For all the high-tech wizardry and mobile technology shaking up the financial world, cross-border payments remain one area plagued by low speed and high expenses. But blockchain—a digital ledger of economic and other types of transactions—promises to change that unbalanced equation by streamlining how money moves between nations.
To bring businesses closer to the holy grail of real-time payment, blockchain uses innovative approaches to clearance and settlement, largely through open-source transactions using cryptocurrencies such as bitcoin and ethereum.
"Wire transfers usually take around three days, and that can represent a huge deficiency in the use of working capital for many companies," said Lamia Pardo, senior vice president of growth and operations at Pangea Money Transfer in the greater Chicago area. "Fees are between 1 to 4%, so naturally this is an area where adoption of blockchain is happening faster."
Additionally, it can be difficult for senders and receivers to track their payments when funds are in transit, which creates uncertainty about delivery timing and the final payment amount. And something as simple as an incorrect account number can make it tough to trace transactions when problems arise.
Pardo noted that with blockchain, a transaction between two currencies "is reduced to minutes, and the reduction of intermediaries helps with cost savings. In addition, users don't need to take the risk of currency fluctuations, since the transaction settles fast."
A blockchain primer
Blockchain is a fully public digital ledger with two types of records: transactions and blocks. Blocks hold batches of transactions. The blocks are time-stamped and link to a previous block. Blocks cannot be corrupted, because the transactions cannot be altered retroactively.
Blockchain first appeared about 10 years ago for bitcoin transactions, and can be visualized as the rails upon which bitcoin and other cryptocurrencies ride, said Steven J. Ehrlich, the lead analyst for emerging technologies at Spitzberg Partners LLC in New York City.
"Blockchain's impact on cross-border payments is still largely aspirational at this point, but it is slowly growing," said Ehrlich. "The value proposition is clear: Since most monetary transfers today are digital in nature, we should be able to send them as quickly and easily as an email."
The biggest use of blockchain today is in international remittances, said L. Gary Boomer, CPA/CITP, CGMA, former CEO of Boomer Consulting Inc. and now the company's strategist and visionary, based in Manhattan, Kan. He cited the example of a laborer in the U.S. on a work visa sending earnings back to his parents in his native country.
"With the current bank system, that's very time-consuming, risky, and you don't really know if they are getting the money," Boomer said. "Plus, the cost is 8% to 10%. But with blockchain, you can complete the process in a matter of minutes and you know that your parents got the money. The security and authenticity of the transaction are verifiable and immutable—it can't be changed—and you are knocking down that cost."
What finance departments need to know
Aside from lowering costs, blockchain can be leveraged to grow customer bases, a fact finance departments need to know. "Ideally, using blockchain technology for cross-border payments should make for a smoother and more positive customer experience when they are paying suppliers or doing payroll," Ehrlich said. "If implemented and marketed properly, this is a significant value-add that can lead to customer growth and help certain firms create an identity for themselves as an innovator and first mover."
Pardo agreed. "I believe at this point it's worth considering the inclusion of blockchain in a company's settlement mechanism or foreign exchange algorithm. It's important to demystify it, learn it, consider it, and track it."
That said, there is no one-blockchain-fits-all formula for applying the technology to foreign payments.
"At this point the technology is not plug-and-play, so each institution needs to closely examine the benefits and tradeoffs of various blockchain-based applications," Ehrlich pointed out. That way, an institution can identify applications "that offer value to their clients and a pathway to scalability and enterprise-level adoption. This is a challenging task, but there are significant rewards available, even today, for companies willing to go through the process."
As for when blockchain will cross a border of a different kind—universal ubiquity—expect a rapid timeline. With cross-border payments, Boomer predicted that blockchain-enabled apps will hit critical mass by 2020, and will be widely accepted by consumers and financial services organizations by 2025.
It appears the International Monetary Fund is embracing the shift as well. In June, the IMF released a research note that suggests cryptocurrencies could pave the way for smoother, more efficient cross-border payments. The IMF said that in the cross-border landscape, blockchain is like an instantaneous email as compared with the current "snail mail" system.
But accountants and finance professionals don't have to wait to appreciate the impact of blockchain on attitudes, as well as payments.
"It has forever shaken the perception that payments were already as good as they ever were going to be," Ehrlich said. "Many institutions and individuals have long been frustrated with the correspondent banking system, for instance. It's slow, opaque, error-prone, and has little cost certainty. Blockchain technology, at least in theory and design, addresses each of these headaches. The genie is out of the bottle."
Lou Carlozo is a freelance writer based in Chicago. To comment on this article, contact Chris Baysden, senior manager of newsletters at the AICPA.