The buzz around blockchain has been loud in financial services – many call the technology overhyped and oversold. Some have suggested it will take 10 years to achieve wide adoption.
But for a bank in Edmonton, Canada, distributed ledger technology is here and now.
ATB Financial recently sent $1,000 to ReiseBank in Germany in eight seconds, using the Ripple network. It wants to do more.
"We think blockchain technology would be good for low-value, high-volume payments between banks at first," said Tim Wan, director of innovation at ATB, a $43 billion-asset bank.
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At this point, Wan said, his bank is not trying to nail down all the uses for the technology. "It depends on the growth of the network," he said. "I think the use cases will prove themselves, with the efficiencies and the potential of the technology, and the speed of the tech and real-time settlement."
ATB is one of a group of banks that have gone public with their use of Ripple's blockchain technology for cross-border payments. Others include Santander, UniCredit, UBS, ReiseBank, CIBC, and National Bank of Abu Dhabi. (Santander has created an iPhone app with Ripple that lets customers – initially the bank's own staff members – make a payment in U.K. sterling and send it to anyone in the eurozone or the U.S. with a bank account. The bank has a lot of employees from Spain who work in the U.K. and send money back home. The sender can see the foreign exchange rate before approving the transaction. The app is still going through Apple's approval process.)
Is this distributed ledger-based global payment network a potential alternative to the decades-old Society for Worldwide Interbank Financial Telecommunication?
"That's a loaded question," Wan said. "It could possibly be. We also know that Swift is working on evolving their network as well. We're open to any technology that improves the customer experience. Whether it's Swift or Ripple, we're open to all of that. I'm not going to say sweepingly that it will or can replace Swift, because there are more components than just the technology involved."
For one thing, Swift has a large network of banks that participate in its payment messaging system. "Their reach is incredible, and that in itself carries a value proposition further than the time and cost of using Ripple," Wan said.
For its part, Ripple would like to work with Swift. "We're a software company, we're not a Swift," said Marcus Treacher, Ripple's London general manager. "We could create networks that do what Swift does, or the technology we make could be used by Swift. There are lots of ways it could be adopted. If I were Swift, I'd generally be intrigued and interested by what we're doing."
Swift signaled a willingness to work with blockchain technology in a paper it published with Accenture in April.
"As a financial industry cooperative, SWIFT's focus is on building technical, operational and business capabilities with a view to evolving our platform such that distributed ledger technology-based services could be offered to our 11,000+ members, when the technology matures and firm business use cases emerge," the paper stated. "Such distributed ledger technology-based services could be provided by SWIFT, our community or third parties. In this context, we will continue to work with the financial industry to guarantee end-to-end automation and backward compatibility with legacy processes." (Swift did not respond to a request for an interview by deadline.)
Most of the white paper takes an enthusiasm-curbing look at eight factors that would have to be addressed for industrywide adoption of blockchain technology to happen: governance, data controls, compliance with regulatory requirements, standardization, identity framework, security and cyber defense, reliability, and scalability.
In Wan's view, all the questions Swift raised in the paper are valid.
"In talking to some of the larger banks in the past year, my advice would be to ask the right question at the right time," he said. "If you want to prove the validity of this technology and whether it can move in real time, then answer that question first. Compliance and security and all those pieces are inherent benefits of blockchain technology. Let's test those sequentially. If you ask the right questions at the wrong time, meaning, at the very beginning, you can talk yourself out of anything."
Asking the right questions at the right time "would enable banks to grow with some of these fintechs that have some incredible value proposition that we haven't seen before in banking," he said.
Wan said he sees three advantages to using blockchain technology for sending payments to other countries.
One is the ability to know when the payment will arrive and how much it will cost, including fees and exchange rates. In global payments today, where payments pass through multiple correspondent banks, it can be hard to estimate the fees each bank will charge and how long each "hop" will take.
"Blockchain provides certainty where at times in networks and transactions, we may not have visibility into the rate and the fees associated, especially if there are multiple banks between each transaction," Wan said.
Speed is a second advantage. The transaction ATB sent from Canada to Germany that took eight seconds typically takes two to six business days, he said.
The third benefit, in Wan's view, is "the ability to layer on opportunities to maximize margin and reduce cost." The bank could offer its business customers new products or services built atop the blockchain, for instance.
