As Traditional Payments Get Faster, What’s Left for Bitcoin?
12.03.2018

Cryptocurrency fans like to poke fun at the two or three-days required for a bank to complete a cross border payment. Given their sluggishness, incumbents like Western Union and SWIFT seem destined to be toppled by speedy bitcoin and other cryptocurrencies.

Not only are these clunky legacy systems still around, but they have been improving. This October, SWIFT demonstrated how a bank payment from China to Australia could be completed in 19 seconds. SWIFT is the Society for Worldwide Interbank Financial Telecommunications, a communications network that links the world’s banks together.

Transferwisea remittance company that eliminates foreign exchange fees by matching payments going in and out of countryis moving money from the U.K. to Australia in just 15 seconds. Remittances are small value person-to-person paymentssay a transplanted worker periodically sending a few hundred bucks to a family back home. This September, 12.4 percent of Transferwise’s payments were sub-20-second, up from 8.3 percent in June, according the startup, which was founded in 2011.

If the incumbents have caught up to the challengers, what remains for cryptocurrencies to do in the field of cross border payments? I’d argue that censorship resistance may be one of their main advantages.

It is on the fringes that bitcoin may have the best advantage. 

SWIFT’s effort to speed up payments comes courtesy of its new gpi initiative. Prior to gpi’s introduction in 2016, there was no fixed deadline for settling a SWIFT-enabled cross-border bank payment. Under gpi, member banks are now obligated to provide 24-hour or faster payouts. Nearly 50 percent of gpi payments are completed in less than 30 minutes. As for Transferwise’s speeds, credit improvements to processes like anti-money laundering checks, which now take only a few seconds.

But infrastructure upgrades by central banks are the main reason that Transferwise and SWIFT can now make instant payments. Central banks provide the payment rails for private players to build their platforms. Small payments ($50 to $5000) are typically processed on a central bank’s retail payments system. These systems batch many thousands of payments during the course of the day, only to settle them 24 to 48 hours later with central bank funds. If Joe transfers $50 to Jane, she might have to wait a few days to get access to this money, especially if there is a weekend in between.

Plodding central bank retail payments systems translate into sluggish cross-border transfers. Prior to executing a remittance, Transferwise must wait for Joe’s $50 to be transferred along central bank rails into its own bank account. On the other side of the border, Jane can only collect the $50 after her bank receives funds from Transferwise’s bank. The combination of delayed settlement, weekend closures, and evening cutoff times brings this chain of transactions to a crawl.

Central banks’ new retail payments systems process payments in real-time. So when Joe transfers $50 to Transferwise’s bank account along central bank rails, Transferwise can now access those funds a few seconds later. This allows it to move on to Jane’s payment, which can occur in just seconds if a real-time retail payments system has also been installed by the receiving nation’s central bank. Joe can also now make a payment on a Saturday evening. Central banks used to close their doors at 5PM and on weekends, but these new retail payments systems are forever switched on.

The Bank of England, UK’s central bank, was one of the first off the mark in 2008 with its Faster Payments system. Since then, other central banks have built their own real-time retail payments systems. Sweden’s BiR opened in 2012, Singapore’s FAST in 2014, and Australia’s NPP in 2018. The European Central Bank is slowly rolling out SCT Instant while in the U.S., privately-owned The Clearing House’s Real-time Payment (RTP) is live.

In addition to getting faster, incumbents are also getting cheaper. To transfer €2000 from Europe to UK, Transferwise charges an all-in fee of €6.80, or around 0.35 percent. That’s an improvement from the €10, or 0.5 percent, it charged last year. By comparison, sending €2000 worth of bitcoin might cost twenty cents in mining fees. But the recipient still has living expenses like rent and food to take care of, which means converting those bitcoins into pounds on a cryptocurrency exchange. Given that this conversion will cost an additional 0.25-0.50 percent, any edge that a bitcoin payment might have had is taken away. Further complicating matters is bitcoin’s insane price volatility and the perpetual risk of a bitcoin exchange being hacked.

There is one cross border payments niche that the incumbents can’t serve: the de-risked market. De-risking occurs when financial institutions exit relationships with clients who are operating licitly but considered “high risk.” For instance, take Qatar’s recent payment of $15 million to Palestinian civil servants. Rather than moving the money to Palestine via SWIFT-connected banks, Qatari officials filled up three suitcases with $15 million in cash. With Israeli approval, they drove across the Gaza border with the funds.

This may seem like an awfully cumbersome way to move money, but consider that the only connection that most Palestinian banks’ have to the global banking system comes courtesy of correspondent accounts held at Israeli banks. According to the World Bank, Israeli banks have been known to limit or sever their relationship with Palestinian banks when they are deemed too costly to maintain. Cash may have been the Qatari’s only option for making the $15 million payment.

Risk has also hobbled the U.S. marijuana industry. Thanks to clashing state and federal regulatory frameworks, U.S. banks have refused to provide accounts to marijuana companies. Cash is the only means for these businesses to get by. Other notable examples include censorship of adult entertainers by PayPal and the refusal of banks to serve Somali money transfer operators or finance Iranian shipments of medicine.

It is on these fringes that bitcoin may have the best advantage. Although traditional cross border payments options like Transferwise and SWIFT are moving towards real-time, people who have been censored from these systems do not get to enjoy any of these benefits. (Frontier markets, where banking systems are less developed, are another fertile ground for bitcoin-mediated payments, as startups like BitPesa have shown.) Like a banknote payment, a bitcoin transfer has the distinction of being unstoppable. No matter how risky the sender or receiver might be, a bitcoin miner is unlikely to drop their transactions from a block. Unlike a banknote, a bitcoin moves instantaneously. Maybe next time Qatar officials need to pay Palestinian civil servants, they’ll consider bitcoin.