Case 16: Blockchain Can Improve Domestic Payments
There is a strong drive within Europe to achieve “instant payment solution should become available to end-users in the short term, consisting of a common scheme cooperatively developed on the market.” Government regulators believe that faster payments will accelerate economic growth, as businesses will be able to speed up its cash conversion cycle, generate working capital, and reduce the need for expensive short-term financing. A secondary driver for financial institutions to strive for real-time payments is their commercial need: They need to respond to customer expectations, and respond to competitive threats from new entrants.
In the payments space, the biggest challenges financial institutions face have to do with the silos within banks. Many of them have built various and complex IT infrastructure over the years, which on average cost 7,3% of a bank’s yearly revenue in operating expenses, compared to an average of 3.7% across all other industries.
At a procedural level, the process of inter-bank clearing requires an intricate coordination of resource-intensive steps between banks, clearing houses, and the central bank. These steps are typically not executed at a constant basis, but rather as a processing cycle which happens several times a day. The outcome of it is that payment can often end up credited one or more days after their initiation, especially over weekends or holidays. The intricacy of the current system constitute a procedural challenge for payment service providers, and highlights the need for a more efficient system for real-time payment, both domestically and internationally.
If a country can move towards an domestic economy where all transactions are recorded in real-time on a blockchain ledger, then this would mean more efficient execution of inter-bank payments. The central bank would need to launch a digital asset, preferably a cryptocurrency, which all parties agree upon as being representative of the same liability.
This would allow the government to balance the economy more efficiently and systematically, as they could leverage big data analysis to keep an up-to-date view of the money flow inside the country. An upcoming report by HSBC suggest that such comprehensive insights would allow the central bank to conduct a more direct version of quantitative easing. By performing targeted cash injections into the real economy, the central bank can extend the monetary policy interventions to include businesses and even private households, not just financial institutions and thereby significantly increase the effectiveness of the measures.
This idea is still years away from being put into practice, as a World Economic Forum (WEF) report suggest that about 10% of global GDP will be stored on blockchain technology around 202520. Before that however, blockchain technology will benefit several parties:
Consumers: Allows customers to make faster payments over their phone or mobile device, and online.
Small Businesses: Help merchants and small businesses make payments on time and receive payment faster.
Corporations: Large firms can ease cash management by timely incoming and outgoing payments. Employee payments can be delivered at customizable schedules based on smart contracts.
Financial Institutions: Can provide the most convenient online and mobile banking experience. They will also be able to serve as a springboard for new services. By adopting interoperable distributed ledger platforms such as those being developed by Ripple(see p.35) and R3CEV (see p.24) financial institutions can deliver realtime payment services that will work as quickly and efficiently both domestically and internationally.