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Utopias are easy to imagine, but a lot harder to make into a reality. Clear, early promises find themselves crashing up against real-world complexities, human nature and the crushing truth that those early promises may not have been so clearly thought through after all.
The early days of cryptocurrencies had lots of promises. Phrases like ‘the democratisation of finance’ littered blogs and think-pieces, and people from all sides of the political spectrum twisted cryptocurrency to fit their own viewpoint, conjuring up a utopia that suited them.
The reality has become, like everything else, much more complex. The rise and (current) fall of the most well-known cryptocurrency, Bitcoin, has been replicated across the ‘wild-west’ style creation of rival crypto coins that have flooded the market. This instability is not it’s only weakness, either.
The energy consumption used by cryptocurrencies has become a real worry for those battling climate change. It’s estimated that Bitcoin alone currently consumes an estimated 150 terawatt-hours of electricity annually — more than the entire country of Argentina (a population of 45 million).
But what of the technology itself? Phrases like ‘the democratisation of finance’ were quickly followed by the classic ‘Bitcoin won’t change the world, but the technology behind it will’, pointing towards blockchain technology and its potential applications in a plethora of areas.
This is one of those promises that is indeed becoming true. Blockchain technology is being used in the medical field, in supply chains, by governments in lots of areas, and other industries from real estate to the payments sector.
“We see opportunity in that area coming from the blockchain technology acting as a ledger tracking the payment, and giving everyone transparency in the process, not from volatile cryptocurrencies’ said Terry Clune, TransferMate founder, during a recent interview with PYMNTS.com.
This is not to say cryptocurrencies won’t play a big part in future payments, but that the volatility problem will need to be solved. This is where ‘stablecoins’ come into the picture.
Unlike cryptocurrencies like Bitcoin, whose value is based purely on market forces, stablecoins are pegged to assets, like fiat currencies such as the US Dollar or Euro. They could also be pegged to precious metals such as gold.
Now, while fiat currencies haven’t exactly been the paradigms of stability lately, their fluctuations can generally be judged over months and years rather than days or weeks. What’s more, their value is more based on real-world economics rather than investor feelings (there are many respected economists that would argue vigorously with that statement, but it is generally true).
Another key factor to the stability of fiat currencies is the regulation and security that surrounds the cryptocurrency. Businesses need to have the knowledge that their transactions are happening in a lawful, regulated environment. Without that core foundation, the risk factor makes any moves towards cryptocurrencies as a way to transfer money a no-go.
“We’re regulated by central banks right across the world so we can administer transactions’ said Terry Clune in the same interview. ‘Whether you’re moving fiat currencies or cryptocurrencies, regulation is going to be core to how it happens in the future. Regulator are going to be requiring that any money movement is administered by regulated entities. The wild west that we talk about now is clearly going to be turned into a much more controlled environment.”
Stablecoins are not currently regulated in any meaningful way, particularly in terms of international money movement. This may change soon in some major jurisdictions, such as the UK, but nothing is set in stone as of yet even there.
Taking a step back then, stablecoins value are based on something tangible, and are therefore less risky to use as currency to buy goods and services in the medium to long-term, but the market they are created, held and operate in is not regulated. The reality therefore is that it’s unlikely businesses will use stablecoins at a large scale any time in the near future.
And now we come to the point where we must add a third term to the ‘cryptocurrencies’ and ‘stablecoins’ debate – a CBDC, or ‘central bank digital currency’ (as is usually the case, governments show a lot less creativity than the marketplace for naming new innovations).
Essentially, the difference between a stablecoin and a CBDC is that the latter would be backed with reserves at the issuing countries’ central bank. In other words, it’s a government-backed stablecoin, and therefore regulated.
There are two models of CBDCs being discussed – retail and wholesale. A wholesale CBDC is for financial institutions that hold reserve deposits with a central bank. A retail CBDC is one that will be issued for the general public.
Last year, the U.S. Securities and Exchange Commission Chair Gary Gensler called for cryptocurrency markets to be regulated while Jerome Powell, Chair of the Federal Reserve, called for the same to be done for stablecoins. Current Vice Chair of the Federal Reserve, Lael Brainard, said that the creation of a central bank digital currency (CBDC) should be explored in response to stablecoins.
We can now see the evolution in the marketplace taking shape. Cryptocurrencies were created but were highly volatile and risky, stablecoins were created to reduce (but not eliminate) this volatility and risk, and now government-backed CBDCs are being proposed to bring a robust legal and economic framework to wrap around crypto technology in order to create a stable marketplace.
