apifiny is one company in the latter camp and has recently launched its Roxe settlement network using blockchain to facilitate real-time clearing and settlement of cross-border transactions. In a recent conversation with PYMNTS, Apifiny CEO Haohan Xu discussed why the time is now for the global payments ecosystem to begin shifting from an account-based paradigm to a token-based one — and how the company plans to overcome the challenging inertia of legacy infrastructure that prevents so many financial institutions (FIs) from embracing innovation.
Too Many Chefs
Many of the biggest pain points of global payments can be traced back to the fact that the traditional correspondent banking model involves too many intermediaries to move money around the world.
According to Xu, the tallest hurdles lie in the actual clearing and settlement of transactions, with each currency relying on its own real-time gross settlement (RTGS) system. When an FI is not directly a part of that system, it relies upon an agency bank that is. The result is a disparate chain of middle-men that limits transparency and speed of cross-border transactions, while adding costs to customers resulting from FIs' need to hold reserve funds in multiple currencies at other institutions.
In the B2B payments realm, these friction points are especially damaging for corporates sending high-volume, high-value transactions without any visibility into where money exists as it moves throughout the correspondent banking chain.
Using blockchain, Apifiny's settlement network Roxe aims to settle a range of asset classes including the U.S. dollar (USD) and digital currencies. The technology uses smart contracts in the form of what Roxe calls smart ownership proof, settlement notes that hold the asset itself.
"Banks can have smart ownership proof that mirrors the underlying asset," Xu explained. "When banks send money to each other, they can send ownership proof to correspondents on the Roxe chain; when they receive smart ownership proof, they can immediately verify that it has underlying USD, for example, and they can go to any settlement node and redeem that USD."
He added that the technology aims to "change the financial system from an account-based paradigm to a token-based paradigm," with Apifiny partnering with both FIs and digital asset exchanges to wield an asset trading model to facilitate currency exchange and settlement.
Easing Banks Into Change
If much of this sounds technological, that's because it is, and for many FIs, the burden of investing in the understanding of this technology remains high.
Xu said he is aware of the adoption challenges for banks that have stuck to traditional global payments infrastructure and workflows for decades. The three biggest adoption challenges, he said, include the "inertia of legacy technology," as well as the resources banks must invest in understanding and implementing this technology. The third — and most difficult, he said — is the hurdle of regulatory compliance across geographies.
As such, Xu said that while FinTechs like Apifiny are attempting to overhaul the entire makeup of the global payments ecosystem, the first steps will be simply to encourage an environment in which blockchain coexists within the current traditional system.
It will be at least another decade until blockchain can fully disrupt the market and replace legacy ways outright, he said. For Apifiny, the next few months will be focused on signing on FI customers to Roxe, and while change is difficult, Xu highlighted that the technology operates without a native digital currency - unlike other blockchain-based payment networks like Ripple and its XRP. This lowers adoption barriers for banks that aren't willing to hold such assets on their balance sheets, he noted, although the adoption curve will still likely be a long one.
Until then, Xu highlighted the importance of taking the first step to such a massive paradigm shift.
"There has to be a starting point somewhere," he said.