Blockchain can make India a leader in cross-border real-time payments

The Unified Payments Interface (UPI), the instant real-time payment system developed by National Payments Corporation of India, may represent a significant growth driver for India’s payments industry, but one must not lose sight of an untapped technology - blockchain technology - which can leapfrog industry transformation and push India to the forefront of the global payments industry.  

Real-time payment systems (RTPS) currently require banks to settle transactions several times a day which multiply processing fees along the way. Blockchain technology can effectively circumvent this and enable different financial institutions to connect through the same ledger. This singular change will increase cost efficiency in an unprecedented way. India accounted for the largest number of real-time transactions in 2021 (48.6 billion) – almost threefold that of its closest challenger, China and almost seven times greater than the combined real-time payments volume of the world's leading economies – U.S., Canada, U.K., France and Germany (7.5 billion). 

The adoption of blockchain for cross-border payments could decrease global total transaction fees of up to US $20 billion and reduce fees in remittance inflows by between 40-80%. The processing of cross-border payments on real-time payment systems would replace the traditional correspondent banking model with a more reliable model that has a collaborative ecosystem at its core. This collaborative ecosystem would be open to all types of payments stakeholders that could move money instantaneously, with improved traceability. 

Transaction fees are also becoming increasingly unacceptable to consumers. In fact, the exchange rate used for a cross-border payment remains largely unknown as initiation and transaction fees can vary. Transaction fees often make up a high percentage of the transaction amount - the World Bank estimated this at 6.5% in 2018. This is significant for countries which depend on remittances, with remittance inflows accounting for as high as 40% of the GDP for some countries in 2019. India is already a leader in real-time payments, hitting a staggering 48.6 billion transactions in 2021, which helped unlock $US16.4 billion of additional economic output, equal  0.56% of formal GDP. 

The UPI has been the biggest factor in driving the growth in real-time payments. As NPCI works to extend the reach of UPI beyond India through collaborations with global institutions and firms, it can be expected that the estimated cost savings of $USD12.6 billion for Indian businesses and consumers in 2021 will only grow in time. 

Payment rails today use the inter-bank, correspondent banking model, with distinct borders and jurisdictions. But this is increasingly at odds with a world where trade is global and happening around the clock. Payments currently adhere to strict business times both in the initiating country and in the destination country which result in slower processing times, often over several days. Payments also have to go through more than one intermediary bank before reaching its destination, causing further delays and fees. Additionally, unless it is a repeating payment, current methods do not even guarantee certainty that the payment is valid for the destination account. 

How Blockchain fits in the global payments puzzle 

To realize cross-border RTPS payments, central and reserve banks need to be open to discussions with each other to achieve interoperability and the near real-time movement of funds. In certain parts of the world, this has already been accomplished. 

There is already movement away from the legacy SWIFT data formats with the introduction of ISO20022, a data-rich XML format message, that will replace the outgoing ISO15022 (MT Standards) message format. ISO20022 will allow greater flexibility, harmonization, resilience, and straight-through processing (STP), among other things. Most significantly, the new data format will enhance the speed, efficacy, and ease of adoption of RTPS systems around the world. 

The use of the ISO20022 messaging format, underpinned by blockchain technology and networks, will go a long way to accelerate the move to real-time cross border payments on RTPS. The data-rich nature of ISO20222 messages means they could add information required to meet compliance requirements. This can potentially harmonize payments systems around the world to enhance efficiency and increase STP, further adding credence to the use of RTPS for cross-border transactions. 

India is already a proven leader in domestic real-time transactions and has set benchmarks that will be difficult to replicate. Blockchain can give India an opportunity to be a global leader in international cross-border payments and set standards for the world to follow.

Amit Ghosh

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Amit Ghosh, Chief Information & Services Officer at R3