When the hyper ledger fabric-hosted foreign exchange payments and settlement system that Standard Bank is developing in the cloud goes live in the first half of this year, it will significantly increase the success of international trade. It will also speed up foreign exchange payments and settlement while making transactions more transparent, “providing an independent and much safer cloud-hosted record of all documents and steps, instantly available in real time to all parties involved,” predicts Richard de Roos, Head of Foreign Exchange at Standard Bank Group.
Scaling and monetizing blockchain, otherwise known as distributed ledger technology, into user-friendly products and services that transform the client experience has long been an ambition of the financial services sector.
As the use of blockchain increases, the most innovative companies’ – and countries’ – are racing to develop effective cross border payments and trade finance blockchains. Beyond the chequered performance of cryptocurrencies, however, distributed ledger technology has not yet been successfully harnessed into easy-to-use banking applications – despite the broad recognition of the potential of this technology to significantly disrupt the sector.
Standard Bank clients conducting foreign exchange for payments in Africa currently face several challenges in meeting regulatory reporting burdens as well as accessing liquidity.
Completing a foreign exchange transaction for offshore payments typically involves a three-step journey. The first mile requires; originating the instruction, accessing an exchange rate, correctly identifying the beneficiary details, complying with regulation, and then accessing available funds. In the second mile payment instructions are remitted to the beneficiary bank. In the third and final mile, the receiver is paid by the beneficiary.
The Standard Bank team noticed that, “the majority of client trades fail in the first mile of payment. That is, at the very beginning,” says de Roos. If Standard Bank could develop a limited blockchain that reduced failure in the first mile of foreign exchange payments and settlement, then simply hand the transaction over to SWIFT (which already manages payments via its own tracker feature, called Global Payment Initiative), “we could actually offer clients a fully integrated end-to-end block chain solution that would dramatically reduce the incidence of trade failure while also increasing regulatory transparency and improving the visibility of liquidity,” says de Roos.
While successful proof of concept and live blockchains do exist, “the scale of the private permission-based participation required to build widely utilized and scaled blockchain ecosystems has to date, rendered them, impractical,” says de Roos.
As such, Standard Bank’s development of a limited private permission-based distributed ledger accessed through an easy-to-use web-based customer interface and ultimately available at all its online channels, “is an important first step in growing a scalable private permission-based foreign exchange payments and settlement blockchain ecosystem across Standard Bank’s 20 market African footprint,” says de Roos. Standard Bank is also working with its major shareholder and global banking partner, the Industrial and Commercial Bank of China (ICBC), enabling Standard Bank to extend this private permission-based ecosystem into China. This will ensure a seamless trackable payment experience for all Standard Bank clients – covering the African continent and augmented with Asian interoperability.
The challenge with distributed ledger technology, however, is that for it to work, “you need to attract multiple users to a single point in the cloud, and then make this point available to multiple other users,” says de Roos. Normally, this means either owning both ends of the system, or having thousands of banks and other involved parties around the world all joining and operating the same block chain.
Clearly, Standard Bank owning the whole cross border trade ecosystem – end to end – is not likely to be possible due to the massive number of parties involved: buyers/sellers, banks, shipping companies, ports, freight forwarders, insurers, regulators, customs, etc. “Expecting all the world’s banks as well as multiple third parties to join a Standard Bank-operated blockchain is simply impractical” says de Roos.
While in time Standard Bank expects to participate in much broader – even universal – blockchain-based payments ecosystems, “we are currently focusing on quickly addressing specific client pain points through a limited private permission-based format,” says de Roos.
To achieve this in a manageable way, private permission blockchain technology supports the sharing of information amongst multiple participants on a network, enabling each party to track changes. Changes are also instantly shared with the other participants – all without the need for a central database. In other words, it all takes place transparently, is traceable in real time and is permanently recorded in the cloud. This also means that it is, “entirely independent of third-party control or manipulation while placing the customer in a position of control,” de Roos.
As such, initially, this much smaller private permission-based network will only include Standard Bank and Stanbic Bank partner banks, clients and third parties directly involved in trades, and SWIFT. “We have also decided to include our foreign currency trading app, SHYFT, which provides access to a host of payment distribution partners and e-commerce platforms,” says de Roos. Since ICBC is also key to most Standard Bank trades involving Africa and China, and both Standard Bank and ICBC have built their platforms on hyperledger, both banks’ private permission blockchain trade solutions are entirely interoperable. Moreover, with the whole system being on the cloud, “Standard Bank working together with ICBC means that our private permission blockchain foreign exchange payments and settlement solution provides clients potential access to similar ecosystems around the world,” he adds.
The entirely manageable one-to-many structure is conceived on a hub and spoke basis, “where the hub is Standard Bank and its 20 franchises across Africa working with ICBC to extend the hub into Asia, and the spokes are the various payment rails, like SWIFT and SHYFT,” explains de Roos. Since the blockchain is built with sufficiently standard architecture, additional spokes – or payment rails – can be added over time, “providing our private permission-based blockchain the ability to extend participation to any and all payment rails that may become relevant to clients,” adds de Roos.
The visible and private permission-based nature of the ecosystem also means that the platform cannot, for example, be used for money laundering. In other words, Standard Bank’s foreign exchange payments and settlement blockchain does not operate like a cryptocurrency, accessible to all. Instead, since this is not a public blockchain, “it can’t be used for anything other than legitimate, regulated and entirely transparent transactions involving Standard Bank clients,” says de Roos.
Only once this private permission-based blockchain foreign exchange payments and settlement ecosystem was built did Standard Bank look for integration points with the banks’ legacy architecture. This is important because it means that, “we innovated an original and distinct digital solution independent of existing architecture – evolving an entirely new payments network in the cloud,” says de Roos.
Standard Bank’s conceptualization and development of this private permission blockchain foreign exchange payments and settlement solution, “reflects the banks digital vision to become Africa’s leading financial services organization, delivering exceptional client experiences and superior value by forging new paths with new technologies,” says de Roos.
