International remittance markets are ripe for disruption by emerging technologies such as blockchain, due to the largely outdated architecture used worldwide today. The capabilities of blockchain are uniquely suited for solving common remittance problems.

Owing to this, companies such as R3, IBM and Ripple have created products that target this very market. These have been adopted by multiple banks to streamline their processes.

One of these banks is Kerala-based Federal Bank, which first adopted R3’s Corda blockchain and, more recently, Ripple’s blockchain solution.

Why Is International Remittance Inefficient?

Even though the current correspondent banking system has been in place for over 40 years, it has been highly inefficient until this point. This is primarily due to the fact that the system used is not a remittance system, but simply a messaging service.

SWIFT, or the Society for Worldwide Interbank Financial Telecommunication, is a system used by banks worldwide to send and receive messages regarding financial transactions across borders. Correspondent banking suffers from many shortfalls, with the first being that it takes more than 3 business days for the money to be moved.

This is due to not only the inherent outdated nature of the system, but also due to the lack of transparency in the settlement process.

The second pain point in SWIFT is the fact that the actual money does not move across the borders, instead moving in the form of credit dues. These are then redeemed by the bank on the receiving end, creating the need for large pools of liquidity to be maintained.

A typical SWIFT transaction would involve bank A in India sending a message to bank B in the UAE. Bank B is required to have a pool of liquidity in the currency of the country it is based in, so as to allow for the transfer to be paid out at the other end. The credit due is then adjusted in the bank’s systems, completing the zero-sum game.

Blockchain For Efficiency

Blockchain solutions allow for the simultaneous collaboration between various actors on a proprietary banking network, owing to their tolerance to Byzantine Faults, This means that there can be seamless and almost real-time collaboration between participants on the network without the worry of a misplaced transaction.

Moreover, the solutions offered by blockchain providers today also come with a high degree of transparency; a luxury afforded to them due to the properties of the network. This is one of the reasons Federal Bank approached R3 Corda to implement its solution.

Federal Bank accounts for 35% of all the foreign remittances into Kerala, which itself accounts for 35% of inward remittances to India. The remittances market in the subcontinent is valued at $69 billion and continues to grow.

To find out more about why Federal Bank chose blockchain for this, Curious Dose reached out to them for a comment. Mr Jithesh PV, Deputy Vice President and Head, Digital, at Federal Bank, shed light on the state of affairs at the bank.

When asked why the bank chose to focus on blockchain, he stated,

“Blockchain is transforming everything from payments transactions to how money is raised in the private market. Blockchain smart contracts promise to automate many of the tedious processes within the banking industry, from compliance  and claims processing, to distributing the contents of a will.”

This will enable Federal Bank to be a one stop for both dependable and fast payments and financial services. This also comes with a higher priority on real-time cross-border payments, wherein an in-house blockchain solution has been created by the bank. In the DVP’s words,

“The Distributed Ledger Technology (DLT) acts as the backbone of the new cross-border payments infrastructure to solve inefficiencies and provide faster, more affordable services.”

This is but a few of the various blockchain benefits offered by its use. The permissioned aspect of the blockchain network can be a transformative power, said Jithesh. The blockchain platform performs more than remittance. According to the bank,

“Inter-ledger protocols and smart contracts means multiple use case can be coupled with the remittance ledger. The system is capable of creating a consortium of Exchange Houses and Banks.”

More Efficient Processing For Customer Benefits

Using blockchain solutions such as those offered by Ripple have the customer as the focus point of the benefits. Jithesh stated,

“The winner, in the end, would be the customer who could benefit from the security, verifiability, speed, and ease that blockchain-based banking technology is aiming to bring in.”

There is also the further possibility of these payment flows being optimized by use of Ripple’s products. Blockchain systems allow both the sender and recipient to track their money at any given time, with the blockchain also enabling real-time transactions settlement. Speaking more on this, they stated

“Federal Bank is currently onboarding with Ripple’s xCurrent platform. There is no cryptocurrency involved, the platform…securely connects and communicates all the parties to the cross-border remittance. The solution will make the cross-border remittances faster and better with its distributed ledger technology.”

There are also benefits to be seen to exchange houses, which are said to have much more transparent and real-time view of the flow of money owing to the use of blockchain technology. This reduces the processing burden and hence makes the transactions more efficient.

With the customer in view, Federal Bank seems to be riding the cutting edge of the blockchain wave. The optimizations in their processes is clear, with the end benefit being translated to the customer in a visible manner.