International payments the winning application for blockchain

Start-ups and banking institutions around the world are investing heavily in blockchain and on paper it seems like the perfect solution to fixing banking systems, which often times lag behind current technology trends and in some cases were created before the internet.

But, it’s never as simple as it seems.

As a refresher, a blockchain are a decentralised, secure, digital ledgers that can be used to record many different types of information. First developed as the architecture behind the popular cryptocurrency Bitcoin, it allows for real-time transfers and a dramatic reduction in transfer fees.

Theoretically, blockchain should be the perfect solution to the cumbersome process of international payments in particular.

International payment systems rely on central banks and are heavily regulated by government. Additionally, each sending and receiving bank has to use the same hardware/software platform. Compounding this complexity is the possible need to introduce a third bank before the transfer reaches its ultimate destination.

Governments have increased demands for terrorism financing reporting, politically exposed persons and anti-money laundering. Thus processes are added to back office reporting and manual document collection over the payment messaging system, adding increased costs, time and risk for bank management.

One global bank recently paid $US1.9 billion in compliance fines and subsequently spent $US4 billion to fix risk and compliance issues.

Transferring money can still take several days internationally, money can get lost and there is potential for error in the details submitted. Currently false positive for international transfers run at around 6-8 per cent of all transfers done, and there is a penalty cost for the bank for each false positive.