At a SWIFT conference in March, Cheryl Gurz, manager of the emerging technology segment for BNY Mellon Treasury Services, cited new technologies, including the blockchain technology used by the cryptocurrency bitcoin, as a possible threat to banks’ dominance in cross-border payments. The blockchain is a distributed ledger, hosted on many servers simultaneously.
Companies that need to make payments across borders traditionally have done so via wire transfers that travel from bank to bank via the correspondent banking network.
Gurz and other speakers on the SWIFT panel noted that providers like Ripple Labs, which uses blockchain technology, and Earthport, which makes use of different countries’ ACH networks, can handle cross-border payments in fewer steps than the correspondent banking system.
Gurz warned that if banks don’t keep on top of emerging payments technologies, “new entrants will completely take our space.”
Cross-Border Payments: Ripe for Disruption?
Lee Kyriacou, a managing director in payments at consultancy Novantas, argued that wire transfers work pretty well for corporates. “I’m not sure there’s something so fundamentally wrong or inadequate with the system that you’ll see wholesale changes,” he said.
While ACH is cheaper than wire, wire transfers have the advantage of being irrevocable, Kyriacou said. Even if ACH systems move to same-day timing, a payment made by ACH is “not irrevocable,” he said. “You can challenge the payment. A wire is a wire. It’s done. Goodbye.”
But Bob Stark, vice president of strategy at Kyriba, which provides SaaS treasury solutions, said he’s starting to see interest among corporate clients in new payment methods.
“Part of it is just finding lower-cost ways of delivering those payments to beneficiaries, especially in emerging markets,” said Stark, pictured at left. “The second part is that the use of cryptocurrencies—bitcoins and other currencies like that—is in play, which obviously bank channels aren’t designed to handle.”
Kyriba’s treasury solution links to “a small but growing number” of nonbank payment providers, he added, all in response to requests from clients.
Stark said, though, that alternative payment channels may fall short in terms of treasurers’ two main considerations when it comes to making payments: convenience and risk.
Making payments through a bank satisfies both of those concerns. “It’s simple, it’s easy, the infrastructure is there,” he said. “There’s also a lack of risk. You’re dealing with a large institution. If that bank fumbles the payment, and somehow it doesn’t get there, you have a contract with them that remediates any issues.”
Most of the nonbank payment providers “aren’t name brands; they don’t have the reputation for having done this for a long period of time,” he said.
“Second, what remediation is there if something goes wrong?”
Even if a smaller payments provider has insurance in place, there’s the question of how easy or difficult it would be to resolve the problem of a payment that didn’t reach its destination, Stark said. “There could be lots of steps to recover those funds.
“The potential is that they definitely replace some more traditional ways of sending payments, especially to emerging markets,” Stark said, and added that new entrants are also likely to encourage banks to come up with “more innovative and competitively priced products.”
Alternative Payment Providers
Gareth Lodge, a senior analyst in the banking practice at research and consulting firm Celent, noted that payments are also occurring via the procure-to-pay networks, such as GT Nexus.
But Lodge noted that despite all the talk about “alternative payment methods,” such as Earthport or PayPal, “the vast majority sit on top of existing payment networks.
“They’re payment providers, not payment networks,” he said, but added that that may be what a consumer or corporation wants.
“If you’re sending $100,000 to a supplier in another country, or $100,000 to buy a house in a different state, what you want to know is that the people you’re using are reliable, are secure,” Lodge said. “That’s what a lot of these other networks haven’t achieved.”
Companies’ willingness to consider alternative, less reliable payment methods may vary with the size of the payment, he suggested. “If you’re sending $5, perhaps your expectations and your willingness to compromise some of those for a cheaper rate might be greater.”
One wild card is how new payment methods will be regulated, Lodge said. “It is a fundamentally different technology and approach to the market we’re seeing,” he said. “I’m not sure all the regulation applies that well to it.”
Stark said more regulation could make innovative payment providers more attractive to treasurers concerned about the risks involved. On the other hand, regulation “may increase some of the costs that make them attractive options in the first place,” he said.
Immediate International Payments
Paul Thomalla, senior vice president of global corporate relations at payment systems company ACI Worldwide, predicted the faster payment systems that are starting to come online around the world, like the Faster Payments Service in the UK and the G3 Immediate Payments system in Singapore, will start to attract companies that need to make international payments.
Once a payment has been approved internally, a corporate treasurer would like to pay directly, said Thomalla, pictured at right. Currently, the payment instruction “goes to a wholesale bank, the wholesale bank manages his liquidity and currencies, and if it’s going to a different country, there are generally lots of steps.”
If a company had its ERP system linked to an immediate payment system, the treasurer “would press that button, pay whatever currency in whatever country, and get a message back,” he said. “That’s what a treasurer wants. He doesn’t want these intermediate steps and paper processes.
“The fact that it’s going to be cheaper will drive a lot of that change,” he said. “Second, they can integrate it into their ERP systems.”
Thomalla predicted, though, that even if payments start to migrate, very large payments would be handled differently. “I believe there will be a need to white-glove very large transactions, transactions that are so large that they are systemically critical either to the bank or the treasurer,” he said. “There will have to be some kind of network to do that.
“But right now the reliance on wire traffic will start to diminish as people move to ACH and to faster payments, especially from an international point of view,” Thomalla added.
Bitcoin Technology Still Unproven
The blockchain technology behind bitcoin has attracted a lot of attention, in part because it is perceived as very low-cost.
But Thomalla argued that while blockchain technology is promising, “it is quite a way from being proven.”
He compared blockchain technology to the Intel chips within his laptop, and noted that he doesn’t use the Intel chips, but Excel and other applications that run on the laptop. “What you’ve got with blockchain is raw technology,” Thomalla said. “It’s the application on top that’s going to make the difference, and I don’t think we’re close to that yet.”
Kyriacou argued that characterizations of the blockchain as a low-cost method for maintaining information about payments are mistaken.
The bitcoin miners that maintain bitcoin’s blockchain technology are being rewarded with the value of the bitcoins they generate, he said, and he estimated that the value of the bitcoins mined to date totals US$2.5 billion. “That’s an expensive system, not a cheap system,” he said.
Kyriacou suggested that the blockchain technology could support useful applications. For example, in trade finance, the blockchain might be a way to document and confirm the shipment of the goods being financed, he said.