Businesses and consumers just want to be able to move their money around the world as effortlessly as they send email. What’s stopping them? One reason may be that international payments infrastructures can be inefficient and expensive: transactions in different currencies can require multiple intermediaries and take days or weeks to complete. Improving operational efficiency to the point where payments can be sent like emails requires the removal of existing barriers that cause delays and high fees. Just a couple years ago, this would have been called a pipe dream. Now, advances in digital technologies such as blockchain and smart contracts are making all sorts of improbable things possible.

As you heard at Sibos this week, IBM, KlickEx Group and Stellar.org unveiled a new blockchain payments solution that uses IBM Blockchain technology to provide both clearing and settlement of financial transactions on a single network in near real time. The solution, which is currently in use by Advanced Pacific Financial Infrastructure for Inclusion (APFII) members, is a major step toward improving payments processing.

An industry primed for disruption

As you might expect, payments are a huge segment of banking. However, even as digital payments become a preferred method of exchange, challenges in payment processing remain.

Following traditional practices, parties to a transaction have their own records on separate ledgers. Reconciling those records is a manual, often paper-intensive and error-prone process containing several steps. At each step, middlemen must be paid, and there is the possibility of opportunistic pricing in currency corridors that have less competition and less regulation.

In recent years, blockchain has been drawing attention because of its potential to increase transparency and decrease the need for middlemen through shared, distributed ledgers, consensus and an immutable history of transactions.

When long-standing challenges can be solved with new technology, disruption is imminent. According to a recent IBM Institute for Business Value study, C-suite executives are aware they must disrupt and evolve to keep pace with competitors who are advancing innovative network business models.

A blockchain solution for cross-border payments

IBM’s blockchain payments solution is positioned to transform how cross-border payments are processed. By addressing clearing and settlement on the same network, the solution is designed to significantly reduce settlement time. If you’ve read my previous blog post, you’ll recognize this solution follows a design pattern focused on the use of a digital asset, which is one of several approaches to using blockchain for payments optimization. Using this approach, payment instructions (on the clearing ledger), along with transaction details (on the settlement ledger), and a negotiable native asset are all combined to drive atomic transactions on a single, integrated network.  Payment initiation, compliance verification, foreign exchange and settlement happen as a sequential set of integrated steps in near real time for every transaction.

Through IBM’s blockchain payments solution, which integrates the IBM Blockchain Platform with the open source Stellar network, payments are settled based on instructions provided through smart contracts on Hyperledger Fabric, and they become immutable and final once recorded. Stellar, now part of the Hyperledger project, provides the network and digital asset management to facilitate the settlement of transactions cleared on Hyperledger Fabric. Financial institutions will later be able to choose the settlement network and/or the native asset on Stellar that facilitates settlement with finality in near real time, including central bank-issued digital assets.

An eye on the future

According to KlickEx group, the new network is already in parallel production with its legacy systems, processing live monetary transactions across 12 currency corridors among several Pacific island nations and Australia, New Zealand and the United Kingdom. Using this new network, KlickEx aspires to process up to 60 percent of all cross-border payments in these corridors by early next year. Commercial banks and financial institutions that have been part of the initial development and deployment process will be invited to join the network beginning in 2018.

Reducing the friction and costs associated with cross-border payments is a major draw for businesses. However, if you look a bit further, you’ll realize that modernizing payments can help accelerate financial inclusion in unbanked regions by providing digitally-connected consumers in emerging markets with access to the global financial system.  Cheaper payments, faster payments, and social good — that’s global transformation led by IBM!