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Finance Sans Frontières – Notes on the Cross-Border Payments Revolution

by Kate Goldfinch, Associate editor at The Fintech Times, Future magazine founder

A revolution is unfolding in the global remittance and payments market. Every day we read announcements from different financial services providers – whether they are fintechs, or incumbents – heralding new products or new partnerships. The latest breaking news is Facebook’s Libra Association – which not only aims to reimagine the user experience for financial transactions, but also creates a global precedent for a realignment of the international payments market. 

All this frenzied activity can be summed up simply – the existing system is failing to meet the demands and realities of its time. It’s all too complex – it needs to be overhauled, streamlined, with faster data throughput, fewer intermediaries, faster transaction times, and lower fees. “The past five years have brought increasing change to the world of cross-border payments. The trusted and tested correspondent banking approach has encountered challenges from emerging alternative solutions and new players upending some of the industry’s fundamentals. The nature and direction of these changes, however, remains unclear in many cases,” according to  joint McKinsey & SWIFT research: A vision for the future of cross-border payments. Let’s attempt to figure out what’s happening in the ‘kitchen’ of the international payments market.

How does this all work currently?

It’s worth noting that at present, there are several different systems and conceptual approaches in operation to carry out cross-border payments. The first one to mention is SWIFT (Society for Worldwide Interbank Financial Telecommunication), that provides a network enabling financial institutions worldwide to send and receive information about financial transactions in a secure, standardised and reliable environment. 

Created in 1973, SWIFT enables participating financial institutions (FI) – of whom there are several thousand – to find the shortest payment route through the options which SWIFT provides. When a FI becomes a SWIFT participant, it is allocated an ID-code, which subsequently simplifies message-reading on the movement of funds within the system. In an earlier incarnation, the system operated on the principle of checking messages less frequently than now, when SWIFT is rolling out its new gpi product. This innovation forces system participants to respond promptly to notifications they receive – and this is reflected in the speed at which transactions are processed. However, this product cannot be regarded as a breakthrough. We could say that more kinds of push notifications were added into the system to make messages more visible and trackable, with a motivational system bolted on to improve response. As SWIFT’s own representatives say, since the roll-out of the new product, transactions take just minutes, or sometimes even seconds. The costs of sending a message have fallen over the past seven years by over 60%.

In addition to the SWIFT network, Visa and Mastercard have their own Worldwide Networks operating on a traditional payments basis, working through card-issuing banks, acquirers, and clearing partners. For example, when paying by card at a card-accepting retailer, ‘behind the scenes’ a huge number of operations are going on, involving all participant members of the system.

The costs of sending a message have fallen over the past seven years by over 60%.

The merchant card terminal sends a request through the Visa or MasterCard system to the card-issuing bank (the bank who issued the card to the card-holder) – and in seconds a response is received to indicate if the card account has sufficient funds to honour the transaction. If so, the terminal displays the message ‘transaction approved’. Next, the acquiring partner (which provided the retailer with a merchant terminal to receive non-cash payments) receives the transaction information from the merchant for the whole day, and transfers this information to the relevant payment system which carries out clearing. This rather simplified picture doesn’t include many nuances we haven’t cited – for example, at what speed the information is transferred to the acquiring partner, or how quickly the information is moved to the payment system’s network. 

cross-border paymentsAs the end-user when making a non-cash payment, you will get a ‘pending transaction’ notification, which will enter the records of already-completed transactions within 1 to 3 days on average. What’s interesting is that the amount listed in the pending transactions can differ from the amount actually charged from your account. This happens because the funds are pre-blocked at the moment of purchase, yet can be charged later – so you never really know for certain what specific amount is going to be charged.

Basically, to sum this up: the current SWIFT approach and philosophy are very complex and rely on the involvement of a large number of intermediaries in the system. Transactions don’t take place in real time, and serve card-holders poorly from the viewpoint of the time period for dispatching or receiving funds (quite apart from the costs of the transactions).

All of this gives a poor perception of the financial system to the new generation; and creates new demands and expectations from consumers about the operations of this system. Nowadays, we expect a user experience on the same level as social networks – in which money can be transmitted right here and right now, to be available anywhere in the world in real time, and with the minimum of service fees. And there are many companies – neo-banks, fintech-providers, and incumbents who are competing for the rights to provide exactly these solutions. Those who can succeed in doing so first will hit the jackpot and secure massive coverage. However, success will require rather more than just being a developer with a good idea. What are the trump cards that will define this game?

Who will win?

New-gen electronic tools, integration, partnerships, smart-clearing, and Big Data will form the basis for future global remittance and payments markets. It’s a battle being fought among major brands such as Visa and MasterCard, able to secure massive deals when purchasing leading financial providers. For example, Visa acquired Earthport this year for ₤198M GBP. 

Traditional banks are entering this game too – not in their own names, but through leading payment systems and SWIFT, or through partnerships with fintech providers. Everything we mentioned earlier has been rolled-out across traditional monetary systems. There’s also the area of that market based on decentralised technology to consider. 

Traditional banks are entering this game too – not in their own names, but through leading payment systems and SWIFT, or through partnerships with fintech providers.

These solutions include IBM’s service IBM World Wire – which in practice provides financial institutions a blockchain-based platform for making cross-border payments – as well as partnerships with which fintech companies are beginning to work (for example, the cross border provider TransferGo had its first quarter live for money transfers to India with Ripple as a partner). Yet this is still only part of the story – nor does it list all those interested in the cross-border payments market.

‘The Dark Horse’

Who else, then, is pitching for a piece of the pie? Well, ‘the king is the one who owns Big Data’ and thus the tech giants enter the arena. There’s much talk nowadays of Google, Amazon, and Facebook. Let’s concentrate on this latter brand. Opinion is strongly divided in the industry currently as to who has the best chances of victory in this tight field. Will it be providers with financial DNA or will it be tech firms, or even telcos with their huge resources of Big Data?

