How to fix banking without breaking it - Wired Magazine
New York fintech Tassat is looking to bring speedy digital-cash payment settlements to the Middle East and beyond—but not at the expense of upending legacy systems.
How, in the digital era, can it still take days for international banking payments to clear? Whether you’re an institutional investor transferring billions, or an expat worker sending a chunk of their paycheck home, the days drag.
It is a question that puzzled Thomas Kim, a former executive at US investment management firm Bridgewater Associates. So much so, he decided to do something about it. Kim is now chief executive of New York-based fintech company Tassat Group, which partners with banks globally to provide digital cash to facilitate corporate and cross border payments.
One strand of the business involves digitizing money for use in the international payments system, providing a blockchain-powered alternative to slow, costly, and error-prone settlements.
Currently, many banks rely on correspondent banking relationships to facilitate wire transfers between countries. That allows a bank in one country to make a transfer on behalf of a client, by using a correspondent bank in the destination territory. But if the bank does not have such an associate, it uses the correspondent banks as intermediaries through which the payment instruction “hops.”
These are what Kim calls “legacy payment rails”—something Tassat, which was founded in 2017, is looking to improve upon. “The hopping that a transaction has to go through may involve three, four, or five hops, just to settle. The impact of that is measured in days. There’s an opportunity for us to improve upon this,” says Kim.
Tassat has two main business streams: the payments settlement platform using distributed ledger technology, or blockchain, and a regulated cryptocurrency derivative exchange.
The former is what makes banking transfers faster and more efficient. Through blockchain, Tassat “digitizes” money, which is still still pegged to a fiat currency—legal tender such as the US dollar—and backed by bank deposits. That is then used by banks’ corporate clients, who can move money digitally through virtual accounts.
“We’re giving banks the ability to digitize cash. It removes the risk of moving assets from one party to the next,” says Kim. “It isn’t designed to rip existing banking technology out, but more importantly, to make it nestle into their existing technology. “We’re not trying to kill correspondent banking relationships in any way, we’re just trying to make them easier, faster, more efficient, and more secure.”
The instantaneous nature of the transfers means that banks can’t make money from interest by holding onto funds while they clear. But the upside for banks, Kim says, is that blockchain-based transfers and settlements allow them to attract more high-value deposits and clients.
“It’s a stake in the ground and also helps them retain clients. And the cost to banks is a fraction of what it would be if they tried to build it themselves,” says Kim.
One of Tassat’s major clients is Signature Bank, for which it helped build a blockchain payments platform called Signet. The company says it is now in talks with banks and regulators in the Middle East to work with companies in this region.
“We are the only fintech in the US that successfully partners with banks to deploy a blockchain-based digital payments platform for use by bank customers,” says Kim.
One draw is the huge remittance business in the Gulf region, which has a high expatriate population. The UAE and Saudi Arabia were among the top countries by remittance value in 2017, with a total of AED 169.2 billion sent from the UAE last year.
The efficiency of digital assets is already extending across sectors such as oil, real estate and even transportation. “As a result, digital cash is needed to facilitate real-time payments and settlements of transactions,” Kim says.
“At the end of the day, the Middle East is embracing digital cash. It is embracing the need to improve settlements. It would be foolish for us not to have a presence.”
Note: This article was originally published in the inaugural edition of Wired Middle East.