Bradesco emulates Itaú by subscribing to a blockchain-based system for international money transfers, another example of technological advances that intensify competition in the sector
Bradesco announced last week that it plans to join a blockchain system operated by IBM that allows money transfer in international markets. The structure called Blockchain World Wire has the mission of combining payment messages with its own system of settlement and compensation.
The cryptocurrency system offers a simpler model for international payments that allows reducing intermediaries, which makes a difference with traditional systems, said IBM.
This system becomes a competitor of Ripple
Ripple is another blockchain-based system for international payments. Itaú, the largest Brazilian bank and direct competitor of Bradesco, joined Ripple last year.
The interest of the large Latin American banks to adapt new technologies to their menu of cross-border payment services corresponds to a new policy to revitalize a market that is often defined as outdated.
“There is a global trend towards payments in real time” said Cesar Boralli, director of Rapyd for new business in Latin America.
Which, in time, leads to cut costs and reduce a source of revenue for banks.
International payments demand a very complex process
Requirements for the prevention of money laundering (PLD) must be complied with, as well as applying the regulations to identify the client (known as KYC, for its acronym in English). It also involves the conversion – and risk – of currencies, in addition to settlement and compensation.
Both startups and Latin American banks are offering new services for retail and corporate clients to improve parts of this process. Behind all this is the fierce competition between financial and technological giants in a market that, globally, handles 200 billion dollars of revenue per year. IBM, Western Union, Swift and Ripple are competing to become the market leader for years to come.
“The costs of sending international payments will continue to be reduced,” said Alfred Nader, manager of business solutions for the Latin American and Caribbean division of Western Union Business Solutions.
The dissatisfaction of global payments
Banks, through the Swift system, have traditionally dominated the international payments market. Over time, this system has earned a reputation for being slow and opaque. Many times the senders are not sure when the transfer will arrive or even if it will arrive completely to the recipient’s account.
In this environment, Swift has launched a global payment initiative – gpi in its English acronym – whose mission is to make the process transparent and to do it much faster. So far 3,500 international banks – representing 85% of transfers via Swift – have joined gpi. However, the application of this model will still take more time. By the end of 2018 only slightly more than half of the Swift transfers were made through the gpi, which was an increase from 15% in the previous year.
While Swift works for banks to use gpi, new competitors seek to displace it by offering better and more effective international payment systems. Ripple, and now Blockchain World Wire are joining banks to their platforms based on digital assets. Western Union, since the launch of its business solutions division a decade ago, promises faster and more transparent services through its own payment lanes.
The payment startup Flywire also offers a new payment lane – partnering with local companies to adapt their product to the local environment. The company expects to process 5 to 6 billion dollars in payments, local and international, this year.
“We do not use third-party payment systems, we do it ourselves” said Ryan Frere, vice president of global payments.
“When we have to work in an associated manner, there is an exclusive payment method related to a region or market. For example, Boleto, is a key element that we have to solve in the Brazilian market. Topics with local card acquirers. We want the sender to see the process as if it were a local transaction and that the recipient has the same experience”.
Cutting currency conversion costs
The process of currency exchange has almost always involved an additional cost and more complex processes when making international transactions, particularly in Latin America.
“In some countries, the exchange rate is very volatile,” says Rafael Ayla, who heads Flywire’s Latin American payments division. “This means a great challenge for any entity that works with international businesses.”
In Peru, local startups are directly addressing the issue of international currency conversion. Rextie, which was launched in 2017, offers a digital currency conversion platform – moving to an online platform a process that many Peruvians literally perform on the streets – as well as a service that protects against money laundering.
Co-founder and CFO Matias Maciel estimates that Peruvian banks take 15 to 20 cents on the dollar in foreign currency changes. Rextie, which develops an automated digital process, applies a fee of 2 to 3 cents to the dollar.
“These new automated processes will be the future of international currency exchange,” he said. “The digital market will increase and be more present”.
The end of the currency market triangulation
Many businesses in Latin America have always more of a headache with the conversion of foreign currencies. Doing a theoretical exercise we have a company X of Colombia that has to import products from Mexico. To pay for imports from Mexico or any other country in the hemisphere, you must first make a conversion to US dollars, which requires more time, cost and makes the international payment process more complex.
Both the Colombian importer and its Mexican counterpart will have to face the risks associated with the process of convertibility of international currencies.
“Through the traditional process, many currencies of Latin American origin are considered exotic” says Luis Felipe Aparicio, commercial manager of the Colombian securities broker Bolsa y Valores. New payment systems promise to end the dilemma of triangulation. The Blockchain World Wire, for example, is famous for making 1,000 currency changes directly.
Using the systems of Western Union, Actions and Values has recently launched a new international payment service. The clients are mostly local companies dedicated to both export and import. In most cases, the service allows direct currency changes and compensation of payments in 24 hours.
“The service generates a lot of value for our clients,” says Felipe Jaramillo, head of treasury solutions at Valores y Valores. “Exporters have saved money by working directly with Mexican pesos and the Mexican counterpart does not bear the risks of working with US dollars”.