And finally, there is a fourth option emerging that we should mention in passing – Tokenized fiat cryptocurrencies. This is essentially a digital representation of a fiat currency, like a dollar, on the blockchain. We could very well see this in the long-term future, with cash and assets being digitized and traditional methods of fiat currency distribution (like the humble bank note) becoming entirely digital.
This all sounds like the evolution of cryptocurrencies is actually a return to the where we started – CBDCs sound a lot like fiat currencies but by another name. This is not the case though. It’s where that original ‘Bitcoin won’t change the world, but the technology behind it will’ comes back into play.
There is no doubt that a crypto-based payments system would be radically different than one based on the movement of fiat currencies. But why? What are the benefits?
1. Reduced Fees and FX costs
In the current SWIFT system of international payments – still 98% of the payments market in terms of volume – international payments go through a pass-the-parcel type of process where lots of banks can handle a payment, each taking a cut and incurring high FX fees. With crypto, this chain is essentially truncated between sender and receiver, cutting out those additional costs.
While regulated institutions will still charge fees for handling this money transfer efficiently and securely, it will be in a much more cost-effective and transparent way. How FX-type fees will play out when one CBDC is exchanged with another is an interesting aspect to watch closely.
2. Security, Tracking and Tracing
Blockchain technology allows us to fully track and trace a payment, and store that data. Not only will this bring further transparency in the international payment process, it can also be used to increase the security behind the payment.
Moving away from a cash run financial system also removes many of the methods criminals use for money laundering and other nefarious activities – although we can be sure that they’ll find new methods leveraging crypto technology.
3. Increased Speed
At the same time, speed of payments would also be increased without necessarily compromising this security. Payments using crypto technologies would be, for the most part, instantaneous.
4. Expanding Financial Inclusion
The reality of the financial ecosystem is that many banks don’t want to serve certain markets, as there is not enough profit in them. In this way, large swaths of the world population are cut out of the banking world. With cryptocurrencies, people can send and receive payments without even having a bank account and access the financial system at lower costs and with less barriers to entry.
Any person that has the answer to the above question please get in touch. It’s really impossible to know, but we can take educated guesses.
Cryptocurrencies like Bitcoin will almost certainly continue to play a role in the payment’s marketplace, particularly amongst consumers. There are advantages to a decentralized currency, but many of those advantages aren’t with businesses, so we can, with reasonable safety, remove cryptocurrencies of this type from the future of international B2B payments at a large scale.
It should also be noted that cryptocurrencies are likely to continue to play a large role in the black markets and in criminal circles.
Stablecoins are an interesting proposition, especially if some emerge as a truly international currency that businesses can use across borders in a stable manner. Most likely the practical way it’ll play out is by using fiat (or CBDCs) to buy these stablecoins (using regulated institutions), complete a transaction, and then convert them back.
“With our solution at TransferMate, we can empower on-ramp and off-ramp from the stablecoin interface and back again [by leveraging] the regulatory approvals we have secured from central banks worldwide to release the payments and administer those transactions” said Terry Clune, commenting on this process and how it might work in the future.
Stablecoin hedging could well become a key part of a treasury departments job in the medium future. More likely, though, is that hedging will be with the more (in theory) stable CBDCs.
CBDCs seem the most likely end goal of all this crypto evolution. They will be less risky and volatile than the other options and be fully regulated from start to finish. The result will look very much like how fiat currencies currently work, but by using the blockchain technology to bring additional benefits to businesses using them.
A major caveat here is the cautious approach governments are taking on creating CBDCs. While this caution is understandable, it does open the possibility of stablecoins (or even cryptocurrencies) to grab such a sizeable share of the payments space that CBDCs never really get off the ground.
Cryptocurrencies have challenged the hegemony of fiat currencies that has existed for centuries and have in turn pushed people and businesses to innovate and match their benefits, while reducing their pitfalls.
That future may be nearer than we think, it just won’t be the utopia some like to imagine.
If you want to talk to the TransferMate team on how you can make efficient, cost-effective and transparent payments right now (without the need for risky cryptocurrencies), contact us here.
The Big, Big Interview with Gary Conroy
Competitors or collaborators? Friends or foes?
The fintech and traditional banking sector are often portrayed as pure competitors, with fintechs trying to supplant traditional banks and create a new financial ecosystem for consumers and businesses. The reality, though, is much more nuanced, with collaboration as common a feature as competition.
We sat down with Gary Conroy, Chief Product Officer at TransferMate, to explore the payments side of the fintech and banking relationship, and where the two are likely to converge, and where they have already.
Q. We’re talking today about the convergence of the traditional banking system and fintech. So, let’s get some fundamentals in place – what is the traditional correspondence banking system?
