Visa Testing Blockchain for International Payments

Blockchain technology may make credit card payments cheaper and safer.

That’s the aim of a pilot program Visa Europe is launching with BTL Group, an effort billed as “a first-of-its-kind blockchain-based settlement system.”

Visa Europe announced its search for banking partners to participate in a “proof of concept” for international transactions using BTL’s interbit distributed-ledger technology.

Who Was Behind the Pilot

The project came at a turning point for Visa in Europe. Visa Europe had been run as a separate company from Visa Inc., and in June 2016 Visa Inc. completed its acquisition of Visa Europe, bringing the two back together. The blockchain trial was run through Visa Europe Collab, the group’s innovation hub.

BTL Group was a young company listed on the TSX Venture Exchange, built around Interbit, its own private blockchain platform designed for banks and other businesses rather than for a public cryptocurrency.

Hendrik Kleinsmiede, Co-Founder and Innovation Partner, at Visa Europe Collab, wants to test international payments over blockchain technology between a hand-picked series of banks across different countries, to see if credit risk and transfer time can be reduced without compromising security.

“For me the opportunity is a fascinating and potentially very beneficial one,” writes Kleinsmiede. “Through the use of smart contracts and blockchains I believe we can create a fast, compliant and low-cost interbank payment and settlement service, with embedded regional compliance.”

The plan was to invite a small number of European banks to connect to the network and send funds to each other across multiple currencies.

How a Blockchain Settlement Works

Blockchain is a distributed ledger that keeps copies of every transaction made. One advantage is security – each transaction depends on the previous one. Amending previous entries requires the consent of all participants.

In today’s system, when a bank sends money abroad, the payment often passes through one or more correspondent banks, each keeping its own records and settling up with the next. That’s where the delays and the credit risk come from: until everyone has reconciled, someone is owed money. A shared ledger that all the participating banks can see at once could, in theory, let them agree on a payment and settle it in a single step.

Smart contracts, which Kleinsmiede mentions, are small programs stored on the ledger that run automatically when certain conditions are met. In a payments network, they could carry rules such as compliance checks, so those happen as part of the transfer rather than afterward.

The Problem With Swift

According to the Financial Times, if the project succeeds, it could present a threat to Swift, a 43-year-old interbank messaging system that handles 30 million requests a day.

Moving money cross-border can take at least three working days with Swift, and the system has been subject to its own security problems: earlier this year, malware was used to steal $81 million from the Bangladesh Bank through Swift – the hackers were only prevented from stealing more when a spelling mistake in a request prompted Deutsche Bank to investigate.

https://twitter.com/HendrikCollab/status/771303478673244160

What Happened Next

Swift didn’t stand still. In January 2017, it opened its global payments innovation (gpi) service for live payments, and by February banks including Citi, BBVA, ING, Standard Chartered and UniCredit were exchanging gpi payments across 60 country corridors. Gpi gave banks faster cross-border payments and a tracker that lets a sender see where a payment is and when it has arrived, answering several of the complaints that made blockchain look attractive.

Visa kept working on blockchain, but through a different partner. In June 2019, it launched B2B Connect, a distributed-ledger network for large business-to-business payments between banks, built on technology from Chain Inc. after about three years of development. It went live covering more than 30 trade corridors.

BTL carried on developing Interbit. In March 2018, it said the platform would be available for public testing on April 23, 2018, describing it as a “token free” blockchain designed to keep business data private.

What It Means for Fintech Startups

The Visa pilot is a good illustration of how big incumbents test new technology. A pilot with a startup is cheap, it teaches the incumbent a lot, and it doesn’t commit them to anything. Meanwhile, the threat of competition can push the incumbent, or its suppliers, to fix the problem in a more familiar way, as Swift did with gpi.

For a startup, a pilot with a famous brand is valuable for credibility and learning. But it’s not the same as a contract, and it’s worth planning for the possibility that the partner takes the lessons and builds, or buys, elsewhere.