Final Year Project: Blockchain and Cross-Border Payments Industry

Verified

Added on 2021/03/03

AI Summary

This final year project investigates the transformative potential of blockchain technology within the cross-border payments industry. The research, conducted by Sameer Ahmed at Cass Business School, analyzes the inefficiencies of the current payment systems and explores how blockchain can offer a more viable and efficient solution. The project utilizes questionnaires to gather data from financial institutions that have adopted blockchain, providing insights into the technology's impact on speed, cost, and security. The findings suggest that blockchain is more efficient than existing technologies in the cross-border payments sector and is on track for mass adoption. The paper covers the current systems for cross-border payments, the role of blockchain, the adoption of blockchain in financial institutions, and provides recommendations for future researchers. It includes an introduction, literature review, research methodology, data analysis, and conclusion, offering a comprehensive overview of the topic.

Final Year Project
1
Blockchain and the Cross-Border Payments
Industry
Name: Sameer Ahmed
Supervisor: Dr Li Cunningham
"I certify that I have complied with the guidelines on plagiarism
outlined in the Course Handbook in the production of this dissertation and
that it is my own, unaided work".
Signature……………… …………………………………………………………………….
Cass Business School
BSc(Hons) in Business Management
Student ID: 160016163

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

Final Year Project
2
Acknowledgment
Firstly, I would like to thank Almighty God for providing me the strength and guidance to partake
and complete such an endeavor.
Next, I would like to acknowledge my supervisor Dr. Li Cunningham for her constant help and
support. This task would not have been possible without her guidance and efforts. Her constant
guidance kept me on track and helped me produce a well-rounded and well researched academic
paper.
I would also like to acknowledge my Parents. They have provided me constant support and
encouragement throughout the time line of this research paper.
Furthermore, I would like to thank my University, Cass Business School. The university has
provided me with an invaluable set of skills and experience that has greatly helped me in
completing this research paper.
Lastly, I would like to give credit to the banks and financial institutions that helped me in the
research for this paper. These institutions provided invaluable data without which this research
paper would not have been possible.

Final Year Project
3
Abstract
This research paper provides an insight into the concept of blockchain and how it is revolutionizing
the cross border payments industry. This research paper thus sets out to investigate whether a
disruptive technology like blockchain proves to be a more viable and efficient solution to the ever
growing issues faced by the payments industry. Blockchain technology has the potential to
revolutionize the payments industry. While people expect a lot from the technology, the real world
benefits are still not clear. However, the technology is undergoing mass adoption by major
companies because of which its benefits are becoming clearer day by day.
The research method used for this research paper is questionnaires. A number of people from
companies in the banking and finance industry that have adopted Blockchain were chosen to fill
out the questionnaires. This gave the researcher a good overall view about whether Blockchain has
helped or made improvements in the Cross border payments and settlements category.
After a thorough analysis of the authors research findings and an in-depth view of the existing
literature the author has concluded that blockchain technology is overall more efficient than
existing technology in the cross border payments sector and is on track to mass adoption.

Final Year Project
4
Table of Contents
1.0 Introduction..................................................................................................................... 5
2.0 Literature Review............................................................................................................. 8
2.1 The Cross Border Payments Industry .........................................................................................9
2.2 Problems with the current system .......................................................................................... 10
2.3 History of Blockchain .............................................................................................................. 11
2.4 Concept of Blockchain technology ........................................................................................... 12
2.5 Adoption of Blockchain in the Payments Industry .................................................................... 14
2.5a Adoption by Financial Bodies ............................................................................................. 16
2.5b Adoption in UK.................................................................................................................. 17
2.5c Adoption in China .............................................................................................................. 17
2.5d Adoption in America ......................................................................................................... 17
3.0 Methodology and Research Question ............................................................................. 18
3.1 Research Objectives ............................................................................................................... 19
3.2 Research Methodology ........................................................................................................... 19
3.3 Limitations ............................................................................................................................. 20
.3.4 Deductive research vs Inductive Research .............................................................................. 21
3.5 Pilot Study.............................................................................................................................. 21
3.6 Alternative Methods .............................................................................................................. 21
3.7 Research ........................................................................................................................ 22
3.7a Limitations ........................................................................................................................... 22
3.8 Sample........................................................................................................................... 23
3.9 Ethical Considerations ............................................................................................................ 25

