When one of the largest banks in the world announces that 75 other banks have signed up to join a new payments information network it has developed, which, powered by Quorum, is a permissioned variant of the Ethereum blockchain, that grabs a lot of attention.
This is the largest number of banks to join any blockchain application in live production. And when Euromoney sits down with the lead bank, just a couple of weeks after this announcement, it soon becomes clear that take up has proceeded even faster than first expected. The Interbank Information Networks (IIN) is already approaching 100 banks signed up as of the second week of October.
Partly that’s testament to the sheer power of network pioneer JPMorgan, the largest US dollar clearer globally whose treasury services business processes approximately 26 million payments transactions a day, in total worth over $3 trillion in 108 currencies and 100 countries.
When you recall chief executive Jamie Dimon’s previous fulmination against bitcoin, this rapid take up of the first live blockchain service provided by the bank he leads looks even more extraordinary.
That’s why it’s so important to start with what IIN is not.
“It is not a coin. It is not a cryptocurrency network,” Sungmahn Seo, head of Emea payments and FX at JPMorgan, tells Euromoney.
Neither is this a system on which banks conduct fiat currency payments using so-called stablecoins backed by hard currency reserves, the latest invention from crypto land, or even central bank digital currency.
“One of the first-use cases suggested for blockchain was payments,” says Seo. “But we thought: ‘Not quite’”.
He explains: “Broadly speaking, the cross-border payments system works quite well. Attempts to construct some new way of transacting on blockchain look to us like a solution in search of a problem. However, when a cross-border payment does get stuck for whatever reason, that can get quite painful. It can be difficult and can take weeks to resolve. We want to make resolving stuck payments much simpler and much easier, and that is about easing access for the right parties to the right information.”
Euromoney wonders how many stuck payments JPMorgan has to deal with. After some checking, the answer comes back that this bank handling 26 million transactions a day – many of those of course being domestic within the US and so quite simple – may encounter between 100,000 to 200,000 enquiries regarding stuck payments every year.
Mostly these are cross-border. The volume of international payments has picked up in recent years as once purely domestic small and medium-sized enterprises increasingly source supplies and sell finished product across borders. That growth has coincided with much more insistent know-your-customer and anti-money laundering regulations and a reduction in correspondent banking networks.
“Why do payments become stuck?” asks Seo. “It may be that a beneficiary name matches the name of a sanctioned individual and that requires investigation, or more often that there is a missing field in the identity of a party to the payment – an address say – or another obvious error.
"There can be many steps between multiple correspondent banks in sending a payment from the US to China, for example. And when a query pops up, the question becomes: which bank has the full and complete information? Banks start sending emails but some banks don’t like to respond that way because email may be insecure. So, then it’s phone calls between banks in very different time zones. The query can start ping-ponging around. When it gets painful, it gets really painful. A payment that should have taken minutes can take many days to complete as requests for information ping-pong between the banks.”
JPMorgan’s insight was that instead of handling payments, a distributed ledger network that is securely encrypted and allows participants to identify themselves and the payment that they are a party to and go into a portal to request and retrieve the missing information might be a good way to reduce time to resolution from a couple of weeks to perhaps a couple of days or even a couple of hours.
“IIN is for all kinds of payments that go into banks’ correspondent channels,” says Seo. “They could be payments of just a couple of thousand dollars or a couple of million. It is size agnostic.”
He makes no bones about why the bank developed it: “JPMorgan is the largest dollar clearer in the world. It’s in our interests that the international payment system works as well as it can.”
He adds: “Even though JPMorgan is a very trusted brand, it just made sense to us that the system would benefit from a mutually distributed open network to resolve such blockages on payment transaction information.”
The mantra here is that if we don’t disrupt ourselves then somebody else will disrupt us- Sungmahn Seo, JPMorgan
JPMorgan started the network one year ago with Royal Bank of Canada and Australia and New Zealand Banking Group. The 75 banks that were announced in September 2018 constitute many of its correspondent banks.
JPMorgan will operate it, but this is an open network and Quorum itself is open source. The more banks join, the sooner resolving information on this blockchain project will become second nature.
That raises the obvious question: what next?
“It is still early days for blockchain, with a lot of investigation yet to be done into the scalability of the technology,” says Seo.
But this network looks to have achieved scale quickly.
“Once you have a group of banks routinely using a network that is intuitively easy to log into and to retrieve information from to resolve problems, there are likely to be other use cases and services,” he says. “The 90 or so banks that have already signed up are all clients, and I’m sure they’ll be forthcoming with ideas.”
Does he have any hints? “Fraud detection may be one.”
And what of payments? JPMorgan invests something like $11 billion a year across all divisions of the bank in technology to stay in the vanguard.
That will allow SME owners across the UK and Europe to pay for goods, salaries and investments in 189 countries and territories, with pricing that will undercut most banks by at least 75%.
Michael Kent, Azimo’s CEO, says: “In 2018, it’s unacceptable for business owners to have to fiddle around on an unusable banking website to make overseas payments that take days to arrive, and then to be overcharged for the privilege. We are using our award-winning technology and mobile apps to give small businesses the service and pricing that they deserve.”
Azimo Business has been in beta testing since June. Payments to China and Hong Kong have taken off particularly quickly. The big banks know they are under threat.
“Certainly, the mantra here is that if we don’t disrupt ourselves then somebody else will disrupt us. We constantly ask ourselves: ‘Are we being disruptive enough?’” Seo says.
“Payments is still very local. But real time payments are coming to international markets and we want to be at the forefront of that. And there are now so many payment types and wallets that we intend to offer a payments gateway where clients can come to JPMorgan and we can route them to the optimum channel given their priorities, whether those be speed or cost or whatever.”