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In August 2016 the World Economic Forum published a report declaring that blockchain will become the “beating heart” of the global financial system. Amongst the most popular use cases for the recently surfaced technology is that of cross-border payments and correspondent banking, which have been portrayed as slow, complex and inefficient. In that context, distributed ledger technologies (DLTs) like the Blockchain have shown promise in cutting costs and allowing for simplification of processes and transparency in data-sharing throughout the payment system.
The hype around blockchain technology over the last few years has led to quite a few platform initiatives that vary between them on a number of things, but most notably on their distributed economic consensus method and how they achieve trust. As a result, the spectrum between permissionless and permissioned distributed ledger systems is wide (e.g. between Bitcoin’s, pseudonymous, ‘proof-of-work’-based decentralised system and Ripple’s more centralised system that operates on a ‘validator’ basis) and, consequently, there are also trade-offs in relation to their speed, costs involved, irrevocability and finality of payments.
While these new types of ‘Consensus-as-a-Service’ platforms has still to prove that they can deliver on their promise of creating efficiencies in the international payments space by making payments faster, more secure and transparent, the question that arises is: What are the key issues that they will need to pay attention to in moving forward?
Having studied the history and development of SWIFT for a number of years[1], our research led us to some valuable findings regarding what it takes for a cross-boarder payments platform to be successful and find itself at the core of the global financial system, but also what are the drawbacks that newer platforms can try and avoid as they compete in the international payments market.
SWIFT was initially founded to replace out-dated technologies such as the telegram and telex, so its technological capability was somewhat undisputable and efficiencies in the payments' lifecycle were largely anticipated. However, the key issue that SWIFT struggled with in the first few years was interfacing with existing technologies. While it took time to respond to these challenges – which on their own delayed adoption – commoditised products such as the ‘SWIFT Interface Device’ (SID) or subsequent Terminal Devices proved to be a stepping stone in achieving critical mass as they allowed for a seamless and cheaper connectivity to the network.
Creating a common language that would provide the basis for the automation of transaction processes was also at the top of the SWIFT agenda from the beginning. Having said that, messaging standards were not created in a vacuum. Throughout SWIFT’s history we traced a number of disputes and conflicts which made clear that voluntary consensus was the only way forward in order for the sector to attain process innovation and business transformation. As expected, this came with time and only after establishing co-operative principles and a sense of community across the industry.
Finally, SWIFT made a great effort that lasted more than two decades to not only internalise and influence regulation in cross-border payments, but also level the playing field when it comes to different jurisdictions.
At the moment, the different DLT platforms have shown little appetite to co-operate and discuss standards as well as protocols. In addition, lack of platform integration can lead to a fragmented payments landscape, which could prove more expensive to both large and small firms to maintain. Whilst competitive pressures can push for quality of services, it is still unclear how the benefits of DLT are going to be realised in the mid-term for the sector in its entirety if there is little co-operation (or co-opetition) among institutions globally on key issues such as standards, platform protocols, regulation, and technology adoption.
It goes without saying that shared ledger systems hold great promise and have the capacity to transform the entire cross-border payments sector and beyond. How and when this will be achieved it remains to be seen. - A variation of this article appeared in the Print Edition of the World Finance magazine (http://www.worldfinance.com/) in the Jan-Feb 2017 issue.
[1] Scott, S. V. and Zachariadis, M. (2014) "The Society for Worldwide Interbank Financial Telecommunication (SWIFT): cooperative governance for network innovation, standards, and community", 83, Routledge, Taylor & Francis Group, London ; New York, NY. A free copy of the book can be downloaded from Amazon here.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Nick Green Director at Purple Patch Broking Ltd
22 August
Oleg Stefanet Chief Risk Officer at payabl.
20 August
Venkatesh P Co-Founder and Director at Maveric Systems
19 August
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