International Remittance has always been the chink in the Banking system’s armour.

Currently, cross
border payments go through the 600 year old correspondent banking system facilitated by SWIFT, which
is essentially a messaging service used to securely transmit information and instructions through a
standardised system of codes. But a solution which takes 3 days just to transmit information cannot be
really called a solution in this age of globalization.

While there are these problems plaguing the segment, what has really helped SWIFT over the years is
the network and the consortium of banks that is has gathered over the years. As of 2015, SWIFT linked
more than 11,000 financial institutions in more than 200 countries and territories, who were exchanging
an average of over 15 million messages per day. It has become as ubiquitous as VISA and MasterCard in
the international payments space. But that does not mean it is as effective.

The international remittances are currently slow, expensive, and opaque. The presence of large number
of middlemen makes it even more sluggish. The majority of SWIFT clients have huge transactional
volumes for which manual entry of instructions is not practical. The need for automation for SWIFT
message creation, processing, and transmission is growing.

This is where Blockchain comes in. Blockchain is a database that is secured and maintained by a large
number of nodes which can be anywhere in the world. Data is stored in blocks, which are time-stamped
and linked to each other to form a chain. It makes sure that all data stored in the chain is secure and
immutable forever. Through its consensus mechanism, the blockchain is ‘trustless’, which means that
one does not have to rely on the trustworthiness of a single party.

Ripple is the one of the few firms leveraging the Blockchain in the banking sector, and the only one
addressing the cross-border payments. It has used the consortium of banks that use its technology to
form a Global Payments Steering group to take advantage of the network effects. It includes some of the
biggest banks around the world like Bank of America, Standard Chartered, Mitsubishi, Royal Bank of
Canada, and many more. Axis Bank and Yes Bank are the only Indian banks which are a part of it.

India, the biggest receiver in the Cross Border Remittance market can benefit largely from the shift to
this new technology. The emigration of Indian workers in foreign countries mean an influx of remittance
payments for their families in smaller denominations. And the main issue with current system of
payments is that there is an inverse relationship between the value of transfer and the fees charged due
to Economies of Scale. So, a migrant worker transmitting payment to his family ends up paying
surrendering around 5-10% of his transfer payment in just fees (even more when you calculate the
Foreign Exchange Spread).

There are multiple factors that make up these costs which can be eliminated through the application of
Blockchain. The slow-moving nature of these payments forces the banks to hedge against the volatile
movements and foreign exchange risks. It also forces the banks to address the liquidity needs due to
huge amounts being transmitted. These also include compliance costs of the Banks to regulations like
Basel III. The large amount of intermediaries in the whole process adds up to the costs through the
various commissions.

Blockchain helps in addressing these issue through its decentralised ledger and consensus. These rapid
nature of the transactions eliminate any kind of liquidity risk that the Banks might have to Hedge
against. The consensus system also helps in the validation of transactions which are currently done
through a manual entry system.

It also leverages the use of digital assets to solve the issue of multiple currencies. Instead of hedging
against the various currencies, the banks will only need to take care of the digital token thus eliminating
operational costs of maintaining multiple foreign currency accounts.

The system of nodes disregards the need of multiple intermediaries that plagues the current system of
cross-border payments. Each financial institution which is a part of the network can be a node in the
system. These nodes can then directly conduct transactions directly with the other partner institutions
without the need of a central clearing house. To increase the integrity of the system, there can be other
validators such as stakeholder companies, internet service providers, and other such institutions.

Since Blockchain does not discriminate between the transaction sizes, a whole new wave of population
can enter the cross border payments market which could not do so because of the high transaction fees.
According to Ripple, the leading Blockchain network in Banking Sector, the International Payments costs
can go down by 42%-60% through the implementation of its Blockchain network. India’s incoming
remittance market stood at $62.7 Billion in 2016. Assuming the global average cost of 21 basis points on
payments volume, Blockchain can help save Indian banks save around $80 Million. This will be a huge
boost to the already ailing Banking Sector

While there are benefits, there are also hindrances that comes with adopting any kind of new
technology. One of the biggest difficulties is to disrupt the established network of banks. It is not easy to
topple a recognised organisation like SWIFT with which most of the banks are comfortable with. Then
comes the issue of smaller domestic banks. If these local banks are not on the blockchain, then the big
banks (known as Correspondent Bank) needs to rely on the older services to communicate with them,
which will bring in the complexity of handling multiple systems at the same time.

While there are established Blockchain networks already in the space, the Indian Banks have taken an
unusual route and formed its own consortium called ‘Bankchain’. Announced in February 2017 by SBI, it
has grown to 24 members (International Banks also) with the aim of exploring, building and
implementing Blockchain solutions in the banking sector. It currently has 10 active projects underway
like share KYC, Syndication of Loans, Virtual Currency, Cross-Border Payments, etc. While it is an exciting
project with bright prospects, it will be interesting to see how they deal with other Blockchains like
Ripple which benefit from a larger network effect and have Axis Bank and Yes Bank as its partners (who
are also a part of Bankchain).