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

Final Year Project
5
4.0 Introduction to Data Analysis ......................................................................................... 25
4.1 Data Analysis.......................................................................................................................... 26
4.2 Data Analysis- Questionnaires ................................................................................................ 26
5.0 General Discussion ......................................................................................................... 33
6.0 Conclusion ..................................................................................................................... 34
6.1 Summary of Results ................................................................................................................ 34
6.2 Initial Objectives: ................................................................................................................... 35
6.3 Future of Blockchain: .............................................................................................................. 35
6.4 Implications: .......................................................................................................................... 36
6.5 Recommendations for future researchers: .............................................................................. 37
References .......................................................................................................................... 38
Appendix ............................................................................................................................. 41

Final Year Project
6
1.0 Introduction
Every industry goes through technological advancements and innovation. One such industry that
has not experienced major innovation is the payments industry. In today’s world of digitization,
cross border payments are still slow, costly and prone to security risks. Major companies have
been investigating distributed ledger technology for quite some time now. When Bitcoin emerged
in 2008, majority of people believed it would bring about a revolution in the financial world.
However, as time passed by, its weakness as a currency became apparent because of which the
focus shifted to its underlying technology, Blockchain. Blockchain is a disruptive technology that
is slowly taking over. Blockchain is revolutionizing processes in a number of industries. Its
technology can be applied to fields such as Data sharing, Digital IDs, Supply Chain, Payment
processing, etc. Also, Blockchain is viable for many industries such as auditing, gambling, and
authentication for events or luxury goods (Fanning & Centers, 2016).
One of the most notable areas where Blockchain technology is becoming the standard is the
gigantic payment’s industry. Experts predict that blockchain could save financial institutes at least
$20 billion annually in costs (Fanning & Centers, 2016). This makes further exploration into the
potential of Blockchain crucial for companies and governments alike.
This paper focuses on the application of blockchain in the cross border payments industry.
Blockchain in simplified terms is a distributed ledger in which the members taking part in the
network share transaction information between the parties.
The technology is a means of attaining a low cost way of sending payments that not only cuts
down the need for third party verification but also proves to be very secure. Thus, Blockchain is a
means of sending payments without the need for third party verification. Along with this
Blockchain technology results in only a fraction of the fees being charged as compared to the fees
charged by existing institutions using other technology. Blockchain aims to shift the world to a
cashless system. Today, trillions of dollars’ exchanges hands around the world via an antiquated
and outdated system of slow payments and added fees. The current system used for cross border
payments is ineffective, expensive and highly fragmented.
If a person employed in New York wants to send money to his family in London. He might have
to pay a $35 flat wire transfer fee. Moreover, he will be required to pay additional fees amounting

Final Year Project
7
up to 7.4%. The bank chosen to transfer the money gets a cut, the person is also charged an
exchange fee. It will take the recipient bank several days to register the transaction. This way the
payments business proves to be very profitable for banks leaving them with no incentive to reduce
their fees.
In comparison to banks public blockchains cut down on the need for intermediaries to verify
transactions and allow people access to fast, cheap, and efficient payments.
Blockchain technology is the underlying technology for cryptocurrencies. The cryptocurrency
bitcoin takes anywhere from thirty-five min to sixteen to process transactions. Even though this
isn’t perfect, it is a big improvement as compared to the average 3-day processing time Banks take.
Bitcoin transactions can take 40 minutes or up to 16 hours — in extreme cases — to settle. That’s
still not perfect, but it represents a leg up from the average 3-day processing time for bank transfers.
Transaction made through crypto currency are hard for government to monitor due to their
decentralized nature. As a result of this it is very hard for governments or regulatory authorities to
shut these transactions down. The diagram below provides a descriptive image into how
blockchain differs from existing systems.
This research paper aims to explore the effects of blockchain in terms of cross border payments. It
aims to show a comparison of Blockchain Technology as compared to the technology being used
today (other than blockchain) for cross border payments. This paper also aims to shed light on

