Recently, Wells Fargo, a leading financial services company, partnered with HSBC bank, one of the largest banking and financial services organizations, to benefit from its blockchain-based tools to settle foreign exchange transactions. After this agreement, Wells Fargo and HSBC Bank will process all their US dollar, Canadian dollar, Euro, and British Pound Sterling transactions using a shared ledger. They also plan to extend their platform to settle more currencies in the future. Both parties can use Payment-vs-Payment settlement netting efficiently, which will reduce risks and the cost associated with processing foreign exchange transactions. Under this agreement, Wells Fargo will use the FX Everywhere Platform for interbank foreign exchange transactions. Banks used this platform within the HSBC group to settle foreign exchange transactions. Since its launch in 2018, the FX Everywhere platform has settled around 3 million intrabank trades worth over $2.5 trillion. The use of blockchain technology to settle foreign transactions will reduce transaction costs. Wells Fargo will initially settle around 100 transactions per week and then gradually increase the rate with this partnership.
Using a shared, private ledger based on blockchain technology, Wells Fargo and HSBC will optimize Payment-vs-Payment netting opportunities. With the flexibility provided by this technology, banks will be able to net bilateral payment commitments and settle on a priorly agreed cadence several times a day. Wells Fargo and HSBC also plan to introduce more participants to launch a central Financial Market Infrastructure (FMI) to operate the platform rulebook. The FX Everywhere platform operates on CORE distributed ledger technology inspired by Batons Systems’ blockchain. The Baton rulebook governs it. This platform allows participants to efficiently settle bilateral cross-border commitments across a range of currencies and provides flexibility to optimize the risk associated with Payment-vs-Payment opportunities. Additionally, blockchain technology will offer both parties real-time transparency about the settlement status of foreign exchange trades in all the four stipulated currencies.
This partnership between these two leading financial services providers is a prime example of how blockchain technology is entering the foreign currency market and transforming the relationship between investment and central banks. Some time ago, the Central Banks of France and Switzerland also conducted some tests as a part of their projects around central bank digital currencies. Under this project, they tested their first cross-border payment using blockchain technology. This partnership is also a part of HSBC’s long-term commitment to the broader adoption of blockchain technology. It should be noted that blockchain technology for settling cross-border payments is not new. Several banks have started using blockchain technology to settle cross-border remittances and payments in the last couple of years.
How Can Blockchain Revolutionize Banking?
Blockchain is a decentralized, tamper-proof technology that securely stores the record of each transaction. It offers several opportunities to remedy the inefficiencies that have plagued the traditional banking sector for decades. Here are some ways blockchain technology can help banks:
1) Payments and Remittances: One of the most common uses of blockchain technology is cross-border payments. Usually, the traditional banking system takes days to process cross-border payments. This process is also quite expensive. Blockchain technology solves this problem by facilitating payments in a matter of mere seconds. It also reduces the enormous costs associated with cross-border payments. According to a recent report by the Juniper group, commercial banks using blockchain technology can save up to 3330% by 2030. With remittances, the transfer process through banks is quite complex, lengthy, and expensive. There are also other tax and legal issues.
2) Improve customer verification: Customer verification processes like Know Your Customer (KYC) and customer due diligence processes are long and require financial institutions to spend an average of $60 million per year. Some banks even spend over $500 million per year just to verify their customers. Banks can reduce their operational costs by storing KYC statements on a blockchain. This allows banks to securely access and share customers’ information with consented third-party organizations like insurers, car rental firms, loan providers. This leads to improved efficiency and a reduction in operational costs.
3) Reduce fraud and improve efficiency: As discussed earlier, data stored on a blockchain is decentralized, which means all the parties on that blockchain will have access to that information. Unlike centralized bank ledgers with centralized databases accessible only to a limited number of people on the top, decentralized ledgers share information with everyone on the ledger. This means there is increased transparency within all parties; therefore, any data breach or fraud will be immediately noticeable and traceable.
4) Simplify operational processes: Usually, there is a lot of manual work involved in banking services, for example, when you file a loan application. It is pretty cumbersome and involves lots of paperwork. Enter blockchain, and banks can put all relevant parties on a common digitized infrastructure. These manual processes can be digitized, leading to faster and more efficient transactions and contracts. For instance, if you are going to file a mortgage application, it involves a significant paper trail between loan officer, borrower, underwriter, homeowner, and others. All these actors are connected with blockchain technology, and ledgers can be updated automatically and smoothly.
5) Removal of intermediaries: Blockchain removes intermediaries involved in cross-border transactions. Money can be transferred directly from one bank to another without going through other correspondent banks. This reduces both time and cost associated with cross-border transactions.
Therefore, as illustrated above, blockchain technology can revolutionize and ultimately disrupt the financial services ecosystem. Its decentralized, tamper-proof technology can significantly help banks improve speed and reduce costs.