I think everyone knows the traditional banks – what you’d know as high street or commercial banks – that provide transactional services, as well as credit, mortgages, overdrafts, etc., to retail customers, from individuals to businesses and everything in between and beyond.
At its base, it’s a vast – and complicated network – that allows people and businesses to move money from point A to point B.
Q. We always talk about the international banking system. Is it in more reality a lot of national banks working together?
For the most part, yes. The network is largely made up of domestic banks and they ‘correspond’ with each other through formalized connections. One bank will open an account with another bank (called a ‘nostro’ account) and they will send them instructions – typically via the SWIFT system that we’ve heard so much about lately – to process payments on their behalf.
Q. And then, what is fintech, and in particular the space we operate in – the payments sector? What makes it different from that banking system?
Well, that’s a broad question with a broad answer. Fintech serves lots of different areas – peer-to-peer payments, you can have business-to-consumer payments, you can have consumer-to-business payments, and you can have business-to-business payments.
We, as fintechs, are transforming how businesses pay because we are building new banking infrastructure for them to leverage.
Q. And how does that work in practice? What is this new infrastructure made up of?
“I see the job of fintechs as being able to abstract that complexity away.”
Well, it’s important first to look at what we’re replacing. With the banking infrastructure, there is a lot of complexity – and unnecessary complexity at that. It’s made up of a vast network of connections; lots of integration points with multiple parties that has been built up over centuries.
I see the job of fintechs as being able to abstract that complexity away.
At TransferMate, for example, we have built new bank rails – payments infrastructure as a service at a global scale. We’ve done this by securing regulatory licenses across the globe, which in turns gives us access to local payment schemes across the world, and we’re able to integrate that in a simple interface for our customers to use.
Q. How else does this new infrastructure change things?
It’s not just about the faster payment rails, but on top of that you can layer open banking, account information services, payment initiation services. You can have confirmation of payee. You can have a request to pay.
So, there’s all these different value-add that you layer on top of that technology that, ultimately, allows for an easier end user experience. And one of the interesting challenges for TransferMate is that consumers are used to a relatively easy user experience in their daily consumer life.
We want to bring the same experience to business and corporate and finance users in their professional life that they’re used to in their everyday consumer life.
Q. Another fundamental question. Why didn’t the banks build this new infrastructure themselves?
Well, they’re dealing with this complexity every single day – it’s difficult to rip up what you have and start anew. It’s like rebuilding an airplane mid-flight.
“The advantage for a fintech is, if you’re starting from a clean slate, you can pull the strands together and architect it in such a way that works as a coherent whole.”
If you look at the banks, 80% of their IT spend is on legacy system maintenance. They are trying to not disrupt everyday consumer activities. And, because they’ve been around a long time, they have multiple systems running side-by-side. Add to this the acquisitions they regularly make, you are also managing multiple companies under one umbrella, with all their disparate processes and systems, never mind the physical infrastructure of local bank branches.
The advantage for a fintech is, if you’re starting from a clean slate, you can pull the strands together and architect it in such a way that works as a coherent whole. We have focus.
Q. And a key part of that infrastructure is licences and regulations. How have fintechs got permission from all these countries to operate there? Presumably there’s a lot of hoops to jump through to establish a banking presence in a country and to be able to move money in and out of it.
Absolutely. First thing to say though is that not all fintechs are regulated, nor do all fintechs need to be regulated.
In TransferMate, we went down the regulated route. We could’ve gone down a sponsor bank route and use sponsor banks and their licenses, and just provided the technology, but we believe there’s value in having the regulation. It shows a maturity of capability.
And certainly, as a regulated payments institution, we have both payments institution, money transmitter, and e-money licenses. You are subject to, effectively, the same scrutiny that any organization, including banks.
Q. If a bank partners with us, do they get automatic access to those regulated regions where we’ve done the legwork?
Yes. We’re allowed to operate in those regions where we’re licensed. So, if anyone – either a bank, be they regulated, or a software platform partner or a customer – wants to work with TransferMate, we’re operating under our own license in those territories.
Q. One thing you would associate to banking network is the security behind it. Does the infrastructure built by the fintech community have those same robust systems? Where do they differ?
I can’t speak for the fintech community, but I can speak for TransferMate.
We’ve implemented very robust systems. With all different regulators – we’ve taken the highest bar of all of those and made sure that all our anti-money laundering and transaction screening goes through the most stringent of processes.
For example, when customers book a transaction with us, we will screen both the sender and the receiver, as well as any narrative and reference information at the time of booking. And then, before any money goes out the door, we’ll screen it again, in the case that anything has changed in the intervening period.
