Fintech being a leading light of the startup ecosystem over the years, has played crucial roles in development of the financial services industry. Strong ecosystem level changes are opening up opportunities for new business models. Introduction of blockchain technology in this evolving sector has a considerable impact and advantage.

Blockchain technology is a “chain of blocks” where each block holds timestamped digital data and it’s own previous blocks’ unique identity. The unique features of blockchain have potential to benefit the financial sector significantly.

In this blog we will cover following topics:

• What is Blockchain?
• How Blockchain is transforming the financial ecosystem
• Fintech and Blockchain-Use Cases
• Future of Blockchain in Finance

What is Blockchain technology and its features?

Blockchain is a decentralized database management system. The name signifies itself, a series of blocks containing transaction data, a hash identity, and node details are connected to form a chain. Blockchain is distributed ledger technology (DLT) which allows data to be stored globally on thousands of servers.

Below are the key features of Blockchain for its deeper understanding:

• Security and Transparency

Financial services all across the world are still centralized and multi-folded. Financial data is mostly stored in centralized databases, and it has to go through multiple intermediaries like front-back offices etc which results in lack of transparency across the system, wherein safety being solely dependent on intermediaries and their level of security.

This lack of transparency within the system fosters security threats or data breaches across the organization.

With the introduction of blockchain technology, transparency and security can be ensured simultaneously. Its distributed consensus based architecture facilitates the security towards data breaches, security threats etc. 

• Privacy

Blockchain system provides operable keys-a public one and a private key. Public key is available to all users in the network. However, the private key is only accessible to the stakeholders of the transaction. This enables transparency wherein the transaction will be visible to all users in the network with public key whereas the stakeholders and the transaction details will only be visible to those who have access to the private key. This process enables transparency within the system while securing the confidential information of the stakeholders.

How does Blockchain work?

Blockchain records validate and store the data in its database. So, it leverages to validate a transaction happening across the network. Each block in the block chain contains follow information

• A hash pointer (link to previous block)
• A timestamp
• Transaction data

Future of Blockchain in Fintech Technology

Andy Martin, a world-class blockchain expert, recently forecasted market changes based on the token economics forced by blockchain and described what exactly it provides:

“Decentralized communities provide certainty of identity, “who am I dealing with”, the certainty of provenance, “what am I buying” and smart contracts give certainty of execution, “if I do this, then I get paid” in these new marketplaces.”

Let’s understand better how Fintech and Blockchain can be chained together to build a FinBlock ecosystem.

Blockchain in the fintech industry can provide us a more seamless and effective way to banking, built around concepts of equity and decentralization. Blockchain-based fintech enables seamless transfer of funds, top of the line security and transparent financial tracking.

Reduced Costs and Transactions in Minutes

With blockchain integration in fintech applications, sending money, regardless of the amount, is much faster. Blockchain-based transactions occur in real time, so the recipient will not have to wait for days or weeks to get the money.

In addition to this, fintech applications powered by blockchain technology can drastically reduce the transaction costs enabling direct, P2P transactions that eliminate any middleman, meaning all unnecessary expenses and fees.

Use Cases of Blockchain in Fintech

Some use cases of blockchain in fintech services are: Cross Border Payments, Lending Platforms, Credit Score, Invoice Management and Billing Solution, Fund Investment, Government Expenses, Financial Record Keeping, Stock Exchange and Initial Public Offering

Let’s discuss Cross Border Payments and Lending Platforms use case in details:

Cross-Border Payments

Banks always charge an additional fee for every transfer or payments across borders, which in a way becomes expensive and slow. 

E.g If you want to transfer money from India to the USA, the transfer goes through one or more financial institutions before it reaches the receiver.

Introduction of Blockchain allows individuals to send and receive money with minimum interference of different intermediaries, which enhances the payment settlement quickly and efficiently.

Lending Platforms

When it comes to lending, one is required to establish trust and make a transaction happen. However, with blockchain technology in fintech, borrowers can directly deal with the lenders on the rate of interest, installments, and duration of the transaction with the help of immutable smart contracts.

Conclusion:

Blockchain in financial services can offer multiple benefits, which can help transform the finance industry. According to KPMG, “blockchain can reduce errors by up to 95%, increase efficiency by 40% and reduce capital consumption by up to 75%”. Blockchain in finance is an exciting concept with the potential to transform the finance industry.

