In the past few months, a major event in the blockchain industry was the collaboration of IBM’s and Stellar’s joint launch of a cross-border money transfer business World Wire. This business is based on Stellar’s blockchain technology, enabling participating compliant financial institutions to transfer different fiat currencies. In view of Stellar’s peer-to-peer clearing model and its low cost of use, this service will significantly reduce the transfer cost between different currencies, so the service providers and service users in this business will benefit from this cooperation. This service is also a direct challenge to SWIFT, the long-term monopoly of this business. Given the current huge market for cross-border transfers, financial institutions participating in World Wire will get very good revenues from this business. As a provider of this service, IBM will also receive consistent and stable business benefits.
IBM’s World Wire is undoubtedly a successful case of using blockchain technology in practical financial applications. This practical application is also the best endorsement of the Stellar technology. While the industry is paying attention to the success of this partnership, the industry almost forgets that the company that first started supporting Stellar was not IBM, but Stripe. When the Stellar Foundation was first established in 2014, Stripe invested $3 million in the Stellar Foundation in the form of purchasing Stellar tokens. This is a very strong support for a newly established non-profit foundation. Since then, Stripe has been discussing with Stellar on how to apply the Stellar technology to the payment business. However, it is clear that the cooperation between the two has not produced actual application. IBM only started working with Stellar in 2017. Two years later, the actual application was launched. Both Stripe and IBM use the same underlying technology, but the results of their efforts are completely different. This completely different result deserves serious consideration by practitioners in the industry in order to better apply the new technology to the market.
1, Why does Stripe not launch products based on Stellar?
Stripe recognized the potential value of Stellar in 2014 and was willing to invest $3 million to support the development of this technology. This undoubtedly shows the vision of the founders of Stripe. Stripe is also a legend story in silicon valley. Its founders are brothers from the Irish countryside. They were studying at Harvard and MIT respectively. In 2010, because they were dissatisfied with the convenience of online payment, they started to develop solutions for online payment. Their ideas are funded by Y Combinator. The brothers then dropped out of school and set up Stripe to focus on online payment solutions. In the years that followed, Stripe continued to grow and was therefore supported by capital. In 2014, although Stripe was just a startup that had just been established for four years, because they were highly optimistic about the value of Stellar, they invested $3 million to support Stellar’s technology development.
Stripe apparently wants to apply Stellar’s peer-to-peer payment clearing system to its online payment business in the US market. If the direct transfer settlement between accounts can be realized, the online payment can avoid using the clearing network between the banks. The clearing cost in this payment process can therefore be saved, so the transaction costs of both parties in the payment transaction will be reduced, and both parties will benefit. Given the huge volume of payment transactions, the opportunities in this market are clearly very large. So why did this collaboration between Stripe and Stellar not achieve this original intention? I think there may be the following reasons.
First, Stellar’s performance is still not comparable to the processing speed of existing clearing networks. Although Stellar is one of the fastest in the existing public blockchains in the market, its processing speed is far from being comparable to the current processing speed of centralized systems. One of the most critical factors in the payment business is processing speed. If Stellar can’t achieve satisfactory results in this regard, then it can’t be applied to the payment business.
Second, in the market structure of existing payment services, all systems, processes and regulations are based on centralized bookkeeping technology. If a distributed ledger technology is used to replace the centralized bookkeeping system, then this means that all aspects of the market must be changed accordingly. The cost of this change is huge. This situation is not only in the banking sector, but also in the securities business.
In 2016, when the value of blockchain technology was just recognized by the industry, the market’s consensus on its application in the securities industry was the post trade clearing. Post-trade clearing based on distributed accounting techniques can solve many of the disadvantages of centralized clearing systems such as inefficiency and high cost. So at that time, there were high-profile startups that focused on providing solutions in this area. It is Digital Asset Holdings in the US and SETL in Europe. Although these two companies have achieved great results in the past few years, their development is still full of twists and turns. This is because the clearing system is the basic guarantee for the stable operation of the securities industry. The stable operation of the securities industry is an important factor in the stable operation of the entire society. Now if you fundamentally change this clearing system, the costs and risks involved can be imagined. So whether in the securities industry or in the banking industry, changing the clearing system is a very challenging job, basically Mission Impossible.
