Distributed ledger technology could encourage direct transaction settlement and improve reporting for transactions more efficiently than existing protocols like SWIFT.
As discussed in a previous article, the fact that the average bank transfer takes 3 days to settle is a banking legacy that many merchants and consumers are eager to be rid of. Moving money has always been a rather sluggish process, considering the various hoops and hurdles that must be navigated, intermediaries that must be consulted, and correspondents that must be communicated with before funds can reach a single destination. Bank balances must be reconciled across a global system that comprises a broad network of funds, traders, asset managers, and others.
For instance, if a consumer would like to transfer funds from an account in Europe to a bank in the United States, the transfer must pass through the Society for Worldwide Interbank Financial Communication (SWIFT), which sends something like 50 million messages a day between more than 10,000 financial institutions.
When banks don’t have established financial relationships, they must search the SWIFT network for a correspondent bank that has a relationship with both parties for settlement— minus a fee. This means that the SWIFT network serves as an important online database and communication network for banks to negotiate funds transfers rather than as a function through which transfers are processed.
What Role Can the Blockchain Serve?
SWIFT is a collection of intermediaries that slows funds transfers down and invariably tacks on additional costs, fees, and potential points of failure. In contrast, blockchain technology represents a decentralized “ledger” of transactions.
Blockchain settlements don’t require an ever-expanding list of correspondent banks with individual ledgers to reconcile. On the blockchain, transactions can be settled as soon as payments are made, a stark difference from legacy systems that can take days.
Naturally, this speed and convenience could alleviate the soaring costs associated with maintaining a global network of corresponding banks. A recent survey concluded blockchain technology could decrease average transaction settlement costs by as much as $10 billion a year.
The Blockchain can also Improve Messaging
As a blockchain integration provider, Ripple is seeking a means to simplify transaction messaging between financial institutions. The service integrates directly with existing databases and ledgers to provide banks with a real-time communication protocol for quicker settlement. Currently, Ripple is helping approximately 300 financial institutions update their blockchain protocols.
Keep in mind that SWIFT messaging is a lot like email. Messages are a one-way communique, and transactions can’t be settled until all parties involved have had time to see, review, and respond to each transaction message. By providing a bridge between banks and the blockchain, Ripple and their counterpart R3 may offer faster two-way communication that can lead to near-instant settlement.
Both Ripple and R3 are available to work with banks and financial institutions that are interested in pursuing greater efficiency through blockchain technology. With smaller, decentralized systems connecting ledgers across the globe, it’s possible that this efficiency is just around the corner.