Blockchain can help different financial institutions and government entities to improve trust, bring transparency and cut down costs. 

Cross-border payments have traditionally remained a mystery for most users except the participating banks. These payments go through a series of banks before getting credited to the recipient’s account.  SWIFT is the primary method of communication used by banks in processing international payments.

In the era of the global digital economy, cross border payments are still felt backward and rigid. One of the most common challenges of cross border payment today is that it takes several days or a week for funds to reflect in the receipt’s account. This can be due to several reasons such as compliance requirements, regulatory differences, or high number of intermediary banks. Each participant of the entire value chain of the transaction is limited to its own data environment. Lack of visibility of payments status and control on payments affects both the parties involved in the transaction and their banks. Additional challenges in terms of High cost and uncertainty of fees to be charged leading to reconciliation issues also leaves bad customer experience. 

To solve the challenges faced by banks and cater to the changing need of corporates, SWIFT has launched new initiative- SWIFT global payments innovation (SWIFT gpi)

SWIFT gpi at a Glance

With SWIFT gpi financial institutions can send or receive funds quickly and securely across the world, with full transparency and traceability over the payments at any point in time. It aims to improve the cross-border payments across the correspondent bank and introduce a new market standard by connecting all the participants of the payments in the value chain.

How does it work?

SWIFT gpi is a cloud- based database that is hosted at SWIFT, designed to provide complete end-to-end visibility of the payments status until it reflects in the receipt’ account. SWIFT gpi seeks to meet the changing needs of corporates – faster transactions with full transparency and complete end to end traceability, without compromising banks’ ability to meet compliance obligations and market, credit and liquidity risk requirements.

To track the transaction payment, the initiating bank can assign a unique tracking code corresponding to that particular transaction. This unique code is 32 hexadecimal characters. This code is used further to track the status of the payment in the payment value chain using SWIFT gpi.

SWIFT gpi combines traditional SWIFT messaging and banking systems with new business rules. To ensure consistency, SWIFT gpi operates based on business rules captured in the multilateral service level agreements (SLA) between participating banks.

Benefits to corporates

SWIFT gpi is an initiative to improve the customer experience in cross-border payments by connecting all the stakeholders of the value chain. Its design helps banks to complete the international payments faster and without friction which will indirectly help the corporates to expand and grow their business globally. Main benefits for corporates:

• Same day transaction which was almost a week earlier.
• Transparency in the fees charged with respect to commission and exchange rates.
• End to end tracking of payment status at any point in time via the cloud using a Unique reference number.
• The transmission of full and unaltered remittance information which will ease the reconciliation of payments for the corporates.
• Cloud improves the communication between all the parties involved in the value chain.

Benefits to Financial Institution

With the implementation of the first phase of SWIFT gpi, banks can provide better end to end experience to its customers which will improve bank’s relationship with its clients and motivate these clients to increase their volume of transactions with SWIFT gpi banks only.

Cloud technology has eased the bank’s workload in terms of engaging employees for tracking the payments for clients and improving the operational efficiency of the bank. In the long run SWIFT gpi will help banks achieve higher cost saving and operational efficiencies from enhanced compliance practices and optimised intraday liquidity flow.

Correspondent banks benefit strategically by leveraging the end to end digital ecosystem provided by SWIFT gpi and connect all the parties involved in the value chain of international payments. 

Roadmap for Implementation

For smooth adoption of SWIFT gpi, it is being rolled out in three phases. First phase was launched in Feb 2017 with a new set of standards in cross-border payments to improve speed, transparency over fees and end to end tracking of payment information to all stakeholders. Second and third phases would be related to high cost and operational inefficiency in the current cross- border payments landscape.

In the second phase, more control will be given to banks on payments. In case of any fraudulent activity, the bank can immediately cancel the payment regardless of the status of payment in the payment chain. Also, participants can send additional information along with the payment if required.

SWIFT has introduced SWIFT gpi tracker to improve transparency and traceability in the international payment value chain. This tracker can easily be integrated with back-end systems of banks.

These phased rollouts and the approach taken should make it easier to adopt across banks and payment networks resulting in unravelling the mystery around cross-border payments.

