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| Image courtesy of IBM, Inc. |
So, no surprise, IBM created a new platform to facilitate the creation and sending of global payments based on Blockchain, IBM World Wire. This article describes the IBM offering and our opinions on the subject. Note that we are computer industry analysts, not experts in the fintech[1] area. Nor are we particularly expert on the intricacies of cross border payments. However, our background does give us significant understanding of technology and the difficulties of introducing new technology. Now, our thoughts on blockchain and international financial transfers.
In the U.S. today, moving money internationally is typically done through commercial banks and can also involve several financial intermediaries, including the use of a messaging system run by SWIFT[2], a Belgian company. Several years ago, we did a transaction that involved transferring money from Australia to the U.S. To our surprise, we discovered that the transaction was not only surprisingly expensive but would also take more than a week before the transaction was settled. We investigated alternatives with other banks and even a credit union. We were unable to find a faster, less expensive process.
We investigated further to see if this was unique to Australia. It was not. We spoke to the U.S. branch of a Canadian bank about doing a similar transaction. Still no difference. That bank also expressed that there would be a delay that exceeded a week at essentially the same cost. We were frustrated and suggested we could almost walk to Toronto[3] and get our money far more rapidly than the banks’ process. The banker was not amused.
Let’s summarize. The current correspondent banking system is slow and expensive. You lose the use of your money for up to a week plus pay a significant fee to initiate the transfer. Another cost is incurred as the currency needs to be converted in the process; in our case from Australian to U.S. dollars. Exchange rates fluctuate, frequently and sometimes rapidly and significantly depending on the currency. When converting currencies, there is always a cost incurred to the sender, which needs to be taken into consideration to ensure one is sending the correct amount to the receiver. Typically, a bank can generate a significant amount of revenue by managing the buy/sell foreign exchange rates being charged as part of these cross-border payments.
Let’s compare the Blockchain process to SWIFT. First, IBM World Wire allows point-to-point transfers to take place versus the SWIFT system’s reliance on multiple intermediary banks, which adds to the time and cost it takes to complete the transaction. Second, IBM World Wire would be more efficient and less error prone. Finally, the IBM’s system is based on Blockchain technology, therefore IBM World Wire easily handles digital assets such as stable coins. SWIFT indicated it was studying the path to the use of Distributed Ledger technology[4] within its messaging service. Digital assets represent a huge growth area for payments. As near as we can tell today, the advantage goes to IBM World Wire.
What about SWIFT?
Let’s take a closer look at SWIFT as the competitor. Their website indicates that they are planning to upgrade their service to satisfy their banking customers. (NOTE: the statement appears to be a few years old. No details are included.) The large banks are significant shareholders of SWIFT. IBM’s presentation noted that payments represent more than 30% of global banking revenue. Thus, the incumbent that IBM World Wire is competing with is not only closely (financially) tied to the banks but also represents an important part of banking revenue. Therefore, it comes as no surprise that none of the largest global banks appear in IBM’s list of those involved in the World Wire project.
Some other considerations. Generally, it is very difficult to displace a well-established incumbent based only on cost savings and better technology. This case has occurred many times in computers. There are various reasons for this; (not-so-) simple inertia is one reason. Another reason is that change typically involves risk and many organizations are very risk adverse. If the potential change risks or even threatens a significant erosion of a bank’s revenue, that is an excellent reason to delay or resist the change.
However, if the new technology company identifies a growth area where the incumbent is not strong, they have a more advantageous (level) playing field. This is a good entry-point and opportunity for a challenger to grow revenue. Several trends in the payments industry appear to provide such an opportunity for IBM. These include the entry of non-banks into payments. Also, developing countries without strong existing ties to SWIFT have significant growth potential. Europe (since the advent of the euro) itself may be tempted to explore this new technology.
A Final Word
A 2018 quote from a McKinsey[5] web site, appears to be quite germane to our discussion.
“While
cutting-edge technology is exciting, it can also be complex; demand is also
untested, which can result in long lead times with little opportunity to
validate the business model. As an example, consider cross-border money transfer,
a market that has traditionally been dominated by large incumbents such as
Western Union. Despite much hype about fintech—particularly blockchain-based
solutions—entering the space, no start-up has gained anywhere near the scale of
TransferWise[6], a digital business built on top of
traditional payments rails, rather than a reinvention using the latest tech.
TransferWise used great user experience and distinctive marketing campaigns to
grow rapidly, enabling it to successfully disrupt the space, and to report £117
million in revenues in March 2018”
While we are enthusiastic about the prospects for IBM World Wire, we believe IBM will have to battle for success. It may take a while for IBM World Wire to gain enough market share for the offering to become profitable. We hope that IBM is in this project for the long haul. As the reader might expect, we believe that McKinsey’s caution is justified.
[1]
Fintech is a term new to us. It stands for the application of technology to
financial services.
[3]
We hope the reader can forgive our sarcasm.
[4]
From Swift website: https://www.swift.com/insights/press-releases/swift-and-accenture-outline-path-to-distributed-ledger-technology-adoption-within-financial-services
[5]
McKinsey’s website for 2018 quote. https://www.mckinsey.com/industries/financial-services/our-insights/synergy-and-disruption-ten-trends-shaping-fintech
[6]
There is an interesting article on TransferWise in Wikipedia that is worth
reading. https://en.wikipedia.org/wiki/TransferWise
