With interest in blockchain growing rapidly, banks are recognizing that the technology can overhaul their payments models and reduce global interbank settlement costs by both saving time and cutting risk involved with clearing trades.
At present, cross-border payments are processed through a chain of banks, and often these intermediaries represent a point of delay and cost. In recent months blockchain technology has attracted significant investment from many major banks in the belief it can make their operations faster, more efficient, and more transparent by eliminating intermediaries and connecting financial institutions directly.
JPMorgan Chase is now testing the use of blockchain to facilitate cross-currency payments between London and Tokyo. This technology would allow for instantaneous settlement within banks. Similarly, fintech start-up Ripple, with its “XRP” currency, is helping banks transact instantly and directly with other banks around the world.
In both cases, enabling instant point-to-point settlement and providing end-to-end visibility for each settlement will significantly reduce the operational costs and risks associated with reconciling exceptions and failures. Settlement can take place in realtime and increase the accuracy of transactions, while a publicly available record of transactions can also be created, which allows for ease of monitoring by regulators.
Market inefficiencies in cross-border payments have created an opportunity to test blockchain’s potential in this space. It is now crucial that banks and regulators validate the reliability, security, and performance of blockchain for large-scale deployment for clearing and settlement purposes.
By Resham Karira, Retail Banking Analyst