Looking at a Future Without SWIFT: Financial Institutions and Blockchain

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In this second installment of our miniseries on “Demystifying Cryptocurrencies, Blockchain-based Applications and Opportunities in the B2B Payments Space,” the Solutions for Business team at OANDA will address how a decades old "messaging service" — SWIFT — is likely to be displaced for good by blockchain-based applications to fulfill international payments.

What is SWIFT?

Founded in the 1970s, the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, is the preeminent global provider of financial messaging services between banks. It provides its services to over 11,000 banks and financial institutions in over 200 countries and sends over 6.5 billion financial messages a year.                                                       

For decades, SWIFT has provided the global financial system with a secure, reliable means to communicate and process cross-border payments. It has even been called upon to help enforce international sanctions on rogue states. But, while SWIFT remains dominant now, it may not be so in the future.

After all, Swift was built before the internet. In a traditional finance sector dominated by a select group of banks and institutions that, up until recently, had little to no meaningful competition, SWIFT was able to rise to the top unchallenged.                                             

The real Game Changer in finance       

Much has been made of the rise of fintech—financial technology—in recent years, and rightly so. The pervasive changes taking place in the finance sector are attributed to fintech in large part for bringing innovative solutions and provoking a reluctant reaction from banks. But the most innovative development to date is arguably blockchain technology, which is on the brink of going fully mainstream as central banks around the world continue to research how to harness it.

SWIFT's position on blockchain

In Q4 2017, SWIFT said that it is "early days" regarding blockchain technology and that it’s not prepared to adopt it now. The parallels between SWIFT and blockchain with banks and fintech cannot be underestimated.

      The parallels between SWIFT
      and blockchain with banks
      and fintech cannot be
      underestimated.

The network went on to say that it may never adopt blockchain, but instead potentially pursue another route with different technology. It also highlighted that any solution would have to work "with legacy back-office applications,"                  

As Finextra points out, this is likely the main sticking point. SWIFT's network of banks is so vast that getting up to speed with blockchain across the board—with so many legacy systems at work—would be hard and astronomically expensive to implement.
 

What blockchain offers that SWIFT can't

SWIFT was created to replace the old telex transfer system, which was slow, unreliable, and vulnerable to security breaches. It addressed all problems and led to a much improved interconnected financial system—in the 1970s. SWIFT is not a payment system, but only a messaging service.

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Our partner in this blog miniseries, Ripple, the world's only enterprise blockchain solution for global payments, describes how “international transfers can only happen if banks in both locations have a pre-existing agreement. A good way to think about this is email before the advent of the SMTP protocol, which standardized electronic messaging. Imagine being on AOL and not being able to directly email someone using Yahoo. That’s pretty much the situation with international payments. Each region has its own closed-loop system. What’s lacking is a universal translator.” (Source: Ripple blog)                                           

In 2018, blockchain is the logical advancement. Through leveraging blockchain technology, Ripple is leading the charge in providing financial institutions with the following advantages on remittances*:                                                                                                                                           

  1. Speed: Cross-border settlements happen in seconds versus the traditional method of 3-5 days. Payment is instant and on demand.                                                                                                                                                                
  2. Reliability: Ripple’s xCurrent product allows for bi-directional messaging which allows for transparency into fees, as well as reduces errors, repairs and reconciliations.                                                                                                                
  3. Lower costs: Blockchain helps lower FX costs and liquidity requirements. And with instant payment settlement, funds aren't tied up in transit for days at a time.      

* https://ripple.com/solutions/       
                                                

The future of payments

      A future without SWIFT looks
      faster, more reliable, and more
      cost-effective.

While fintech continues to move in on traditional banking sector territory, and banks continue to move forward with legacy systems at their core without much of true innovation, SWIFT is likewise standing by as blockchain-led alternative solution providers continue to make progress.

Similarly to banks, SWIFT is relying on its current size, reach, and the dependence that the traditional and change-averse financial institutions have on it. But as banking continues to diversify away from traditional finance, so too will the global payments system. SWIFT may remain dominant for now, but longer term, it faces a much sterner task.

Since its creation in the 1970s, it hasn't really had serious competition to provide a challenge. But in blockchain it does now, and a future without SWIFT looks faster, more reliable, and more cost-effective.