The IMF this week issued a discussion note on Fintech and Financial Services: Initial Considerations prepared by an IMF staff team which behind the bland title shows that they are envisaging and accepting the possibility of major changes to cross-border payment and other systems.

Key findings

Using an economic framework, the paper discusses how fintech might provide solutions that respond to consumer needs for trust, security, privacy, better services, and change the competitive landscape. The key findings include:

• Boundaries are blurring among intermediaries, markets, and new service providers.
• Barriers to entry are changing, being lowered in some cases but increased in others, especially if
• the emergence of large closed networks reduces opportunities for competition.
• Trust remains essential, even as there is less reliance on traditional financial intermediaries, and
• more on networks and new types of service providers.
• Technologies may improve cross-border payments, including by offering better and cheaper services, and lowering the cost of compliance with anti-money laundering and combating the financing of terrorism (AML/CFT) regulation.

Their overall conclusion is very IMF: “Overall, the financial services sector is poised for change. But it is hard to judge whether this will be more evolutionary or revolutionary. Policymaking will need to be nimble, experimental, and co-operative.” They continue, “Fintech is an international issue. With the blurring of boundaries among entities, activities, and jurisdictions policymakers need to consider implications for common standards and legal principles, to the extent that they align with national priorities.”

Major technologies transforming financial services

The chart below shows how they view the new technologies:

Source & Copyright©2017 - IMF staff

Cross-border payments

The report accepts that, “Shortcomings of cross-border payment services are substantial. Cross-border transfers are costly, and cumbersome.19 Moreover, services are opaque; the price paid for cross-border payments is not transparent, nor known at the time of initiating the transaction in most cases. Finally, sending money across borders is slow. Payments can be routed through many banks before they reach their destination causing delays and incurring fees. Settlement times for cross-border payments can take up to five days for the most common currency pairings.”

So, not surprisingly, the report examines possible evolution of cross-border payments in three scenarios, each centered on Distributed Ledger Technology-based applications:

Source & Copyright©2017 - IMF staff

The authors accept that a revolution is occurring as in messages, "In the age of the internet, instead, there is no distinction between a message going to a domestic or foreign recipient; both take a click. A message is a message; might a payment just be a payment in the future?" So they accept that one of the uses of DLT coulde be the hub-and-spoke configuration which moves value from fiat currency to virtual currency and back to fiat currency:

Source & Copyright©2017 - IMF staff

The authors write that, “From the end user’s perspective, the attributes of payment services offered by hub-and-spoke networks look attractive, despite three important caveats:

• the potentially erratic valuation of virtual currencies introduces risks and could limit the adoption of hub-and-spoke networks, at least for large value payments
• a lack of trust in hub-and-spoke networks could erode their value, though regulation could help
• the lack of interoperability among networks could keep prices of hub-andspoke payments high.

Building it right now

Fintechs are building this solution already. Last year, Ripple collaborated with the technology consortium R3 to run a trial in which 12 banks held Ripple's cryptocurrency, XRP, and used it to settle payments with each other.

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CTMfile take: Things are happening in cross-border payments. Download the report, here, and make your own mind up.