RealUnit’s Vision: Creating a Switzerland-based Settlement System for the Global Economy
by Demelza Hays, Research & Fund Management, Incrementum AG
Competition between banks within countries has had a downward pressure on fees for settling domestic transactions; however, the international payment market has witnessed the opposite trend. More fees and more profits for banks, FinTech firms, and middlemen.
International payments are the foundation for the global economy. Foreign direct investment, remittances, online commerce, salary payments, and foreign exchange transactions via accounts payable and receivable contribute $200 billion in revenue to banks annually.
This $200 billion in fees are split between two main types of fees associated with cross border payments: direct fees and foreign exchange fees. Direct fees are the flat or percentage fee charged by sending and receiving banks for handling the transaction. Foreign exchange fees are the spread between the spot exchange rate quoted by banks and the actual rate that banks convert money at. Money changers always charge a premium on the spot price and keep that as revenue.
Source: McKinsey & Company, Global Banking Practice, October 2018
To bring competition to the market, many FinTech companies claim they want to disrupt the SWIFT network, but SWIFT does not settle a single transaction. SWIFT is only a messaging system between banks and settlement systems.
There are two main types of settlement systems:
- Real-time gross settlement systems (HIGH FEES)Debiting and crediting of funds from the payer to the payee occur immediately after the Payment Service Provider (PSP) receives the transaction.Benefits: low credit riskDisadvantages: high liquidity needed
- Deferred net settlement (HIGH COUNTERPARTY RISK)Debiting and crediting also occurs after the Payment Service Provider (PSP) receives the transaction, but the settlement between Payment Service Providers is delayed until the end of the day or pre-specified times.Benefits: lower fees because less transaction volume is cleared. Only the net balance is cleared.Disadvantages: credit risk inherently arises for PSPs, as the payee’s PSP advances the funds to the payee before inter-PSP settlement takes place.
In Switzerland, Swiss franc payments between banks are cleared through a real-time gross settlement system called Swiss Interbank Clearing (SIC). This system has high liquidity costs and high fees. The Bank for International Settlements wrote a report stating that distributed ledger technology could improve settlement systems by increasing speed and transparency and decreasing costs.
In the coming months, RealUnit Schweiz AG will use the blockchain technology to improve upon real-time settlement systems. Companies can directly settle payments immediately and at any time using shares of RealUnit Schweiz AG that are backed by assets held and stored in Switzerland. The distributed ledger technology enables direct fees and processing times to come down because fewer intermediaries are involved. RealUnit Schweiz AG’s solution can be compared to a DLT-based real-time gross settlement system with fees comparable to a deferred net settlement system.