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

Final Year Project
8
adoption of blockchain in financial institutions for cross border payments around the world. The
following points have been covered in this dissertation:
- The current systems for cross border payments and its inherent issues
- The role of blockchain in cross border payments
- Wether or not Blockchain technology is helping revoloutionize the Cross Border
Payments Industry
- An analysis based on findings collected through primary research from a hundred
particpants belonging to nine large scale financial institutions
- A brief look into the future of blockchain
This dissertation has been sanctioned into four parts, mainly the ‘Introduction’, ‘Literature
Review’, ‘Research methodology’ and ‘Data Analysis’. Recommendations and implications of the
research has also been added after the conclusion. While introduction defines the concept of
Blockchain, the literature review gives a comprehensive look at the History, concept and adoption
of Blockchain technology. The research methodology explains a step by step approach taken by
the author to conduct primary research for this dissertation. The data anlysis provides an indepth
research and discussion based on the findings of the primary research conducted. Lastly, the
conclusion overall view of the findings and the results that have been achieved after analysing the
findings.
2.0 Literature Review
This section provides an in-depth look into the available literature on blockchain and the payments
industry. This section will shed some light onto the existing literature found on the payments
industry and the current systems used for cross border payments. The section follows a step by
step procedure in explaining the cross border payment industry, issues with the current system, the
history of blockchain, the concept of blockchain and adoption of blockchain technology.

Final Year Project
9
2.1 The Cross Border Payments Industry
Cross border payments have been an instrumental part in enabling cross border investment and
trade, and have been a key factor in the emergence of today’s global economy. Cross Border
payments account for more than 40% of global transactional revenues. Based on figures from 2016
(Boston Consulting Group, 2018) transactions at the global level exceeded $22 Billion in volume
and $22 trillion in value.
The Committee on Payments and Market Infrastructure (CPMI) states that in order to process
payments, respondent Banks are required to open accounts with Correspondent banks to settle
transactions by debiting and crediting accounts. These accounts that banks open with each other
are called Nostro accounts. Banks that hold these accounts then issue statements for their account
holdings including Nostro accounts. Then these accounts are reconciled to ensure correct transfers
are made. Today’s cross border settlements is handled by the Society for Worldwide Interbank
Financial Telecommunication (SWIFT). SWIFT acts as the link between different banks. It acts
as a messaging service between banks and hence establishes bank identifier codes. More than a
million correspondent banking relationship are made as more than 11000 institutions engage in
mutual correspondence (CPMI, 2016).
Figure 1 explains how a payment is processed using current technology (other than blockchain).
The technology shown is that of SWIFT. The figure explains the steps taken to process a payment
using SWIFT.

Final Year Project
10
2.2 Problems with the current system
The current system is full of inefficiencies and flaws which makes way for disruptive technologies
and innovations to come in. Due to these inherent flaws in the system institutions and governments
are trying to find alternative methods to improve the efficiency of their cross border transactions.
Blockchain technology does not encounter these problems and therefore provides increased
efficiency and on demand liquidity in cross border payments. Some of the main flaws are as
follows:
• Need for Intermediary Authority:
A big hurdle for the industry, as well as for regulators, is the sustained decrease in
correspondent banking relationships which result in lengthening of payment chains and
increasing reliance on fewer correspondent banks (FSB, 2017). Due to tightening
regulatory requirements (AML and CTF) by key jurisdictions, such as the Europe and
US, 75% of global bank providers have reduced their correspondent banking
relationships (IMF, 2017) or left this business altogether.
• High Costs: High costs are a huge problem for the current payment processing system.
This rises due to multiple banks being involved, each charging a fees. In a report by
Mckinsey&company mentioned that the average cost of a transaction amounts to $25-
30. These high costs are a major problem for companies settling billions of dollars in
payments across borders.
• Long settlement times: According to a survey, 64% of treasurers stated that they
prefer real-time payments tracking, while 42% were in favor of instant payments.
Blockchain is able to provide both of these qualities through the use of Distributed
Ledgre Technology (DLT).
• Security issues: Due to the considerable number of intermediaries involved the
chances of fraud or a hack increase. Just in 2016, the world’s biggest payment settler
Swift, experienced a mass scale hack in its system.

