Blockchain and Biometrics

The article below has been written after discussing with industry delegates participating in the 4th National Summit on Smart Cities India 2018 held in New Delhi on Friday, the 24th of August 2018.

Have been tracking the Kerala flood disaster, and had also written about Paytm's ability to collect donations rapidly. The figure has now gone to Rs.30 crores from 12 lakh customers in about a week.

Another article that caught my eye last week was the report that State Bank of India (SBI) would be using multiple modes of biometric authentication for mobile apps.

The news of the UAE Government wanting to provide Rs.700 crore to the Kerala flood relief (which was eventually found to be not true) got me thinking. There are a large number of emigres from Kerala in UAE, Saudi Arabia, USA and other European countries. Remittances are one of the largest sources of funding for developing countries, contributing more than capital flows and development assistance.

India received US $ 62.5 billion in international remittances in 2017, making it the largest recipient in the world. To give one an idea of how big this is, compare this with the amount of FDI India received in 2016 - US $ 44.5 billion. The world has been in financial turmoil for the last few years and FDI flows have been going up and down. In contrast, foreign remittances have been a steady source of foreign exchange reserves for the country.

Kerala is the state with one of the highest number of emigrants, although this would apply to the country as a whole too.These cross-border payments are a source of income for families who have a member working abroad. And while normally these are being provided through SWIFT, but in times we have seen in the recent past like in Kerala, is it swift enough? And more importantly can it not be transferred more frequently, to a larger number of people?

Today SWIFT is the most widely used payment interface for cross-border payments - connecting more than 11,000 financial institutions in over 200 countries, who are exchanging an average of over 15 million messages per day. So it is a huge financial network; but is it fast enough and also efficient?

The main issues are two fold - one is cost and the other is time, time taken to transfer funds. Normally majority of the transactions take about two - three days to be processed, and there also seem to be clarity issues as far as fund tracking is concerned.

On the cost front, post offices and money transfer operators charge about 6 percent of the amount remitted, banks charge in the range of 10%.

New technologies such as pre-paid cards and mobile operators/apps are resulting in lower fees for sending money home. But are not available for cross-border remittances. The large number of banks in the middle makes it slow, and hence there is need for automation.

Blockchain is one solution involving automation. It is a digital record of transactions maintained and validated by a network of computers, with the help of a cryptographic audit trail. A distributed ledger means that no single authority like a clearing house, needs to verify or execute transactions. In it's place, participants have computers that serve as nodes within the network, and add time-stamped blocks of transactions to form a chain. This chain can’t be mutated or changed. Hence "block-chain"

 There are multiple factors that make up the cost of the present day cross-border payment systems - SWIFT. Compliance to existing banking regulations, hedging against volatile currency conversions/transactions due to money transfers taking a couple or more days (imagine how this would be impacted when the rupee fell to Rs 70 and beyond against the US $ recently in just a few days).

Blockchain helps in addressing these issues through it's decentralised ledger (database), consensus protocol, use of digital assets and smart contracts.

Ripple and Stellar are two major organizations leveraging blockchain in the banking sector. While both attempt to make cross-border payments more efficient, their approaches are different.

The former is using proprietary technology and has major banks as part of it's consortium -like Bank of America, Standard Chartered, Mitsubishi and Barclays to name a few. Only two Indian banks - Axis Bank and Yes Bank are part of this. On the other hand, Stellar is an open source blockchain platform which can be adopted by any organization. IBM has partnered with Stellar to address the issue of cross-border payments.

We in India being one of the biggest receiver in cross border remittances markets, can benefit greatly from shift to blockchain. One estimate indicates that international payment costs can come down 40-50 % through the implementation of the blockchain network, resulting in savings in the range of US $ 80 million ( Rs.560 crores), on the basis of 2016 remittance data.

The Paytm example in the current Kerala situation has shown that digital payments can be collected and transferred quickly. If we could address the cross-border markets using blockchain, it would be faster than the existing financial networks, looking at being able to touch people's lives. Not only in times of need but also on a more regular basis, through digital transfers/payments.

With Government's "Digital First" initiative, and successful implementation of Gujrat International Finance TEC- City (GIFT), with whose President - Business Operation had a chance to meet in a Smart City Summit held in New Delhi on Friday, the 24th of August 2018, it is important that India build a strong leadership position in the global financial supply chain using IT.

As far as authentication and security issue is concerned at the sender/receiver end, biometric authentication is one way forward. Something that SBI is considering,as indicated at the start of the article, but only for incountry payments.

If organizations like SBI and Paytm were to come together leveraging their respective strengths and customer base, it would be a major leg up for not only financial inclusion, but also help shape/grow the retail market, not only in times of crisis, but also consumption.

Shivang Ranjan