Top 3 Benefits of using Blockchain for Payments

Technology innovation has been fundamental to financial services industry transformation and Blockchain is one of many technologies that will form the foundation of next-generation financial services infrastructure. In Payments industry, we often ask this question how do we reduce the time it takes to reach the recipient while minimizing the costs associated with the money transfer.

In order to understand how Blockchain can help achieve the above, lets first understand the different parties involved today in a Global Payment Transfer. Below pic depicts the same.

Image Credit: weforum.org

As shown in the diagram, apart from the main core participants such as Sender, Receiver and their respective Banks, there are multiple supporting participants acting as middle-man between recipient and sender such as Correspondent Bank, SWIFT, Clearing Network. For those unfamiliar with these terms, SWIFT is a global provider of secure financial messaging and settlement services. Local Clearing Network is the national interbank network. Correspondent Bank provides access to foreign exchange (FX) corridors and facilitates the transfer (via nostro accounts and SWIFT).

Now, lets look at the benefits that Blockchain can provide to Payments Transfer.

1. Real-Time Payment & Settlement: Blockchain will enable Financial Institution/Banks to fulfill and settle money transfers in real time enabling direct interaction between sender and beneficiary banks, and eliminating the role of supporting participants.
2. Reduced Costs: Payments are costly and time consuming depending on route. Financial Institutions pass on the hedging and operational cost to customer to protect themselves from exchange rate fluctuations. As per weforum.org, the average cost to the final customer (money sender) is 7.68% of the amount transferred. With fewer participants and real-time payment, there will be reduction in liquidity and operations costs leading to reduced costs to customers.
3. Increased Transparency: With Blockchain, all participants(sender, receiver, Financial Institution facilitating the money transfer, regulators) will have full end to end view and every step of the complete process from when money leaves the sender’s account through to when it becomes available to receiver’s account. This will enhance trust among participants. The transparent and immutable data on Blockchain will reduce fraudulent transactions to a fraction of what they are today.

Time, Costs and Transparency are the top 3 benefits (among many) of using Blockchain in Payment Industry.