Blockchain technology is disrupting the banking sector by eliminating middle men and boosting peer to peer interaction. Payments as well as clearance and settlement are the two key areas where blockchain technology is being implemented. Banks have been increasingly incorporating blockchain technology into their internal operations to improve services, efficiency, and security. Some of the early adopters of this technology include J.P. Morgan, The Bank of England, and Deutsche Bank.
Blockchain infrastructure has been used by banks to reduce processing fee and speed up payment transactions. Some of the banks using blockchain in the payment sector include HSBC, Barclays, Banco Santander, Citibank, and ING Bank.
On the other hand, blockchain-based clearance and settlement processes save time, operational cost, and allow banks to reduce back-office staff significantly. Financial institutions such as J.P. Morgan and HSBC have applied blockchain to settle transactions.
Fintech companies on the other hand with blockchain infrastructure and digital asset experience have been developing consumer-facing blockchain applications and growing rapidly in the payments market. Examples for such companies in the B2C space include Coinbase, and in the B2B space include Baanx, Synapse, and Contis (banking as service providers).
The rapid growth of fintech companies using blockchain has forced banks, payment companies, FX providers and others to embrace blockchain and explore its use cases. To stay competitive, financial institutions are partnering with blockchain infrastructure providers to offer digital asset-based products and services. For instance, Ripple, an enterprise blockchain company known for its clearance and settlement service, offers xCurrent product for banks to enable a two-way communication protocol that allows real-time messaging and settlement. Currently, Ripple serves 300+ customers in over 40 countries.
Ripple also offers xRapid which helps in settlement of cross-border transactions quickly. R3 is another player offering blockchain for banks. R3’s blockchain technology was implemented by Swiss National Bank (SNB) for its Project Helvetia to settle large transactions using digital currencies among financial institutions, December 2020. Moreover, as of July 2020, over 85% of banks in Italy were using R3’s Corda blockchain for quick and secure interbank reconciliations and data transfers. Corda-backed distributed ledger technology Spunta, a blockchain-based application is being used by 55 banks for interbank reconciliation.
HSBC has been deploying blockchain technology to transform global trade, simplify foreign exchange, streamline payment settlement, and standardize private placement information. By using blockchain technology in global trade, the company reduced letters of credit processing time from five and 10 days to hours by eliminating the paper-driven letter of credit process.
In the payments segment, HSBC’s On-Chain Payment solution helps to simplify payments processes for numerous participants. HSBC conducted a pilot project of issuing digital bond in Singapore using On-Chain Payment solution. The solution enabled it to effectively conduct cash settlement in lesser time. HSBC collaborated with Singapore Exchange (SGX) and Temasek Holdings to simulate issuance of digital bond on SGX’s blockchain based platform which reduced settlement time from five days to two days, thereby making the process more efficient.
Similarly, to speed up cross-border transactions, SBI tied up with JP Morgan to leverage its blockchain technology which will enable SBI reduce customers’ transaction costs and save time, February 2021. JP Morgan’s Liink blockchain platform will be integrated in SBI’s operations and will enable users to make secure peer-to-peer data transfers and reduce risks involved in cross-border transactions.
The Liink platform is being used by 100 banks globally. Also, several government and private lenders especially from China and Africa are looking for blockchain based clearance system for cross border transactions which could provide them a first mover advantage and make transactions cheaper and faster. Going forward, Liink platform will let banks to verify accounts prior making payment and check if messages are in compliance with regulatory norms which will help mitigate transaction frauds thereby improving customer satisfaction.