Banking on Blockchain, Linking Cross-Border Payments

https://www.pymnts.com/wp-content/uploads/2017/10/IBMPodcast_JesseLund.mp3

Might seamless cross-border payments be among the holy grails of payments? Think of the complexities: multiple currencies, time zones, financial institutions, regulations … the list goes on. Speed and simplicity are prizes to be desired in cross-border transactions (as they are to be prized in so many other subsets of commerce).

To that end, IBM has just debuted a blockchain-based network for banks, teaming up with a pair of other companies – Stellar, a blockchain startup, and financial services firm KlickEx. In the press release, the trio has said it can “reduce the settlement time and lower the cost of completing global payments for businesses and consumers.”

The system has had an initial launch across 12 currencies, far-flung throughout Australia, New Zealand, the United Kingdom and the Pacific Islands.

In an interview with PYMNTS’ Karen Webster, Jesse Lund, IBM’s head of blockchain market development in global financial services, said that the Monday announcement “is not a new foray for IBM,” calling it a natural extension of relationships that are already in place between IBM, banks and financial services firms globally.

Lund told Webster that there has been relatively little investment in global payments infrastructure in the last three or four decades, which has led to inefficiencies – especially in cross-border transactions, marked as they are by the “disjointed process of sending money between two counterparties” across banks and currencies.

Amid the complications of this process, these transactions have traditionally taken days – or even weeks, in some cases – to settle. Done the way it’s always been done, reconciliation still remains a manual process. And with so many manual processes, manual activities lead to inefficiencies, which in turn lead to costs, accrued through wasted time and money.

Now, via blockchain and the aforementioned IBM partnerships, said Lund, settlement “takes seconds.”  In one example proffered by the press release, the network might connect a Samoan farmer with an Indonesia-based buyer, and “the blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to put up collateral, obtain letters of credit and finalize transaction terms with immediate payment, conducting global trade with transparency and relative ease.”

Lund noted that 15 banks are part of the initial adopters of the network. He also noted that KlickEx is the inaugural subscriber on the network, and added that as a relatively small financial institution based in the Pacific, that company has its roots in financial inclusion funded by the United Nations and SWIFT.

KlickEx’s focus is on bringing payment volumes forward, as they want to expand their network into different regions, utilizing blockchain for those initiatives. He also said IBM has been partnered with Stellar.org, which has been helping to build the now-live network for the past several months.

As part of the Monday announcement, Stellar is joining the Hyperledger project. Stellar, said Lund, provides the blockchain network that supports the ultimate settlement of transaction.

The rollout stands somewhere between a pilot and a full-blown implementation, which Lund said is processing and monitoring live transactions in “a very controlled environment.” Beginning in 2018, IBM will be working with the banks to develop a commercial model and develop a governance model across blockchain. “This network will expand by way of the priorities of the banks,” said Lund, which are both subscribers to, and IBM’s partners in, the network.

Said Lund of the concept behind the Monday announcement: “Unlike any of the other models that are out there today … this makes use of a digital asset that provides an ability to bridge the two digital currencies … we can bring together for the first time the payment instruction and clearing aspects and settlement components onto a single integrated network, and put it behind a very simple, standard API” that allows counterparties to come together.

“Nobody is going to jump to this technology overnight,” said Lund. “But if we can provide an alternative financial rail that provides a lot more efficiencies,” then financial institutions large and small will migrate transactions to that rail.

IBM has said it will ultimately seek to support central bank-issued digital currencies, securities, bonds and other assets.

“This is the next step in bringing blockchain from concept to transactional reality,” said Lund.