Paying across borders - Can distributed ledgers bring us closer together?

Remittances are  critical economic resources in emerging economies, helping vulnerable populations withstand adverse economic conditions. Personal remittances represent as much as 10.5% of GDP in the Philippines, 13.7% in Senegal, 28.3% in Nepal and 29.3% in Haiti. Global remittances reached $613 billion in 2017 and are projected to have grown 4.6% in 2018 to a record high of $642 billion. To put this in perspective, global remittances represent four times more than total official development assistance globally, which in 2016 reached $158 billion.
 
Recognizing the vital importance of remittances in and for emerging economies, the international community, including the G20, G7 and the World Bank have led initiatives to bring greater safety and efficiency to the remittances market and better serve the needs of the world’s most vulnerable groups. Clear progress has been made, with a significant decline in the price of remittances as measured by the World Bank Remittance Prices Worldwide database over the last decade. However, more work is needed; the average global remittance cost stood at 7% as of Q4 2018 – 4% higher than the 3% target set in the Sustainable Development Goals (SDGs) for 2030.

Remittances are more expensive precisely in the corridors where they are needed most. Sub-Saharan Africa remains the most expensive region to send money to, with an 8.97% average cost. 

Cross-border payment innovations can help reduce operational costs for remittance service providers 
 
Traditional B2B cross-border payments tend to be slow and opaque, which affects the business and cost structure of remittance service providers, including Money Transfer Operators (MTOs) which handle most personal remittances transactions. While remittances are often available to the recipient for collection within minutes of the transaction being completed by the sender, on the MTOs side, funds take longer time to move across borders through intermediary correspondent banks.
 
Moving funds through the current corridors requires transferal through the relevant domestic payment systems, which often have different operating hours and are located in different time zones. For certain corridors, the funds must be routed through several banks and intermediaries before they reach their destination, leading to higher fees and slower payment settlement.
 
These shortcomings make the cross-border payment industry ripe for disruption and innovation. Some see distributed ledger technologies (DLT) as having the potential to drive industry-wide change. Indeed, B2B cross-border payments, traditionally characterized by fragmentation and opacity, are a potential use case for the successful implementation of DLT.
 
Like many other businesses, MTOs could benefit substantially from this innovation and reduce the costs of moving funds across borders. Some of this savings and increased efficiencies could be passed onto customers, in the form of lower prices for remittance services.
 
Using DLT solutions could also bring down compliance costs and improve the transparency and traceability of transfers. This could help ease the impact of the de-risking phenomenon that has affected the remittance services industry over the past few years.  Increasing the transparency of transactions  could increase the confidence of the banking sector in the remittances industry. Further, DLT solutions could potentially by-pass the de-risking issue altogether, by enabling remittance service providers to operate without the need for a correspondent banking relationship.
 
Solutions are being actively tested in the market
 
In 2018, Ripple, a FinTech company, piloted xRapid, a DLT-based cross-border payments solution, along the very competitive U.S.-Mexico corridor. Financial institutions involved in the pilot saved 40%-70%  in foreign exchange costs, and the average payment times was  just over two minutes. The transfer of funds on xRapid took two to three seconds, with most of the processing time explained by domestic payment rails and intermediary digital asset exchanges.
 
Launched in 2013, Circle is also leveraging blockchain to provide peer-to-peer instant money transfers. Their Circle Pay service is currently available in 29 countries and allows seamless transfers between US Dollars, British Pounds, and Euros. Their website reports that they charge zero fees and zero exchange rate markups.
 
Industry incumbents are also being pushed to innovate, in order to reduce costs and better serve market needs, whether through DLT solutions or otherwise. For instance,

• SWIFT implemented this year a proof of concept using DLT to address Nostro account reconciliation issues. Beyond DLT, SWIFT has also implemented Global Payments Innovation (GPI), aimed at dramatically modernizing B2B cross-border payments by making them faster and more transparent. The SWIFT GPI can deliver payments within a day, and often within minutes.
• Visa’s B2B Connect is testing a DLT solution for B2B cross-border payments.
• JP Morgan is trialing a DLT application that provides messaging, validation and foreign exchange pricing services to improve the customer’s cross-border payment experience. JP Morgan also developed JPM Coin, a digital coin designed to make instantaneous payments using blockchain technology.

  Is the future of cross-border payments distributed?
 
DLT-based cross-border payments potentially offer a promising pathway to dramatic improvements in the lives of millions of people in emerging economies. DLT could improve the traceability of remittances and reduce compliance costs for MTOs and supply chain payments, stimulating economic activity in destination countries. However, their development and broad adoption face considerable challenges:
 

1. A framework is needed for DLT solutions to be adopted across multiple jurisdictions. Today, regulatory uncertainty and mistrust in DLT-based solutions, in part due to confusion between crypto-assets and their underlying DLT technology, are impeding the development of such a framework.
2. It remains unclear if DLT-based solutions will be able to outperform other technologies available in the payments space, with questions and concerns remaining unresolved on key issues such as security, governance rules for protocols, recourse mechanisms for users, privacy, and scalability, among others. For example, as fast payments are increasingly adopted to facilitate real-time domestic payments, solutions like SWIFT GPI could allow links between domestic fast payments systems, achieving real time and low cost transfers across borders.

Whether DLT will be an effective solution to the challenges the remittances industry faces , and when the technology  will reach sufficient scale to effectively disrupt this space, remain to be answered. In any case, there is ample opportunity – and of course need,  – for innovation in the cross-border payment industry.  Without more innovation, it will be difficult to achieve international targets such as the SDGs, and to minimize the cost of remittances while maximizing transparency and safety in the market.