Paraphrase This Document

Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser

Final Year Project
11
2.3 History of Blockchain
Milton Friedman, a Nobel prize winning economist (1999) said,
“the one thing that’s missing is a reliable e-cash, whereby on the internet you can transfer funds from
A to B without A knowing B or B knowing A”.
Digital payments are similar to payments processed through digital means, for example, the
transactions between a cash register and an electronic wallet or through digital money. (Staykova,
K.S., and Dalsgaard, J, 2015). The Cryptographic Mailing List published a report titled, “Bitcoin:
A Peer-to-Peer Electronic Cash System”. The report focuses mainly on a digital currency that does
not require the use of a mediator or a third party. This is evident from the beginning sentence of
the document: “A purely peer-to-peer version of electronic cash would allow online payments to
be sent directly from one party to another without going through a financial institution”
(Nakamoto, 2008).
However, this was not the first time in history that digital payments were mentioned, as in 1970
David Chaum in two publications introduced the concept of a digital currency. After the report a
small amount of institutions made several attempts to introduce digital currencies like e-gold and
e-cash. (Frisby, 2014).
Nakamoto (2008) introduced Blockchain technology was mainly to bypass intermediaries or third
partys such as financial institutions by allowing the participants to conduct peer-to-peer
transactions directly. To accomplish this, Nakamoto developed a peer-to-peer distributed ledger.
By using this distributed ledger, the payee and the payer can exchange and correspond directly
over the network, using consensus mechanisms and encryption (Guo & Liang, 2016; Tsai, Blower,
Zhu, & Yu, 2016; Zhu & Zhou, 2016) to render these transactions to be immune to tampering as
any change to the historical data record is traceable and detectable by the blockchain network
nodes that are participating (B. Lee & Lee, 2017; Tapscott & Tapscott, 2017). The transactions
based on the distributed ledger allow for transaction to be processed quickly and seamlessly, while
also minimizing the potential drawbacks of a trust based model.

Final Year Project
12
2.4 Concept of Blockchain technology
In layman’s terms, blockchain is a trusted, public and shared ledger (The Economist, 2016b), on a
peer-to-peer network which implies that it is run by thousands of participants, however, no one
controls it (The Economist, 2015). This makes blockchain different from existing technologies as
it acts as a shared ledger. As the blockchain is available to all the participants, it makes it public in
nature (The Economist, 2016b). Blockchain acts as a truly trusted ledger as the information that is
processed through blockchain is tamperproof as the system will quickly be able to detect if anyone
attempts to tamper with it (The Economist, 2015). These characteristics allow blockchain to
process huge amounts of information without any third party or middleman in between. For
example, assume Jordan transfers $10 to Linda. The network in the blockchain is aware of Linda’s
ownership of $10 as the transaction is distributed to each participant. While Linda will be able to
transfer $10 or less to another party, the network will automatically reject a proposal to transfer
$12 as it is more than what Linda owns.
A trusted entity records all holdings and transactions when it comes to centralized networks; only
through this can participants reach an agreement/consensus on relevant facts, in particular the
participants holdings (McAfee, 2014). In many countries, security accounts for all the market
participants that invest in securities is maintained by a central security depository. All disposition
and acquisitions that take place are recorder in that register and each balance recorded is retrievable
(J Lollike & N. & Malone, S, 2016). Decentralized networks operate in a way that different records
together provide information on holdings and transactions. The comprehensive information is not
held by any single record. For instance, in some jurisdictions, transactions and holdings of end
investors are not recorder rather holdings of bankers and brokers are. The assumption is that these
banks to and brokers will make entries in their own ledger according identity of investors to whom
the securities belong to.
“As a solution for currency, blockchain is essential. As a solution to sharing information across
disparate parties, blockchain is truly revolutionary” (Price, 2017). It is crucial to understand that
payments done through blockchain are settled almost instantly. The key reason for this is that there
is no financial intermediary. This not only reduces settlement times by a huge margin rather also
result in minimal fees. This is because in a transaction carried out by using blockchain technology
there network management, nostro-vostro liquidity, compliance or FX costs.