High value and low value payment systems converge around block chain and distributed ledger technology

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I’ve been calling out inefficiencies in international foreign currency remittance processing for some time. The correspondent banking model that has been in place for more than 200 years is now significantly challenged by new and emerging technology designed to efficiently manage the secure transfer of value, without the need for trusted intermediaries.  On the face […]

I’ve been calling out inefficiencies in international foreign currency remittance processing for some time. The correspondent banking model that has been in place for more than 200 years is now significantly challenged by new and emerging technology designed to efficiently manage the secure transfer of value, without the need for trusted intermediaries.  On the face of it, distributed ledger blockchain technology goes a long way towards addressing many of the inefficiencies implicit in today’s complicated systems.

What excites us most is that reducing the cost of processing lowers the profitability threshold for payments between counter parties using the new technology. ie. we’re  now considering moving smaller amounts of money more cheaply. The forecast convergence of high and low-value systems is now becoming very real. Enter the micro payment service providers, and a new set of consumer payment offers with an economic business model that can be supported by low-cost pay per use paradigms. The fridge that orders and pays for the milk when stocks are low is increasingly a reality by combining the Internet Things and the Internet of Value.  The wearable that recognizes you’re low in essential nutrients and instructs the 3D food printer to prepare an appetizing meal, straight from the fridge.

To support these use cases, automation and straight through processing based on the blockchain, provide the key to unlocking a new line of revenue, as high-value systems and low-value systems continue to evolve and converge.  In particular traditional low-value payment transfer systems have been plagued with complicated, inefficient and costly chargeback processes, whilst many multi-party participation and error prone systems often delay transfers and reconciliation. The irrevocable characteristics, non-repudiation and customer centric biometric and token based authentication characteristics all but eliminate both the need and complexity of many of these processes, which in turn vastly reduces the cost of providing value transfer services.

With careful management of our digital lives, the responsibility for fraud is increasingly transferring from the service provider to the customer, who at the same time is empowered with an adequate and appropriate set of tools to manage the associated risk.  Social media is on the pathway to providing a self-regulating environment, similar to the Uberisation of the taxi network, challenging the need for industry wide regulatory bodies that have increasingly challenged our sense of trust.

Historically card based payments systems have exposed consumers to unacceptable levels of fraud. We are dependent on costly chargeback processes managed by our card providers, to ensure we receive adequate protection and are hence dependent on a complex network of financial services providers, card issuers, acquirers and merchants for their collective support when exposed to such unfortunate and increasingly “not at fault” situations.

Payment processing costs are passed on to corporate customers and merchants and hence reflect in the pricing of product and services for both online and offline consumers. New distributed ledger technologies can significantly reduce these processing costs.  It all comes down to the definition and adoption of the inter-party protocols necessary to gain access to these efficiencies, and the preparedness of schemes and participants to openly adopt lower cost solutions.

This level of transformation takes time, and I’m not for one minute forecasting the imminent replacement of today’s complex, bilateral and multilateral clearing and settlement systems, however promising proof of concept and live trials are now underway to pave the way for these new technologies into the future.  To access the benefits, participate in the delivery of new services, ongoing investments are required to provide a robust and safe 24/7 centralised ledger accounting systems and better ecosystem management of counterparty risk, liquidity and financial crime in a micro payments world.

In the current trust based international correspondent banking model, participants have both an opportunity and responsibility to evaluate how and where these new technologies can best be associated with products and services delivered to business and consumer customers.  Together with processing efficiencies, significant savings are expected by unlocking opportunities from enhanced remittance details travelling safely with payment instructions.

On and off ramps for financial value transfer continues to rely on the financial service players we know and trust today.  Appropriately, these organisations face increasingly robust know your customer, anti-money laundering counter terrorism funding and sanctions monitoring regulatory compliance responsibilities.  Substantial fines for regulatory breaches are designed to ensure that the financial rails we rely on today remain safe, secure and excluded from financial crime.  Today’s banks are better placed than ever to ensure the level of mandatory compliance necessary to offer value transfer services and thus maintain consumer confidence in our payment systems, however, new entrants will increasingly find attractive niche services offering a low cost, seamless customer experience in what have traditionally been highly profitable segments.  Increasingly interdependent relationships will continue to form between banks and new entrants, particularly focused on mobile channels.

Trials and proof of concept work continue, each arriving at the same outcome. Blockchain technology works with the safety of the system considered to be very high, for now.  Amongst a flurry of recent announcements, JP Morgan recently announced experimentation with $US JPY transfers, with the Wall Street Journal reporting that live transfers may be enacted on the repurposed technology that supports Bitcoin as early as this year, R3 participants are working on trials for transfer of fixed income assets, announcing recently the leverage available from inter blockchain technology enabled smart contracts.  This puts providers like Ethereum, Eris Industries and Chain firmly on my radar.

Global client interbank transfer, are poised to be enacted at what we expect to be a fraction of the current cost.  Both auditors and advisors are skilling now in the new technology to provide the transparency necessary to ensure director proofs can be upheld.

Let’s hope efficiency gains translate to lower costs all round, and hence a reduction in the overall cost of doing business.

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