Fin Tech

The Evolution of Financial Payments

Written by Salim Hussain on Digilah (Tech Thought Leadership)

It is a paradox of our lives that some of the most common of actions underlying a functioning society are left virtually untouched by advancement as civilization marches forth to Metaverses and recyclable rockets. An example is how Education has operated historically – a source of knowledge (teacher/computer) facing a collective of students, dispensing knowledge. The dispenser may vary but the fundamental construct remains unaltered. But the one I want to focus on today is the act of making Payments. Yes, payments…the industry that is supposedly being disrupted with an onslaught of payment tech start-ups touting nosebleed valuations. But if one peels away the slick interface and looks into exactly how the payments course from one end to the other, you will inevitably run into technology which was built when Mash was still on air and “Bloody” a bad word!…

Let’s think of a situation where a corporation say Nike, needs to pay its suppliers in Vietnam called VietShoe. Nike instructs it’s bank to make a payment in VND to its supplier bank account. Nike is shown a FX rate by the trader at Nike’s bank, “Banque de Zapatas”(BDZ)…there follows a little negotiation… then finally the golden word “done” is said/typed. The next stage is for the operations people then deduct the USD100 from Nike’s account in the US and initiate a series of steps whose desired outcome is to get the VND equivalent of USD100 (about 2,250,000 VND at current rates) credited to VietShoe’s account.

FX markets are the largest component of capital markets with a daily trade volume is 6.6 Trillion USD (the equivalent number for equities is 0.5 T and bonds is 4.7T). hence, there are hundreds of thousands of such Nikes making millions of payments to the Vietshoes of the world every day! The scale is mind boggling.  The good news is that there is a method to the madness. There is a common platform and a common language which banks can speak to each other. And a central organization creating rules for this superhighway, so these trillions can move around seamlessly. That organization is a member owned cooperative called SWIFT (Society for Worldwide Interbank Financial Telecommunication). This was set in the 70s! And is still the backbone of the vast majority of the 6.6T being transacted every day.

% Turnover

I will give you a brief taste of the gymnastics involved in the example above.

1.Once the rate is agreed with Nike, Bank NY needs to let it’s partner bank in Vietnam called Bank VN (termed “onshore bank” in the Trading Room) two things – One, the identity of the Beneficiary and it’s bank account details and Two, the amount to be transferred. This is done using a MT 103 Swift format file.

2. Once Bank VN receives the request, it will debit the account BDZ maintains with it for 2,250,000 VND and credit the ultimate beneficiaries account.

(I am making a number of simplifying assumptions here like the presence of “nostro” account as well as absence of routing banks. These can be the subject of another future note.)

The route above, is how most fintech apps work today. If evaluated by a tech person, she will be aghast at the usage of flat files, and, in a minority of cases, API calls (which will be the subject of future write ups). Now, take a step back and juxtapose the promise of blockchain technology to this archaic construct… suddenly, The Swift system, if imagined as an entry on a vast netted ledger, across multiple counterparties, begins to resemble a classic blockchain construct.  And the realization comes that this is the exact point where the technology should be deployed and has not, for the most part, been deployed. For it remains mired in producing Dogecoin’s and NFTs to make use of those Dogecoins!!

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