"We have an oil and gas company that was buying 50,000 fuel injectors from a Chinese supplier they've never dealt with before, but they needed them to be on a flight that day," he said. "Our existing payment systems can't settle that payment in real time. But imagine a world where you could, where the supplier could take the money and trust was not in the phone conversation you'd have with that person or supplier, but in the transaction. Imagine the money was in that supplier's bank account that day and they were able to release that inventory."
Blockchain-based payments could give banks a way to help their business clients handle supply chain and procurement management more efficiently, Wan said. "We believe that we can build new services that consumers never thought they could have."
Other potential use cases for blockchain technology ATB is considering are digital identity management and internal process improvement.
"The sky is limitless when it comes to what blockchain can do," Wan said.
For Ripple's version of blockchain-fueled cross-border payments to take off, it will have to expand its network.
"Having the right partners at the right time will be incredibly useful to the success of Ripple as a network," said Wan. "I will do what it takes to help grow that network. It's like the fax machine. We could build the best fax machine, but if you have no one to fax to or receive faxes from, it's just another dead weight in your office."
In addition to signing 12 banks, Ripple recently received a BitLicense from New York regulators to sell and keep custody of XRP, the digital currency that serves as a sort of postage stamp for transactions on its network (a tiny amount is "burned" to process each transaction). The company also opened an office in Luxembourg.
The company is about to release what it calls the Interledger protocol, which would allow private blockchains to interact with one another.
"You can't put every bank in the world on one blockchain," Treacher explained. "The world would not agree to one blockchain. And even though the Ripple blockchain encrypts all of the transactions that are recorded, banks don't want to have the footprint of transactions to be inspectable or viewable. They want privacy."
To satisfy that want, the Interledger protocol would let two private blockchains connect briefly, just long enough to execute a transaction.
"If my customer wants to move money to your customer in Germany, when their app says it's gone, I want to make sure the money is actually gone," Treacher said. "We use our technology to take control of the funds movement just for the seconds it takes to move funds across. In that time, that technology is coordinating your bank system with mine as if they were part of a permanent blockchain only for a couple of seconds." It also connects to third parties that hold money in the currencies required. "For a couple of seconds only, we're joined as if we were part of a permanent blockchain distributed ledger. When our balances have been updated, we let go."
Having modern core technology allowed ATB Financial to jump in where all U.S. banks have hesitated so far, Wan said.
"Part of why we think we were able to pull this off so quickly and so well was having a full SAP digital core banking platform," he said. "We took that huge leap that other banks have found hard."
A real-time core system isn't necessary to use blockchain technology, Wan said. "But for us it was foundational to being able to pull this off within a few months of signing an agreement with Ripple."
Integrating ATB's payment systems with the Ripple system was "simple but not easy," he said.
"There are some infrastructure pieces that need to fall in place for it to happen," Wan said. "Ripple is not SAP or IBM or some of these larger blue-chip companies, they're a startup. There are inherent shifts in thinking about architecture and payment messaging that need to happen at your IT and your business levels."
The challenge for ATB now will be finding other correspondent banks that are as technologically and psychologically ready to test blockchain payment technology.
"I think probably what's held our industry back is an unwillingness at times to move too quickly," he said.
The original blockchain, developed for the bitcoin network, is open, public and permissionless – anyone can use it, and everybody can see what's going on and verify transactions (even though the identities of all the participants are not known). While the transparency might be a selling point for regulators, it's a sticking point for bankers.
"That was one of my major questions right at the beginning," Wan said. "The inherent nature of a public blockchain with visibility is something we don't care to be a part of. There are competitive elements here. What if I knew that a competing bank here in Canada was doing more business with another bank that I had assumed I was the number one partner for? That's highly competitive information that could be revealed."
When ATB sent its payment to ReiseBank over Ripple Connect, a third party was able to independently verify over the network that the payment was made. "At first it scared me, I did not like it at all," Wan said. "As a bank, we don't want that information to be public. Those are questions that need to be answered over time. Ripple's going to be making changes to their network to make that more private."
A permissioned environment is the only way banks can start using blockchain technology, Wan said. But that doesn't mean waiting around for all the rules to be set. They can be added as needed, he argued.
"If we believe we live in a world that needs to consume innovation and is maybe disruptive at some point, we need to evolve," he said. "Because inherently the technology does offer immutability, reputability and security that our existing database structures don't provide."
Wan sees blockchain technology as a great democratizer. "Now we're playing on the same level playing field – larger and smaller banks alike," he said.
But its success will require a new mindset, Wan said. "If instead of starting the question with, 'but what about," you reframe it as, 'what if,' then you're pulling rather pushing an idea," he said.
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