Current payment processing especially cross border transaction creates a few problems for the banks especially on the management of correspondent relationships, Nostrol accounts maintenance, inefficient settlement process and regulatory issues in today's landscape.
Correspondent relationships
The traditional method for cross border transaction is processed via correspondent banks. Relationships with these banks recently become expensive due to regulatory issues. Blockchain/DLT can solve this problem if all banks in the world join the network.
Interestingly, the recent case between Danske and Deutsche where Deutsche Bank was their correspondent bank used by Danske’s Estonian branch where money flows (euros 2 billion) from Danske are suspicious and whether Deutsche should be held responsible for processing these transactions.
I guess most banks are interested to know the end result of the investigation whether banks should be held accountable for the actions of their correspondent customer and fear if they could be penalized for breaking AML regulations from the actions of their customer's customers.
To start x-border transactions processing, each of these accounts are pre-funded with the country's domestic currency which creates an opportunity cost for the banks.
SWIFT DLT proof of concept is working on this to reduce nostro-vostro liquidity. Ripple introduce their own cryptocurrency to solve liquidity issue in NOSTRO accounts as well.
Settlement process
Every MT instruction will move through each correspondent agents based on their technology capabilities, time zone, AML management procedures, reconciliation process to check if funds arrive etc. Furthermore, as instruction passes through each agent, costs increases due to fees impose from each bank and delays in settlements. These create uncertainty in costs.
DLT can resolve this where their technology is able to provide real-time settlement as highlight by Ripple. Of course, provided all banks join the same DLT network.
Ripple Distributed Ledger Technology (DLT)
Ripple is one of the first solution providers which I touched base focusing on enhancing x-border payments processing. Therefore I would want to touch on them below after attending their seminar.
From what I have understood, their objective is to solve these problems which I mentioned earlier by building a real-time gross settlement system for cross border transactions with lower costs, near real-time settlements.
Some of their product solutions are:
RippleNet
one network with all banks participated that forms a network to send and receive payments using their DLT platform with a common set of SLA agreed upon by all participants.
Correspondent relationships can be reduced if most banks participate in this network
X-current
It is their enterprise solution which consists of several modules to act as an RTGS system to facilitate real-time settlements and tracking of payment instructions end to end. The modules include validator, messenger, fx ticker and interledger protocol
Settlement time can be reduced or even in real time with this solution
XRP currency
In my view, XRP currency can resolve the issues of banks parking their funds in different currencies for each domestic country where their Nostro is held thereby creating opportunity costs. By using XRP, banks can allocate less liquidity in domestic currency to process the same volume of cross border payments.
However, using cryptocurrencies invite many questions and debates partly due to the stability of the value with political challenges as well.
xRapid
Its uses their cryptocurrency, XRP to offer financial institutions a reliable liquidity solution to service cross-border payments. Created for liquidity market makers who provide liquidity and exchange between XRP and any other currency so that banks do not need to hold local currency in their NOSTRO accounts.
DLT is an excellent solution but the major uphill tasks are getting the banks to join these network, going against industry norms as banks are using SWIFT.
SWIFT has already had a roadmap for their GPI to close the gaps surfaced for the past 20 years. However I do not think this is the end of DLT as Singapore has embarked on project ubin to explore the uses of DLT.
