Sending money around the world is slow, expensive and sometimes even unreliable. I have lived out of India, my home country, for more than three decades. Like many expatriates, I occasionally send money back to the family, and the process hasn’t improved much in all these years.
That’s because the current global payments system is not unified. Every country, asset class, payment type whether it’s low or high value has different rules, systems, operating regimes and access requirements. This results in banks having to manage this complexity to enable different systems to work together.
For the uninitiated, here is a simple breakdown: When you transfer money to another person overseas, it doesn’t simply leave your account and land in another. First, your bank “clears” the payment via a central counterparty in your country, who then clears it with a liquidity provider/sending correspondent (which incurs a fee), who then sends it to the destination country’s receiving correspondent (more fees), then it goes via the central counterparty in the destination country before it is finally received by the beneficiary’s bank and deposited into her account.
The result: It takes several days to complete, is expensive and carries the risk of errors. Our analysis of data from the World Trade Organization’s International Trade Statistics, Institute of International Finance’s Aggregate Capital Flows and the US Federal Reserve Financial Services’ Cross-Border Payments, shows that cross-border transactions costs $1.6 trillion annually. At the same time, research by Experian – a global information services group that specialises in financial data, shows that error rates in cross-border banking transactions run as high as 12.7 per cent. From a compliance perspective, new risk is added each time the payment passes through a new party.
Of course, the banks are not oblivious to this. They are aware of the pain points and have been looking at ways to address them. The good news for consumers is that advancements in technology, especially the distributed ledger technology (DLT) – more commonly known as blockchain – could provide the solution to all these issues.
The DLT enables banks to transact directly, instantly, and with certainty of settlement around the world in a matter of seconds through a unified and completely secure online network that runs 24/7.
The technology is being explored extensively across the banking ecosystem and there have been multiple successful pilots of DLT around the world.
Standard Chartered bank recently completed a cross-border transaction through DLT in just 10 seconds, with full transparency of fees and forex charges. The same transaction would have taken two days through the traditional system.
Asia is taking the lead on this front, with financial hubs such as Hong Kong and Singapore racing to adopt DLT. Both these centers are bustling as Fintech hubs in Asia and have introduced various initiatives to help boost the Fintech sector and encourage adoption of their solutions.
They also have an already robust and progressive regulatory landscape. Just in the past year we have seen various incubation schemes, regulatory “sandboxes” for promising start-ups, tax incentives, and government and industry backing.
However, it’s not just the top markets making strides. Across Asia, governments, central banks, and regulators are drawing up robust regulatory plans so that Fintech start-ups can continue to innovate and banks can safely adopt new technologies.
India’s shock demonetisation move last November, aimed at tackling counterfeit notes as well as unreported and untaxed wealth, helped boost the adoption of digital payment solutions. Banks in India are now racing to adopt DLT technology in anticipation of what will be a tidal wave of new capital flow.
It’s the economy
The regulatory support aside, Asia’s socio-economic landscape makes it’s a perfect place for DLT adoption. The region has been a big adopter of mobile internet. That has resulted in tremendous growth in the e-commerce sector.
E-commerce is expected to grow at an annual rate of 25 per cent across Southeast Asia over the next few years, according to a report by management consulting firm A.T. Kearney. The growth of the e-commerce sector has resulted in a surge in cross-border payments. Cross-border payments, the lifeblood of e-commerce. According to the McKinsey 2016 Global Payments Report, cross border payments have already reached over US$30 trillion annually and are increasing at a rate almost three times faster than the global gross domestic product (GDP).
Asian economies are now discussing a regional trade deal called the Regional Comprehensive Economic Partnership (“RCEP”) to achieve greater trade liberalisation. The RCEP is being negotiated between 16 countries including China and Japan. If completed and agreed upon, the RCEP has the potential to transform the region into an integrated market of more than three billion people (over 45 percent of the world’s population), with a combined GDP of about $17.23 trillion, which is about a third of the world’s current annual GDP. This will trigger further growth in cross-border flow and banks will need to be equipped to handle this surge.
At the same time, a large number of Asians work outside of their home country. That has seen a steady rise in money transfers within, and to, the region. According to data from the World Bank, China and India received $65.4 billion and $65.2 billion in remittances respectively, last year. These consumers will continue to demand more efficient, convenient and affordable products and service.
Asia has the perfect combination of having an established banking sector, fast-growing economies, increasing interconnectivity and a widespread enthusiasm from regulatory and governmental backing for financial technology. There is no reason why it can’t become the first region where real-time, cost-effective, international payments will become the norm, rather than an exception.
I, for one, won’t be complaining.
Dilip Rao is Managing Director Asia-Pacific for Ripple.