Banks find use for blockchain: cross-border payments


Finally, banks may have found a problem that the blockchain can solve now and on a large scale: cross-border currency transfers.

The banking sector has seen years of overcrowding and experimentation around distributed register technology, but a project led by JPMorgan Chase, the Interbank Information Network (IIN), is quietly producing large-scale results.

The IIN is essentially a more efficient way for participating banks to transfer US dollars across borders and institutions. His elevator pitch is that problematic payments, which are currently blocked for two days due to compliance issues or to resolve errors, could pass almost immediately under the new system.

The network does not have the wow factor of other fintech innovations like chatbots and robot traders, but its darkness does not diminish its meaning. A success could fool the spirits of a sector that has spent $ 1.7 billion on blockchain projects that have not yet met the "high expectations" of the banks, according to analysts at Greenwich Associates, a market intelligence consultant.

"Surely from a perspective dimension of the ecosystem and starting to do something in production, in having [so many] banks [participate] and some of the biggest banks in the world are a big deal, "says David Treat, responsible for the blockchain practice of Accenture's capital markets.

Until the end of 2017 "everything was experimental and prototype, production was something small and safe in the corner," he says. "What we have seen this year is a transition to the production of real life, and now the first of these ecosystems is dealing with cases of use of real life".

Mr Treat suggests that while the IIN is out by itself now as the industry's only blockchain scale project, it will not enjoy that status for long. "There is more and more evidence points that are creating trust among the leaders of this sector, that we are really at the point where the real value is going to happen," he adds.

There is still an open debate about what "real value" is. Early Blockchain evangelists saw the potential of technology to significantly reduce bank costs by eliminating manual reconciliation work and other intensive database activities.

Banks do not expect IIN to generate significant savings, either now or in the future.

"Blockchain is frankly a great technology, however, I'm not sure that the initial hypothesis that everyone had to save significant amounts of money is where you'll see many of the new products being developed," says Umar Farooq, head of blockchain at JPMorgan. "It will be much more to do things that could not be done without blockchain technology, creating new products … when you consider it as a cost-saving mechanism that limits the potential of technology."

Instead of fixing costs, JPMorgan talked about the potential for IIN to help banks reject competition from fintech start-ups that exploited cross-border payment inefficiencies to offer cheaper and faster solutions.

It remains to be seen if IIN can become big enough to do so and have a real impact on the market. JPMorgan estimates that IIN will manage more than 300,000 transactions a day, a relatively small number compared to the 14.5 million cross-border payments processed daily by the Swift system.

The number of transactions grows exponentially with the entry of new banks into IIN. The network is growing rapidly and now has over 100 members. The dynamic between IIN and fintech is interesting. For years, banks have insisted that fintechs are not friends and Mr. Treat says the spirit continues to be valid.

In the case of IIN, however, the fintechs have had minimal involvement in network development, and project objectives include the protection of the market share that fintechs, like Transferwise and Revolut, are targeting.

"If a fintech takes an aggressive stance against a bank and it's not a two-way partnership, of course, there's a massive competition and a very tough road," says Treat. "There are more (bank / fintech reports) that are actually flourishing … compared to where there is external competition."

Farooq states that while the fintechs "are not currently directly involved" in INI, "we actively participate with the fintechs across all parts of the bank".

The inefficiency of banks' legacy payment systems is probably one of the most difficult problems to deal with for a third-party fintech, as the solution requires a thorough understanding of the problems that most of the fintech outsiders simply would not have. The next big blockchain effort could be a more collaborative collaboration between the banks and the fintech division.

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