Why Businesses Are Switching from SWIFT to Blockchain

Businesses are gradually moving away from traditional banking methods, particularly in the aspects of payment and transaction services, to more advanced, digital, banking and payment services.

This is due to the fact that the banking of the payment services are outdated, and the overall methods are becoming more slow, inefficient, and costly.

Because of the rapid advancements and integration of digital services into daily services, businesses are becoming more and more frustrated

With the banking payment services and are moving to more advanced services, particularly banking services relying on blockchain technology.

These services use digital stablecoins and offer more efficient payment services. This is what is driving businesses toward systems relying on blockchain technology.

The Challenges of Conventional SWIFT Payment Transfers

Essentially, SWIFT functions as a message transmitting service. Using SWIFT, banks send payment messages to each other, and then, correspondent banks or third parties execute the payment transfers.

• Long settlement periods. Interbank transfers are a multi-day process, taking anywhere between 1 to 5+ business days. Transfers are especially delayed with large numbers of interbank relationships and as a result of varying time zones.
• Large costs, hidden fees, and fractured pricing. With each intermediary or third party, there are additional costs: bank fees, currency conversion costs, correspondent bank fees, and other hidden fees especially for cross-border payments
• Once payments are sent instructions by banks, companies lose real-time visibility and control over their payment and its status (stuck, in-transit or delayed). This decreases the efficiency of reconciliation, cash-flow forecasting, and supplier/vendor management.
• SWIFT systems are legacy systems. The SWIFT messaging system is decades old. The design is also from a time when the model assumed business banking hours (manual compliance).

For most companies, especially those with a high payment frequency, operating in multiple geographies and tighter liquidity, it means high processing costs and operational headaches. These limitations also lead to delays with liquidity.

What Settlements on Blockchain Offer

Settlement systems that use blockchain technology work with stablecoins, tokenized assets, and other digital-value transfers and create a different value transfer and settlement infrastructure. The advantages of this technology include increased speed, lower cost, higher security, and greater flexibility.

Better Cash Flow with Near instant Settlements

On many blockchains, payments settle in a matter of seconds or minutes, however, with several traditional payment systems, and time settles in several days. This means that businesses experience greater liquidity and frees up time to manage payment of suppliers and payroll, reinvest money, and manage other capital.

Lower Costs From Elimination of Intermediaries

With blockchains, payment systems allow participants to do peer-to-peer transfers, and this means that other parties, correspondent banks, and intermediaries do not have to take part. This greatly reduces payment cost.

3. Benefits of Transparency, auditability, and compliance

With blockchain, transactions remain permanent and unalterable. Each participant that has the right access can monitor transactions and check whether they are in progress, completed, or canceled.

This not only eliminates the chance of lost or stalled payments, but also facilitates reconciliation, auditing, and fulfillment of compliance obligations.

The operational efficiency of supply chain finance is further enhanced with smart contracts, which automate release of payments when certain conditions are met.

4. Benefits of 24/7 global availability

Blockchain has no set business days or hours while traditional banking is limited to business days and hours.

This means that blockchain payments can be completed at any time, even during weekends. This is especially beneficial for businesses with international activities, as they can complete payments in almost real time.

5. Flexibility and Determining Future Paths

Using blockchain technology to enable tokenization allows converting real-world assets (or fiat-backed digital tokens) into programmable value that can transfer anywhere in the world in real time and under pre-determined conditions set via smart contracts.

As stated by this technology allows the implementation of advanced settlement models that include Supply Chain Financing, automated accounts payable and receivable, conditional payments and real-time multi-currency settlement with global liquidity.

Companies that utilize blockchain technology may have an edge over other competitors in the market as digital currencies become more prevalent.

Legacy Institutions Adapting: A Blended Future

Interestingly, the shift is not being driven solely by nimble fintechs or crypto-native firms. Traditional infrastructure providers, including SWIFT, have also started to embrace blockchain.

This hybridization of the technological systems being used by businesses provides the highest possible velocity, programmability, and transparency that blockchain systems can offer.

But It’s Not Always Simple: Challenges Remain

Although possible improvements using blockchain technologies exist, these improvements are not guaranteed and other challenges firms must address include.

• Regulatory uncertainties and compliance burdens: Crypto, stablecoins, blockchain, anti-money laundering (AML) and know-your-customer (KYC), tokenised assets, and regulatory compliances differ based on jurisdictions and can complicated the legal and operational usage of blockchain settlement systems.
• Scalability and Networking Limitations: There are improvements on the limitations of blockchains, however, given the number of transactions that may be needed for huge enterprises, not all blockchains can support the needed liquidity and throughput.
• Volatility (if stablecoins are not used): There are foreign exchange and settlement risks, along with other potential risks, if the payment systems use native
  cryptocurrencies (rather than stablecoins) leading them to be susceptible to volatility.
• Access and Interoperability: Dual systems typically complicate operations, and are needed for stable blockchain systems for enterprises that still rely on traditional banking.

Conclusion

Moving away from SWIFT and adopting blockchain settlement is not a trend it is a fundamental change in the cross border movement of value.

For companies engaged in global commerce, frequent cross border payment, and high volume global operations, the benefits of blockchain rails are significant. These include speed, reduced costs, transparency, availability any time, programmable money, and traceability.

Meanwhile, the slow acceptance of blockchain technology by SWIFT and other legacy service providers is a sign of positive progress.

We are likely to see a hybrid future, in which a digital decentralized payment system is built on top of the existing trust infrastructure.

In this environment, companies that rapidly adapt to digital payment systems will experience benefits such as improved treasury agility, liquidity, speed of market entry, and more resilient supply chains. These companies will have the competitive advantage.

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