Blockchain technology has been one of the most talked-about technologies in the financial sector in the last year or so, with many institutions increasingly recognizing the potential of distributed ledgers.
Although still primarily associated with virtual currencies such as Bitcoin, the infrastructure could offer many new opportunities to mainstream banks to improve how they process payments.
One such initiative is taking place in Japan, where CNBC reports a consortium of 47 financial institutions (FIs) have come together to use blockchain to streamline both domestic and international payments.
Dilip Rao, managing director for Asia Pacific at Ripple, the Google-backed startup powering the project, told the publication that existing payment infrastructure favors larger banks that conduct high volumes of payments, as their scale enables them to get the cheapest price per transaction.
Many smaller banks that have lower transaction volumes cannot afford the high fixed cost of membership of clearing houses, so have to rely on larger peers as an intermediary. As a result, they have little control over the fees they are charged per transaction, which makes these activities more expensive.
However, blockchain technology, which records and stores all of the transactions online securely on a peer-to-peer network, can eliminate this issue, as there is no need for smaller FIs to rely on central clearing houses or intermediary banks when conducting transactions.
“With distributed ledger technology, it doesn’t matter because the little guy can speak to another little guy and it’s just as cheap if they did 10,000 transactions or two,” Mr Rao said.
Ripple suggests that the use of distributed ledger technology could help cut transaction costs by 60 percent for retail remittances, or 50 percent for corporate payments.
If these figures prove accurate, if could be the case that many more smaller FIs turn to the technology in the coming years to help make low-volume transactions more cost-effective.
CNBC also noted that even though Japan’s banking system has traditionally been conservative when it comes to the adoption of new technology, the country has a great interest in Bitcoin and blockchain that makes it very different from the rest of the world, which could make it an ideal testing ground for new innovations using the technology.