Remittance companies and banks are facing numerous barriers. Overcoming the obstacles to cross-border payments is particularly challenging at present, with slow settlement, high fees, and challenges brought by new competition intertwined.

The COVID-19 pandemic has adversely affected international settlement. A report released by the World Bank in April is concerning: its experts predict that, due to the pandemic and related lockdown measures, global remittance volumes will decline by about 20% in 2020, the largest drop in recent history. This means banks are losing business from all sectors of society, including seasonal workers, embassy staff, and employees of international organizations and foreign companies.

The adverse global environment caused by the pandemic is a significant reason for the setback in international remittance growth. However, even with a vaccine, the challenges facing remittances will not be resolved. If international workers still have to pay high fees and endure lengthy settlement times, they will strongly demand better and more affordable services and may actively seek alternative international payment solutions.

It is not too late for banking institutions to retain these customers. But they must recognize the obstacles preventing cross-border payments from being executed faster, more cost-effectively, and more reliably.

Banks and payment companies face two major international remittance barriers:

Lack of a global network.International payments are troublesome because there is no single global network or service in which all banks can participate to achieve real-time fund settlement.

Although the Society for Worldwide Interbank Financial Telecommunication (SWIFT) protocol has broad coverage, it is only a messaging service system, not a true banking network. A bank in one region can send messages to a bank in another region via SWIFT, but the two parties must establish bilateral arrangements or rely on correspondent banks with relationships. SWIFT has undoubtedly improved the previous lack of international coordination, but its structure remains inefficient and complex, leading to lengthy settlement cycles.

The lack of a global settlement network also drives up transaction costs. According to World Bank data, in the first quarter of 2020, the global average cost of remitting $200 was 6.8%. In Sub-Saharan Africa, this cost is about 9%, high enough to be prohibitive.

Outdated technology.Most banks' post-trade technology platforms are increasingly outdated and are often difficult to change and costly. These platforms typically consist of multiple interoperating systems, including middle office, clearing and settlement, books and records, securities processing risk systems, payment systems, and general ledger processing.

As a result, banks must undertake high-risk, expensive, and multi-year projects to bring their processing platforms up to modern standards.

Lessons from securities settlement

Although the clearing and settlement of securities differs from remittances, a closer look at securities settlement can offer insights into how banks can revitalize their remittance business.

For securities, there are typically central depositories and centralized clearing and settlement services, such as the Depository Trust & Clearing Corporation (DTCC) in the United States. Together, they provide clearing, settlement, and custody services for member firms, and all transactions of financial institutions and their counterparties must be submitted. DTCC acts as custodian of stock certificates and, through a continuous net settlement process, provides each member with its net obligation for each security owed or due, without the actual transfer of stock certificates.

While this net settlement improves efficiency and reduces counterparty risk, it is a centralized process that takes two days in the United States.

Member firms must also pledge capital or securities to cover potential defaults, which ties up capital that could be used for other purposes. Achieving real-time settlement would require significant reforms to DTCC's technology.

DTCC is actively addressing this obstacle in the securities space, evaluating distributed ledger technology (DLT) solutions in hopes of significantly accelerating industry settlement. DTCC has announced two initiatives—Project Ion and Project Whitney—to better integrate DLT with capital markets. DLT is a key component of blockchain, a rapidly maturing technology that has proven capable of executing peer-to-peer, direct value transfers for traditional assets such as fiat currencies, securities, and commodities.

Blockchain roadmap

Blockchain technology is a leading candidate for eliminating the aforementioned obstacles and more, with the potential to drive a transformation in global settlement. It enables banks to transparently display transactions to all relevant parties within minutes. Through blockchain technology, the evolution of the financial account paradigm toward a token paradigm allows traditional assets such as fiat currencies, securities, and commodities to be digitized into tokens. Blockchain technology can 'mirror' almost any asset, enabling instant value transfer between two parties with full transparency.

This technology eliminates many of the middle-office processes used to confirm transactions and identities. Real-time settlement reduces the need to disperse reserves across multiple exchanges, optimizing capital utilization and lowering transaction costs.

Banks and other transaction participants are ready to benefit from next-generation blockchain-based solutions. The latest advances in blockchain technology are fully capable of creating a network that is not merely a messaging service like SWIFT, but one that uses smart contracts to optimize transactions and complete the settlement lifecycle. Participants on this network can conduct transactions that are visible and settled between parties within minutes or even seconds, rather than days, significantly improving transparency and efficiency while reducing costs.

The banking industry may be on the verge of elevating settlement to a new level. Transaction participants are eager for a new, transparent, global network operating 24/7, with seamless access and near-instant transaction capabilities, at a fraction of current costs. Banks must take bold action to move beyond the status quo. The speed, cost savings, and customer satisfaction returns brought by a blockchain-based settlement network will reward their courage.