The role played by financial institutions and global payment systems is radically changing. Within 5 years, the number of intermediaries will fall (and many neo-banks have already popped up to replace numerous archaic players). This implies a lost business sector for those who, just five years ago, had been working well and felt things were going fine. But things are no longer like that, and in a further five years they’ll be even more different. 

Seeing the way the world is heading – towards that notorious financial internet, in which commission fees tend towards zero – global payment systems like Visa and Mastercard are becoming technological hubs. Banks are beginning to build partnerships with more innovative, younger players to help improve their service. Huge, lumbering systems like SWIFT are rolling-out new products – but in all honesty, they’re not going to help them much. Even the few thousand banks in the SWIFT network, with their information-exchange systems, are outweighed in the balance by the might of Facebook’s Big Data, and its two billion users.  

cross-border paymentsDuring an interview with a fintech firm specialising in cross-border, we heard the opinion that it’s easy to imagine anyone as the winners but it will probably be the incumbents rather than Facebook or Google. The very next day, we were given the announcement of Facebook’s new project, Libra Association, which already featured around 100 brands. It’s a blockchain-based system, built on the BFT-consensus system like EOS. Except that where EOS has 21 validators on its network, Libra already has over 100 (with numbers projected to rise to between 500 and 1000 in future). 

Who are these validators? They’re all the international brands who’ve signed up to the Association, and among them are payment systems (Visa, Mastercard et al.) as well as Uber, eBay, Spotify,  Stripe, Vodafone, PayPal, Coinbase and many others. Blockchain developers themselves have commented that this project is a corporate blockchain for stablecoins. Let’s take an overview of Libra from a number of different viewpoints. Taking a global perspective, I see the roll-out of an attempt at mass adoption of corporate money.  

Facebook has 2.5 billion active users, this is more than double the population of China. This constitutes a tectonic shift in mass-adoption of corporate money and will create a new payment experience. Libra will be backed by a basket of assets, meaning that it can be accepted by businesses all over the world for everyday use due to its low volatility when compared to public crypto assets. 

Facebook has 2.5 billion active users, this is more than double the population of China.

A brief survey of its technology inspires a good impression. The code is gleaming, and written in Rust, a great basis for a lightning-fast, memory efficient and safety-focused Libra system. We should also mention the usage of the most advanced cryptography primitives and BFT-consensus, which have been the primary focus of academic research in distributed systems for the past 20 years as, Vitaliy Bulychov (board member at Geo Protocol) has noted extensively.

Incidentally, many sceptics said that Facebook wouldn’t be able to launch its own financial system and that the likelihood of getting a financial licence for Facebook had been greatly exaggerated. Furthermore, many feel it long overdue that Facebook be stripped of its monopoly position. But now there appears the news of this project that unites the world’s leading brands and global payment systems, which have become the validators of the platform that will carry out the operations within FB. But why would all this be needed by so many major brands? To keep fantasy in check, we cite this insert from Visa press release: 

“With our mission and broader strategy in mind, today Visa announced an intent to join the Libra Association, a group of companies, non-profits, and academic institutions that will govern Libra, a new kind of digital currency. Libra is built on a new blockchain and its value will be aligned with, and backed by, a reserve of low volatility financial assets. Digital currencies like Libra could provide new pathways out of cash-dependence and accelerate the journey of the estimated 1.7 billion unbanked consumers into the formal financial system — this is why we’re interested in better understanding the Libra Association, and potentially shaping its development. We see an opportunity to be a voice at the table and provide the expertise for our clients and the payment ecosystem”

“Digital currencies like Libra could provide new pathways out of cash-dependence and accelerate the journey of the estimated 1.7 billion unbanked consumers into the formal financial system” – VISA Press Release

Currently, global experts are carrying out various comparisons between Libra and existing payment models. Some experts suggest, for example, that with Libra Association, Facebook is trying to create an analogue of the Chinese ecosystem headed by Tencent & WeChat with their WeChat Pay service included – except that it is based on electronic systems, and not on fiat currency, as the basis of Chinese system. 

“Comparisons with existing big players such as WeChat pay, AliPay, PayPal and others would be invidious – even if we put to one side issues of greater centralisation. These are just providing a logistic channel for national currencies, while FB is creating a whole new self-sufficient digital currency,” – Vitaliy Bulychov believes.

Meanwhile, other experts are drawing parallels between the new model of Libra, and the SWIFT system. To claim that SWIFT is out-dated when compared to the Facebook project is mistaken, says Valeriia Vahorovska, Managing Partner of Fondy (London);

“SWIFT is an international system of electronic exchange of information concerning financial transactions between stakeholders in the financial market. SWIFT itself is not either a holder of funds nor of card-user data and there is no money circulation within the system. On the contrary, Facebook is creating a completely different ecosystem in which to use digital currency. This is all in addition to Facebook itself being an account holder and a holder of huge amounts of user data. 

Let’s see how the Facebook project will develop, as so far there are not many details or any clear understanding of how the whole system will work. But it is obvious that new approaches are gaining more and more traction, while world demand is on the increase – and therefore, a change in paradigms and approaches is inevitable.”

So, what is being said here?

Of course, against the background of the transformation of the world of global payments, there is much that is still unknown, it’s rather like an experiment. However, one thing is clear – a global remittance and payments market in the future will not be possible without electronic money (even if, for now, it’s carried in cash – such are the realities of life in many world countries). The future of cross-border relies on cross-industrial partnerships and smart-clearing – in which clients will not just get a seamless payment experience, but also access to all the services they might need on a daily basis, in the context of a global consumer experience. It no longer matters whereabouts in the world the clients happen to be located.

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