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The Blockchain vision of correspondent banking – The future or utopia?

05/09/2018

Correspondent banking is being dragged into the 21st century as customers are demanding greater efficiency and transparency as well as more stringent security and anti- money laundering measures. It is an area ripe for fintech solutions but there are also answers within the existing infrastructure such as SWIFT’s Global Payments Innovation Initiative (GPI), according to Didier Balland, Head of Marketing, Cash Clearing Services at Societe Generale.

 

Historically, cross-border transactions have been sent through a correspondent bank network, which can be a slow and laborious exercise. Information on the progress and fees are often opaque plus monitoring or investigating any issues that arise has proven difficult due to a lack of standardisation – transactions are identified by arbitrary reference numbers assigned by each bank.

GPI, which was launched in 2017, has not only increased the speed of the process but also shone a much brighter light into its inner workings. Member banks such as Societe Generale are assigned a standardised, unique end-to-end transaction reference (UETR) while payment information such as fees, FX conversion rates and processing time is sent via its cloud-based Tracker. This enables participating banks to not only trace the payment’s path in real-time, but also view fees and receive confirmation that the payment has been credited.

To date, the GPI has180 banks members with more than US$100 billion in gpi payments flowing through its system on a daily basis across 450 international payment corridors in over 100 currencies. SWIFT reports that 50% of the payments are credited in less than 30 minutes and approximately 92% within a day, which has significantly enhanced productivity.

100 billion US$
in GPI payments per day

SWIFT, along with many other fintech and software vendors is also exploring the possibility of blockchain or distributed ledger technology to further improve the speed and security of the correspondent banking process. The technology has been a buzzword for several years in financial service circles but harnessing its full potential across applications has proved difficult.

I would like to see SWIFT take the lead on blockchain because it has a network of 11,000 banks, the infrastructure and governance in place. I see blockchain as an addition and not as the complete solution. At the moment, it is a utopia and there are several proofs of concepts in the market but the fact is that the technology is ten years old and it is still not yet ready for correspondent banking

Didier Balland
Head of Marketing, Cash Clearing Services at Societe Generale.

The SWIFT initiative was no exception. In March, it completed a “proof of concept” and tested a “private confidential ledger” to record transactions related to banks’ so-called Nostro accounts used to fund their cross-border payments. While 28 banks including Societe Generale found the technology generated greater efficiencies in the arduous reconciliation process and reduced the amount of money they needed to hold in various Nostro accounts around the world, more work was needed before it could handle the high volume of transactions associated with correspondent banking.

Didier believes that blockchain may be useful in the future but should be viewed as one piece of the cross-border puzzle. He notes that there are several challenges including the inability of blockchain as well as other technologies to work together with a bank’s legacy systems at the moment. In other words, new technologies have to be able to talk to old technologies through API’s. Another issue is on the regulatory front and the need to ensure that there is compliance with anti-money laundering, counter-terrorist financing, and sanctions rules when transfers are being made. Didier notes that Societe Generale is involved in other blockchain initiatives such as the We.trade digital platform which also includes Deutsche Bank, HSBC, KBC, Natixis, Rabobank, Unicredit, Santander and Nordea. Leveraging IBM’s hyperledger fabric technology, it employs DLT and smart contracts to manage, track, and protect transactions between SMEs.