We have a very comprehensive rule set that looks at, what’s the profile of this transaction, the profile of the customer, is there things that we need to review here, risk rate of the transaction based on activity, is it something we’d expect to see, and, ultimately, bring all our transactions through a journey and a life cycle that ensures that we are implementing the controls that we have outlined within our policies and procedures, and we’re able to evidence that fact as well, because part of regulation is being audited to make sure that you’re doing what you say you do.
Our job is, I believe, not just to comply with regulation, but to go above and beyond to ensure that we’re doing everything we can to ensure the integrity of the financial and payment systems.
Q. When we talk about fintechs and banks at the moment, are we talking more about collaboration or competition?
I think the competition piece, I feel like, is gone for many years. I think it’s really about collaboration and working together. And the smart banks have figured out that they need to work with fintechs to enhance their own solutions.
There’s still a long road to go to really improve on bringing the experiences that customers want and need in place, and that can only be done with partnership. Because there’s so many different services that need to be pulled together and orchestrated, in order to provide that end user experience.
So, for banks, I think you can either stick with what you have today as your service offering and never change it, or you can work with the ecosystem or with partners to continue to evolve along with the industry. And there’s only one choice, I think, for both banks and fintechs. Banks still have the majority of customers and are able to give fintechs enormous scale when they partner with them. But they recognize that they will need the services and technologies that those fintechs have to enhance their end customer propositions.
Q. What’s the most common type of collaboration between fintechs and banks at the moment? Let’s look at the payments sector specifically.
So, in TransferMate we’ve launched TransferMate for banks and FIs, where we can effectively provide access to local low value clearing schemes at a global scale, thus adding capability for banks and FIs.
One of the more interesting ones is our partnership with Wells Fargo as a distribution partner. So, we have a receivables request-to-pay product that operates across borders and currencies. And we have white-labeled a branded version of that, which we call ‘Global Invoice Connect’, with Wells Fargo.
“We can effectively provide access to local low value clearing schemes at a global scale, thus adding capability for banks and FIs.”
Their treasury management solution consultants in accounts receivable salespeople are then armed with that tool in the market to go out and sell that to their customers. In that case, the bank really needs to create nothing of their own. We’ve integrated with their systems to provide one data set for all receivables for those Wells Fargo customers. But it gives them another tool in their arsenal to go out and sell as a distribution partner.
And, of course, TransferMate also works with banks where they are strategic suppliers to us of access to local low-value schemes. We’re providing the front-end access to partner platforms and customers. But at the end of the day, our accounts that are located at a global scale are held with banks, and so they provide us with access, and our strategic suppliers and partners in that case as well. It’s a mutually beneficial relationship.
Q. Where do you see the biggest benefits you can bring to banks? Where are your key value points?
Well, we have access to over 140 currencies and 200 countries. That, in turn, gives banks access to local low-value rails, be that ACH, be that instant, as well as domestic and international wire.
For the banks, who may be dealing with 20 or so of those intermediaries (which is, by the way, also very expensive to maintain all those bilateral relationships), this significantly consolidates down that number. They’ll have access into those territories they don’t have reach into today and, in doing so, will substantially reduce their costs.
By being smart and getting access to multiple territories in one go; by partnering with the likes of TransferMate – that is a consolidation play that makes a lot of sense for banks.
Q. API integrations are a big part of how fintechs are collaborating on a practical level. How does that work in practice, and, I suppose, what advances are being made at the moment?
Well, everyone has a service they expose the APIs to connect with that service. You set up a commercial agreement, and then integrate with the API. It is the API economy. As that grows, it’s not just fintechs collaborating with each other; it’s platform APIs.
TransferMate has app integrations with the likes of SAP Concur invoice, for example, where they’ve exposed their APIs, and then with the likes of Coupa Pay, where they’ve implemented within their core system the TransferMate APIs.
So, you’ve got different models, be they app integrations or be they more closed and core API integrations. The goal is ultimately a more seamless customer experience.
“The goal is ultimately a more seamless customer experience.”
Previously a customer in one of those accounts payable platforms would have to log off their accounts payable, go onto their ERP, extract files, log onto their online banking, get the response, upload it back up. With the integrations between a fintech like TransferMate in those platforms, the customer can execute their entire payment run from within the platform– from within your SAP Concur invoice– from within Coupa Pay. They never have to leave the platform.
It becomes a much better customer experience, and they get full transparency. And that is, I think, to me, the essence of that API ecosystem is to knit together different services to provide a neater customer experience, and a more value-add customer experience, ultimately, where they get better transparency, better speed, better cost in whatever function it is they’re looking to execute.
Gary, thank you very much.
If you are a bank, fintech or financial institution looking to leverage TransferMate’s global payment’s infrastracture for your own organization, find out more here.
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