E-Commerce has broken the political borders and offers products & services across different country borders. This has resulted in a high volume of cross-border goods and payment flows. 

Cross border payments have become an integral part of the day-to-day activities of global businesses. Small Businesses’ zeal to expand their business beyond their country boundaries has been well supported by ongoing digitalisation and high-end technological capabilities across multiple sectors and industries. However, it continues to face significant challenges owing to complicated cross-border mechanisms. The Small businesses face challenges in making or receiving payments internationally because of dealing in different currencies and country specific rules and regulations for international payments. This has created a need for a more agile and frictionless cross border payment framework making cross-border payments as simple as domestic transactions.

What are Cross-border payments?  

Cross-border payments are defined when both the parties i.e. buyer and sellers involved in the transaction are registered in different countries. Most popular cross border payments methods are wire transfer, credit cards and alternative payment methods- mobile wallet, low value payment method. All interaction for payments happens between buyers and sellers through their respective Banks. The Banks communicate with each other through the SWIFT mechanism when it comes to international transactions. 

In Traditional cross-border payments of correspondent banks, the number of intermediary banks depends on the relationship of the buyer’s and seller bank’s with the correspondent bank. As the number of intermediary banks increases, costs associated with fees and commissions also increase. A Bank can track the transactions till its immediate bank. It becomes difficult for the originating bank to track the transaction once the payment goes to the next bank in the sequence. There is no standard procedure for cross-border payments due to different rules and regulations of each country.  Evolving customer requirements, instantaneous fund transfer, cost reduction, complete transparency and technological innovation has initiated the process to improve cross-border payments as a whole.

Cash Flow in Cross-border Payments

When a customer makes a purchase, there’s a complete back-end process wherein money gets transferred from the buyer’s bank account to the seller’s bank account. This process becomes very complex when it comes to cross-border payments. In international transactions, currency exchange rates and foreign transaction fees are also involved along with the fees or commission charged by the different bank in the value-chain. In cross border payments domestic and international financial institutions are working together to make the transfer of funds.

When a purchase is made, if the buyer’s and seller’s bank have a direct relationship payment is done very easily and seamlessly but in the absence of direct relationship intermediary bank’s role becomes important. These intermediary banks are called correspondent banks.

Major Banks across the globe have their own branch or correspondent bank’s branch in another city. In such cases, the funds will first move from the Buyer’s bank branch to the Bank’s own branch or its Correspondent bank’s branch in the seller’s country. This fund is further transferred to the seller’s bank who will then credit the seller’s account. There are many entities, different currencies, exchange rates and transaction fees involved in the single international transaction which make the process slow and opaque in nature. The more the number of correspondent banks in the chain, cost and complexity of transaction keeps on increasing

In the Era of Globalised Digital Economy, international payments still felt backward and analogue.

A Revolution in Cross Border Payments  

The future of cross-border payments is clear wherein the world requires ability to move funds instantaneously, seamlessly with full transparency and 24*7 access. As the payment industry started moving forward on this journey, an array of new industry initiatives and emerging technologies are transforming the payments process. Fintechs using emerging technologies like blockchain, artificial intelligence, machine learning have started offering faster, agile and seamless solutions to the financial institutions to cater the emerging needs of customers.

Currently multiple paths are being used by the payment service providers such as Real-time payments, SWIFT gpi, SWIFT’s transaction manager, artificial intelligence, blockchain and digital currencies- cryptocurrency, central bank digital currency and stable coins. These new ways in cross-border payments would provide opportunities to make cross-border transactions faster, more frictionless, efficient, transparent and cost-effective like domestic transactions. Fintechs act as catalysts for innovation and bring global payments together through various approaches. Banks have started collaborating with fintech to mend their strengths and optimize their offerings by enhancing the payments infrastructure with latest technologies.

This revolution will transform the landscape of cross-border payments and empower the end user with full control on sending and receiving international payments at any point in time with complete transparency related to fees/ commissions charged and traceability of transactions in the system.

As per Deloitte report – B2B and P2P payments with blockchain would result in a 40% to 80% reduction in transaction costs and take an average of four to six seconds to finalize (compared to two to three days using the standard transfer process).