Banks begin blockchain payment integration
Banks are taking tentative steps to integrating blockchain technology, but so far they have focused on following established payment processes.
Barclays announced last week it was working with Circle, a US app, to facilitate payments between sterling and US dollars on the blockchain.
The UK’s Financial Conduct Authority (FCA) has granted the service a licence – the first of its kind to be granted in the country.
Marieke Flament, managing director, Europe, at Circle, says: “To operate in the UK it is necessary to partner with a bank. It is a joint relationship with Barclays. We see them as innovative, and they want to work with a product that is innovative.”
While it is a significant step, it is not unexpected.
Kevin Curran, senior member of the Institute of Electrical and Electronics Engineers (IEEE), and reader in computer science at Ulster University, says the development was going to happen eventually.
“It was really just a matter of who would be first to be granted an e-money licence by the FCA for a digital currency company," he says. "It just happens to be Circle.”
Circle operates on the model of a hybrid fiat-digital currency. Transactions can be made between sterling and dollars, passing along the blockchain without any fee being charged. The next step is to allow for payments to be made in euros.
Flament at Circle says: “Barclays is providing Circle with treasury account and settlement infrastructure to enable UK consumers to transfer funds through Circle and store pound sterling with Circle. Specifically, we are a client of their fintech commercial banking group.”
For the end-user, the process works like a card payment, using the details of their bank account. They only need to have the mobile phone number or the email address of the recipient to make a payment. The recipient needs to use a blockchain-based app to receive the payment, but it does not have to be Circle.
While using the blockchain’s digital channels, the funds remain as fiat currencies, removing the risk of the fluctuating bitcoin value. The FX rates are set by Circle.
“Circle has its own internal trading operations and works with several banking partners to get access to very competitive rates,” says Flament. “When converting from one currency to another, customers are quoted a competitive price that reflects the interbank mid-market rate plus a small spread. This spread is generally tighter than those offered by similar online exchange and remittance services.”
Although it is not a fully-fledged bitcoin service, the IEEE's Curran says this is the first step towards demonstrating to the general consumer what it is and how it works.
He says: “At the moment, it is not quite ready for the mass market. Buying, selling, storing of bitcoin is still beyond what we can reasonably expect the public to understand. That should change however with new layered solutions which make it easier to buy and use bitcoin.
"Circle is just one instance of making it easier to transfer money over bitcoin.”
There are also moves to make systems available for corporate-focused payments. BNP Paribas (BNPP) is in the process of developing a platform with crowdfunding investment platform SmartAngels. The aim is to make the platform live by the end of the year.
Philippe Ruault, BNPP
Philippe Ruault, head of clearing and custody solutions at BNPP, says: “As the trust bank, the money that flows on the blockchain sits on the BNPP books. Investors in the cash accounts credit the blockchain, which passes on to the cash accounts. The legacy payment is there for the cash, and also for the tax requirements.”
Focused on higher-value payments from established investors, the France-based SmartAngels moved towards blockchain technology to enable a faster expansion of the business. For the BNPP’s part, there are benefits to working with an established start-up.
“On the bank side, there is interest in getting the business knowledge from their part as well," says Ruault. "SmartAngels will also bring some corporates in initially on the pilot.”
What the platforms so far have in common is developing a quicker and cheaper way of facilitating transactions and updating existing infrastructure, rather than a revolution in the banking environment.
Jean-Francois Denis, deputy head, cash management at BNPP, says: “International credit transfers in currency can be long and sometimes unpredictable in terms of duration and fees applied by the parties in the chain. The new players are trying to solve the problems of the legacy situation.”
He says these developments are following the pattern that blockchain integration is taking, adding: “It is an illustration of what we see on the market. The combination of legacy [like card transaction] and its existing processes with new technology and partners.”
And banks are curious how they can benefit. Circle gained bank support earlier on, obtaining $50 million in funding from a consortium, which included Goldman Sachs.
Curran sees this as evidence that banks are believing there is money to be made in the digital currency world, even if for now there is still a degree of caution.
He says: “Banks, of course, also for the most part need to know who the transacting parties are so the anonymity makes this impossible for now. If there is money to be made in the future, watch them suddenly change this modus operandi; and that is just what is happening with Goldman Sachs and Circle. They are simply following the money. Expect more to follow.”
Due to fee-free processing, the blockchain platforms themselves are not yet generating revenues from their services.
Flament says the current model means Circle is relying on investment for growth, adding: “At the present we don’t make money from the transactions. Right now Circle is focused on establishing and growing customers for our social payment app, which is a large and growing category of apps for helping consumers make personal and social payments.
"We can offer this service without fees and at a large scale, around the world, and eventually plan to introduce other products that can generate revenue directly for Circle. It is not the focus at the moment. We have partnered with strong investors and are looking at getting the volume through engaging with the customers.”
There needs to be a focus on how to grow the offerings to make them profitable.
BNPP's Denis says the collaboration with banking partners will pull the blockchain platforms in line with recognized industry regulation, making them more palatable to potential users.
“The solutions being developed puts additional constraints when addressing corporate clients [instead of consumers], especially when high-value transactions are necessary, [and] non-banks players will be limited by the levels of liquidity which can be handled," he says.
“This level of liquidity and value of transactions being processed can also be limited to new players by regulation. And if you want to be able to process a higher-level of liquidity, you need to work with a bank.”
Denis says one of the most interesting aspects of these developments is how the processes are being developed as a group operation between the banks, the blockchain providers, and the corporate end-users.
“The most positive aspect of the developments is the move towards co-development," he says. "The process is directly involving banks, non-banks players/fintechs and even possibly end-clients. There is appetite in the market for further developing in this way.”
BNPP's Ruault adds: “There is big market demand for more efficient private stock processing processes on the blockchain – a lot of corporates and private equity firms are enquiring about how they could benefit – and the blockchain seems to be well suited for this.”