Blockchain technology promises to facilitate fast, secure, low-cost international payment processing services (and other transactions) through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses. Blockchain technology was initially used to support the digital currency Bitcoin, but is now being explored for a wide variety of applications that don’t involve bitcoin.
There are two main areas of blockchain activity that may see live deployments in 2017 and may have implications for businesses: international payment processing services involving bank-to-bank transfers and trade finance applications (including the use of “smart contracts”). These areas are ripe for disruption because existing systems are often old, slow and costly, according to a report by Credit Suisse, which notes that today’s cross-border wire payments can take days to clear and involve fees as high as 10 percent.2
Blockchain May Speed International Payment Processing Services
Some blockchain-based B2B payment processing services already exist; others are expected to launch in 2017 and later. Perhaps the biggest emerging trend is the use of distributed-ledger technologies unrelated to Bitcoin, such as Ripple and Ethereum. In Japan, a consortium of banks plans to go live in the Spring of 2017 with a blockchain-based payment processing service that will support real-time domestic and cross-border payments at lower cost versus traditional services.3
Several existing blockchain-based payment processing services are based on Bitcoin. Some of these are designed for the relatively small subset of businesses trading directly in Bitcoin. But other payment processing solutions address a much larger audience by using the Bitcoin distributed ledger to transfer payments in conventional currencies. This enables them to bypass existing banking infrastructure, with the goal of accelerating payment and reducing cost. The provider converts the payer’s local currency into Bitcoin, then converts the Bitcoin into the receiver’s local currency, often delivering international payments within one to three days.4 In Kenya, BitPesa is using this method to enable companies to make faster, cheaper payments between African countries without having to rely on slow and inefficient local banking infrastructure, according to a Citi Research report.5
Blockchain May Lower Cost of Trade Finance
Numerous initiatives are focusing on applying blockchain to accelerate and reduce the cost of trade finance, which some consider ripe for disruption6 because it currently often involves costly, time-consuming, paper-based manual processes.7 In a recent proof of concept, Commonwealth Bank of Australia, Wells Fargo and Brighann Cotton undertook what was believed to be the first live global blockchain-based transaction involving two banks; the transaction involved a collaborative workflow to track and pay for a shipment of cotton between two Brighann units in Texas and China.8
IBM’s financing unit is working on a blockchain system to free up capital by resolving disputes with customers more quickly; its tests suggested that resolution time could be reduced from 44 days to 10.9
Despite the potential benefits, some believe it may take time for blockchain trade finance solutions to become prevalent. A report from the Boston Consulting Group estimates that technologies including blockchain could reduce the operational and compliance costs of paper-based trade by 10-to-15 percent, but says that the consensus among banks and non-banks is that mainstream blockchain applications in trade finance may be five years away.10
Contracts That Execute Themselves
For trade finance applications, a key capability of blockchain technologies is smart contracts. These are small, self-executing programs stored on the distributed ledger that automatically execute payments or other actions when specific conditions are met. For example, the contract might trigger automatic payment processing when a company verifies that it has received a shipment of goods, thus accelerating the transaction and reducing the likelihood of payment processing service errors. In 2016, financial consortium R3 and its member banks completed trade finance prototypes that used smart contracts to process factoring transactions and letters of credit.11
