ANZ and Wells Fargo test cross-border payments through blockchain
Australia and New Zealand Banking Group and Wells Fargo have completed a six-month trial for a distributed ledger system built to reconcile and settle the banks’ payments. Both banks reported in a recent “proof of concept” that blockchain applications add value and efficiency to the customer experience with the sector for cross-border payments and correspondent banking being “ripe for rejuvenation”.
Both ANZ and Wells Fargo are members of the Linux Foundation, and used its Hyperledger technology to build a private, shared, distributed ledger platform that operated in parallel with existing infrastructure. It allowed both banks to move funds without centralised infrastructure. They said this increased the speed of confirming the cross-border payment, and made it easier to audit the transactions and to preserve confidentiality. The paper describing the results of the trial has been published on ANZ's BlueNotes website.

Real-time payment chain

The new technology allowed the banks to see a given payment chain, from creation to completion, in real time, compared to the current end-of-day batch process which can take two days to complete. It also could eliminate the need for manual reconciliation between two separately held versions of the account statement under existing corresponding banking arrangements.

Onerous reconciliation activity, delays in advising of fund disbursement, and inefficiencies in management and usage of liquidity and funding "could be largely addressed if the industry were to trust a single record of account that could be shared and maintained by multiple correspondent banks," ANZ and Wells Fargo said.

ANZ group strategy executive manager Nicholas Groves will appear on a panel at the Australia FIX conference in Sydney on Thursday to discuss banking applications for blockchain, alongside experts from Commonwealth Bank of Australia, Nasdaq, IBM and the R3 consortium. ANZ is not a member of R3.

ANZ and Wells Fargo said blockchain offers a high degree of security through cryptography. Carla Gottgens

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National Australia Bank and Westpac Banking Corp are also working on blockchain solutions to reduce the costs and risk of cross-border payments through the start-up Ripple. In September, NAB said with CIBC of Canada it had conducted a technical trial of blockchain technology that moved real dollars between the banks over the Ripple distributed ledger.

In an interview in August, ANZ's new head of digital banking Maile Carnege said banks would seek to adopt blockchain internally first, before looking at how the technology could be used in customer-facing applications. "My assumption about where we will get the fastest and most exciting short-term application is in the back and middle office to reduce cost and simplify stuff," she said. "That's not to say it won't hit prime time with consumers, but my guess is it won't start there."

On the Fed's radar

Blockchain developments are being closely monitored by global central banks. US Federal Reserve governor Lael Brainard​ told the Institute of International Finance meeting in Washington on Friday it was "paying close attention to distributed ledger technology, or blockchain, recognising this may represent the most significant development in many years in payments, clearing, and settlement".

"Like many new financial technologies, distributed ledgers could ameliorate or exacerbate traditional financial risks," she said, according to a report in online publication Coindesk, which flagged that the Fed will publish a research paper on blockchain later this year.

Wells Fargo and ANZ say blockchain will reduce the costs of dealing with intermediaries in global payments. CX Matiash

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At the international payments conference, Sibos, held over the last week of September in Geneva, blockchain was a key topic, with trade finance emerging as another banking application.

At the event, UBS unveiled a project replicating an international trade transaction in collaboration with IBM, also using Hyperledger's Fabric blockchain. Bank of America Merrill Lynch and Microsoft also introduced a letter of credit solution built on the Ethereum blockchain.

ANZ and Wells Fargo said in their paper that banks had determined that a "public, pseudonymous network, like the one implemented for Bitcoin, is not suitable for a regulated network of large scale financial institutions. Variances, however, of Bitcoin's underlying technology, such as permissioned [blockchains], can deliver the benefits of reliable information sharing, while reducing the need for intermediaries and their associated costs, and do so with a high degree of security through cryptography."

Broad impact

UBS group chief operating officer Axel Lehmann told The Australian Financial Review last week that ultimately blockchain technology will have a broad impact, but in five to ten years rather than in two to three years.

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He said UBS has no immediate plans to replace the traditional letter of credit with a blockchain alternative, but that too could be on the cards. "We can also look at using private blockchains as a way to optimise internal processes, with a well-defined captive audience," he said.

The ASX is considering adopting blockchain technology for its equities settlement and clearing settlement, while the Sydney Stock Exchange (SSX) said last week its blockchain-focused joint venture with Bit Trade Labs, known as APX Settlement (APXS), has developed a blockchain for real-time issuance and allocation of equity securities.

This is part of SSX's efforts to become less dependent on ASX for post-trade services as it seeks to build an instantaneous, "settlement-and-transfer-upon-trade (T-based DvP)" platform.