Integration of blockchain tech may be an important consideration for legacy banking, financial services and institutions after all: SWIFT -- the leading banking payments network will be integrating blockchain technology developed by R3. This is according to a statement made yesterday January 30 at a moderated panel session at the Paris Fintech Forum.
In the new development, SWIFT will be linking its new payments standards framework GPI (Global Payments Innovation) with the R3 blockchain platform. The launch of the proof of concept will enable SWIFT to "trial a new gateway to interlink trade and e-commerce platforms with GPI.
Using R3 blockchain platform will be the first stage of the protocol and will make GPI payments faster, ubiquitous and certain by use of distributed ledger technology. At the same time, since many people have a "little appetite for settlement in cryptocurrencies," the integration will also extend the benefits of GPI to corporate and markets.
During the forum, Gottfried Leibbrandt, who is the SWIFT CEO, told the audience that the company will incorporate Proof-of-Concept (PoC) from R3 starting sometime today. He was speaking beside Brad Garlinghouse, the chief executive of Ripple. Ripple is a huge competitor of SWIFT, having formed very many collaborations in the last year or so to see banks and financial institutions utilize its RippleNet and the current technology especially for cross-border payments.
Cross-border payments or remittances is an important application for cryptocurrencies and they do so at low cost and better speed than say majority of legacy systems and any legacy institution dominant in the business should obviously pay some attention to that. Ripple -- and other cryptocurrencies -- are establishing themselves as better alternatives especially in areas where there are low levels of financial and banking inclusion. These include Asian markets, the Middle East and Africa.
As the value of global payments industry posted an 11 percent growth in 2017 -- the largest growth in 12 years -- and expected to reach the US$2tn by 2020 and US$3tn within five years according to a survey by McKinsey, cross-border transactions in the Asia Pacific has recorded the largest growth in the last five years. The cross-border transactions in the region grew by 8 percent in 2017 and for more of the total industry than in any other region.
The Asia Pacific payments industry has been growing at a rate of 20 percent in the last five years. In Asia, payment costs account for 3.7% of regional GDP, second only to Latin America, where the ratio is 4.4%. Cross-border payments in North America are cheaper but take a 2.2% portion of regional GDP, where in Europe the figure is 1.5%. The last year report by McKinsey found out that while legacy banks would charge high fees, fintech vendors and "digital attackers" such as e-invoicing companies that are becoming more dominant in Latin American payments markets, can not only lower transaction fees but also reduce entry barriers, especially for those providing fast and efficient services. Cryptocurrency businesses are also becoming important challengers in the payment markets too.
“There is significant risk that banks will cede important aspects of the business to emerging digital challengers if they do not take advantage of recent advances in technology, regulatory changes, and new partnership models,” the report reads.
SWIFT is a leader in the cross-border payments with a client base of more than 11,000 institutions and it moves around $200 billion around the world, every day. The share of crypto businesses in this area of cross-border payments and remittances could grow as the technology develops. But it is now obvious that legacy financial institutions could accelerate usage of blockchain in lowering transactions fees and accelerating transaction times.
According to Leibbrandt, a payment would be routed into GPI once it is initiated on the R3 trade platform. The blockchain technology will speed up cross border payments between banks, with end-to-end transaction tracking. Those using the R3 platform will be able to authorize payments from their banks via gpi link, settle gpi payments through their bank, and receive credit confirmations on the respective trade platforms via gpi Link on completion.
Ripple's CEO Brad Garlinghouse reiterated the problem with centralization in SWIFT and other problem, adding that decentralized systems are likely to "win" over time. CEO of SWIFT, which rolled out the GPI system in 2017 in order to speed up payment processing times, increase transparency and lower transaction costs but mainly relied on existing infrastructure and cloud technology, said that their reluctance about blockchain was worsened by concerns of volatility in crypto prices. He said banks using XRP are reluctant to "convert things into cryptocurrency right now because of the volatility in the currencies."
However, Garlinghouse said the claims of volatility of crypto are unfounded and he felt like it was based on "misinformation".
"Mathematically, there's less volatility risk in an XRP transaction than there is in a fiat transaction," he said.
R3 is a consortium of more than 300 leading banking institutions and partners which was founded in 2014 and aims to link legacy banking platforms with blockchain. The latest collaboration was between the firm and SBI Holdings, which is also a huge backer of Ripple technology. The joint venture known as SBI R3 Japan Co., Ltd. will be based in Japan and concern itself with provision of DLT platform Corda, promote collaboration with overseas offices of R3 and other Corda partners, and develop Corda’s businesses in the Eastern Asian Region. SBI has contributed 60 percent of capital to the venture while R3 the rest.
R3 blockchain solution Corda is being utilized by industries from financial services to healthcare, shipping, insurance and more. It records, manages, executes institutions’ financial agreements in perfect synchrony with their peers. It helps businesses to reduce costly friction in business transactions because businesses can use smart contracts to transact directly.