1. Clearance and Settlements Systems

The fact that an average bank transfer takes three days to settle has a lot to do with the way our financial infrastructure was built.

It’s not just a pain for the consumer. Moving money around the world is a logistical nightmare for the banks themselves.

Today, a simple bank transfer — from one account to another — has to bypass a complicated system of intermediaries, from correspondent banks to custodial services, before it reaches its final destination. The two bank balances have to be reconciled across a global financial system, comprised of a wide network of traders, funds, asset managers and more.

If you want to send money from a UnicaCredit Banca account in Italy to a Wells Fargo account in the US, the transfer will be executed through the Society for Worldwide Interbank Financial Communication (SWIFT), which sends 24 million messages a day for 10,000 financial institutions.

Because UnicaCredit Banka and Wells Fargo don’t have an established financial relationship, they have to search the SWIFT network for a correspondent bank that has a relationship with both banks and can settle the transaction — for a fee. Each correspondent bank maintains different ledgers, at the originating bank and the receiving bank, which means that these different ledgers have to be reconciled at the end of the day.

The centralised SWIFT protocol doesn’t actually send the funds, it simply sends the payment orders. The actual money is then processed through a system of intermediaries. Each intermediary adds additional cost to the transaction, and creates a potential point of failure — 60% of B2B payments require manual intervention, each taking between 15–20 minutes.

The blockchain, which serves as a decentralized “ledger” of transactions, can completely disrupt this state of play. Rather than using SWIFT to reconcile each financial institution’s ledger, an interbank blockchain could keep track of all transactions publicly and transparently. Instead of having to rely on a network of custodial services and correspondent banks, transactions could be settled directly on the blockchain. That would help alleviate the high costs of maintaining a global network of correspondent banks.

According to Deutsche Börse, the Australian Stock Exchange and Depository Trust & Clearing Corporation [DTCC], he said: “Today it is managed through a myriad of messages and manual reconciliation. There is a big opportunity for blockchain to seriously restructure that industry.”