Blockchain Holds Promise for Cross-Border Payments

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Blockchain technology is garnering a lot of buzz these days-and with good reason. Enthusiasts are experimenting with ways to apply the technology to everything from secure digital voting systems and stock exchanges to music distribution, smart contracts, and health records.

The blockchain could be particularly effective in improving cross-border payments, more specifically correspondent banking, business-to-business payments and peer-to-peer remittances. Each of these areas involve numerous inefficiencies. That could soon change.

In simple terms, the blockchain is a system of digital files and accounts that lets a global network of computers maintain a bookkeeping system to record and verify every transaction. Transactions can be added to, but not deleted from, the distributed public ledger-which means that every transaction has a traceable digital "fingerprint" and audit trail. This has enormous implications for security efforts and risk management in today's environment of hacking, manipulating and compromising of data.

If the blockchain sounds similar to a bank ledger, that's because it is. But rather than rely on a central authority to manage the transactions, the blockchain uses cryptography, a mathematical solution managed by the user community. This decentralized approach tips the power dynamic within the financial system-a concept that runs counter to traditional banking, which makes some people nervous.

But while some of these features are controversial, they also have the potential to solve many of the problems that plague cross-border payments.

The traditional funds transfer process for cross-border payments relies on intermediaries. Money moves from one correspondent bank (in other words a middleman), to another correspondent bank or possibly many such banks before reaching the ultimate physical bank location. Each intermediary takes a slice of the funds before forwarding them along the chain, contributing to payment processing delays, expensive customer fees and risk due to weaker banking standards.
The blockchain offers an entirely new approach. The blockchain faces no geographical borders and can reach any area with Internet access. Without middlemen, the fees, transactions times and opacity that have plagued legacy cross-border payments can become a thing of the past.

For this reason, some of the world's biggest banks are experimenting with the technology, including UBS, Goldman Sachs, Barclays, Santander Bank, BBVA, BNY Mellon, USAA and Westpac. The cryptocurrency company Ripple Labs has been partnering with some of these banks to facilitate these efforts.

Ripple Labs provides the infrastructure layer based on the blockchain technology to help transfer funds in seconds rather than in days. It also has created an open foreign exchange marketplace "to bid" and transfer the money at least cost.

Meanwhile, the blockchain network can also be applied to the small- and medium-sized business transactions that are expanding beyond domestic borders to international markets. Many smaller businesses don't really understand the complex tangle of banks that payments need to pass through for global transactions and the processing and conversion fees involved with foreign exchange.

The San Francisco-based startup Align Commerce is now using the blockchain to improve the invoice-to-payment cycle of smaller businesses. It simplifies the confusion faced by businesses that handle different foreign currencies by dealing in local money.

Imagine that a small-business owner in the U.S. sells parts to a buyer in Europe. Via Align Commerce, the U.S business sends an invoice notification to the buyer overseas to be paid in the buyer's local currency. The blockchain will then carry the payment from the sender to the receiver, bypassing today's numerous intermediaries. The Align Commerce system then converts the currency into U.S. dollars and deposits the funds into the bank of the U.S. small business owner. The blockchain can move money faster, more efficiently and provide payment traceability in the process.

Yet the blockchain technology isn't just limited to enhancing operations for banks or businesses. It can offer a low-cost money transfer to another critical segment: the peer-to-peer remittance market. Today, international migrant workers face a slow, daunting, paper-driven, and expensive process of sending money back home to family. Companies that use blockchain technology to cut out the middleman in funds transfers can eliminate the friction and high fees for a demographic that already faces a significant burden. Startups Abra and Beam, among others, are now reimagining the peer-to-peer money transfer process.

In this age of fast-paced Internet commerce, waiting for payments to grind through an outdated system is no longer acceptable. But in order to deal with the issues of today's cross-border payments system, we need a universally accepted, ubiquitous global payment system. That's why the blockchain has the potential to profoundly impact the way we conduct global transactions.

Nasreen Quibria is managing director and founder of payments research and
consulting company, Q Insights. She can be reached at

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