Third, even if such a replacement is technically problem-free, the benefits it generates are not necessarily worth doing. Now when a user makes a payment with a bank card, the payment service is basically free. This is because the bank is able to use the user’s deposits to obtain sufficient income, which can fully cover the cost of the bank’s payment services. Therefore, using the DLT to replace the current existing bank clearing network does not produce more obvious benefits. Therefore, the parties in the payment transaction do not have a strong incentive to adopt this new method of clearing.
There is an opportunity to replace the credit card clearing network with the DLT because the 3% service charge charged by the credit card to the merchant is still too high. However, the main problem in this area is that users’ payment habits rather than technology.
In addition, whether it is a clearing network between banks or a clearing network provided by credit card companies, they are fully exploiting the potential of centralized technology to provide better services. For example, there is now a real-time transfer settlement service, which is an improvement over the initial clearing and settlement service on the next day. The level of satisfaction of users who use the payment transfer service has naturally increased.
Fourth, Stripe did not find a suitable business entry point. Replacing a centralized clearing network with a distributed clearing network, the benefits of this replacement are obvious. However, due to the unreasonable structure of the current market, the centralized clearing network is supported by various other factors, so its status is difficult to shake. If you want to replace the centralized clearing network with a distributed clearing network, you must find a suitable entry point to constantly divide and conquer the existing resistance. Such entry points may be an obvious pain point in the existing market, or they may be new opportunities brought about by the development of technology and business models.
If one analyzes IBM and Stellar cooperation from the above perspectives, then one can easily understand why IBM has taken the lead in implementing the application even though they use the same technology.
2, Why did IBM take the lead in developing applications based on Stellar?
First of all, the current cross-border money transfer business is a pain point in the market, and there are business opportunities. This is why Facebook plans to apply its stable currency business first in the field of cross-border transfers. Based on IBM’s World Wire service, banks that participate in the transfer can get a reasonable profit, which will create a win-win situation for parties involved. Therefore, many parties involved are willing to contribute to this cooperation.
Second, because World Wire supports cross-border transfer services between different currencies, its technical performance requirements are much more tolerant than the requirements of the US domestic payment market. Today’s cross-border transfer business needs at least one day to complete. If a participating bank is not yet a direct member of SWIFT, then the transfer will take longer. Stellar-based transfer business is basically done in real time, so it outperforms existing solutions. In terms of processing costs, Stellar-based transfer business can process 600,000 transactions with one cent. This cost is obviously very competitive.
Third, the cross-border transfer business application scenario needs to be completed by banks in various countries, and such an application scenario is the best application scenario of the blockchain technology. In addition, IBM is a system integrator, not a bank. It is a cooperative relationship with banks in various countries in terms of business nature, not a competitive relationship between them. The clearing network between different currencies led by IBM therefore can easily be supported by various banks.
3, Lessons we can learn from Stripe’s and IBM’s cooperation with Stellar
Stripe, IBM’s collaboration with Stellar led to different results. This is very worth learning for participants in the industry. Some of these revelations are in the classic business strategy, and others are specific to blockchain-based applications.
First of all, the superiority of technology cannot be directly guarantee successful application. In terms of developing applications, the business model is more important than the technology itself. This is fully illustrated by the cooperation between Stellar and IBM.
Second, don’t attack the enemy’s strongest place. Domestic payments in the United States can be said to be the most developed place. Payment services have become the foundation of American economic life. Therefore, to achieve some breakthroughs in this aspect, it will face strong resistance in all aspects. For Stripe, fortunately, its actions in this regard have been in the research stage and have not started to be truly applied.
Third, we must find application scenarios that require multi-party cooperation. This is the best application scenario for blockchain technology. And participants must be independent of each other and not fully trust each other. One such a scenario is trade finance. Trade finance requires multiple types of institutions to participate in a single business. And as long as the cooperation is successful, the parties can benefit from it.
Finally, be sure to find a competent partner. A good partner is not easy to find, just like it is not easy to find a spouse. But once the right one is found, the common cause will leap forward to achieve long-term stable development. If Stellar does not cooperate with IBM, it will not be possible to obtain cooperation from compliant financial institutions that can provide cross-border remittance services in various countries. A few decades ago, an unknown small software company developed into Microsoft today through cooperation with IBM. Now, IBM seems to be helping make another Microsoft.