Banks send $500 million to each other on blockchain launch day

As small business and corporate customers increasingly demand real-time payments, for security of settlement and efficient use of their working capital, Sam Sidhu wants to meet this need.

“We want to be at the forefront of that innovation, to be a bank that is big enough to take on large corporate clients and take on customer service, yet small enough to have the flexibility to do this,” said Sidhu, who is CEO of Customers Bancorp in West Reading, Pennsylvania.

Over the past weekend, the $20 billion customers and two other banks, Orlando-based Cogent Bank ($1 billion) and Phoenix-based Western Alliance Bank ($66 billion in assets), began using an interbank network and distributed ledger to to carry out transactions with each other.

They sent and received $500 million in transactions over the digital interbank network on Saturday. There were about 400 transactions with an average value of $1.25 million.

“This is a way to be able to do not only instant transfer, but also instant settlement, which means the money is really in the account immediately, as well as instant data transfer,” Sidhu said. “It reduces a huge amount of complexity on the receiver’s side and creates security and verification on the sender’s side. So it’s exponentially more beneficial. If you didn’t have any technology limitations, this is how banks would have designed ACH in the ’70s, when they moved from paper checks.”

These transactions will normally be done using FedWire or ACH. Instead, they were carried out using a private, approved ledger developed by the Tassat Group. The blockchain that Tassat developed is a privately authorized fork of the Ethereum blockchain that uses ERC 20 smart contracts. Each bank has its own instance of the blockchain. The digital interbank network connects these blockchains to each other.

The use of private networks like this “is probably where things are going with businesses,” said Alex Tapscott, managing director of the Digital Asset Group at Ninepoint Partners and co-author of the book Blockchain Revolution. “There’s a need for a lot of application-specific implementations that do these things, especially in financial services, where you might not want to rely on a shared ledger where everything is public.”

Participating banks move funds from direct deposit accounts to a joint bank account. Tassat then generates the corresponding amount of tokens and places them in the banks’ blockchain wallets. Tassat then moves the private tokens at the banks’ request to everyone else on the platform.

The sender of money receives immediate confirmation that it has been received on the other side. And, at least in theory, these transactions happen in real time, even after hours, when banks and banking services are closed.

This weekend’s launch was “a very, very, very big first step to show that the network is working and ready to go,” Amy Crate, chief marketing officer at Tassat, said in an interview. “The next step will be for the banks that use Tassat Pay to offer the network to their customers, as an opportunity for something they can use to make interbank payments.” She expects corporate customers to be live in early 2023.

Later, possibly early in 2023, the network will be opened for business customers to send and receive payments directly from their own accounts to and from counterparties in other participating banks.

The first customers of customers who will use this will likely be the digital asset companies that started taking at the end of last yearSidhu said in an interview.

Customers plan to let clients use the network for free, at least initially.

For the customers’ customers, using this network could provide working capital efficiency and ease the accounting work for back office reconciliation, Sidhu said.

For example, a commercial tenant can pay their landlord “at the time that’s most convenient for you, as opposed to several days or as much as a week in advance to ensure the money is received on time,” Sidhu said. The network also reduces the risk of a transaction failing due to the many data fields that must be entered in a traditional payment request.

“If you contact your bank and you say, you can send $1,000 to so-and-so, there are follow-up questions about the address and other data points, and if any of those things don’t match, it can either fail or it can be returned because they don’t know how to reconcile it,” Sidhu said.

In the future, the bank plans to offer other use cases for the web beyond payment.

When developing the network, Tassat Group was informed by a working group of more than 50 banks, Crate said.

“Our plan is by the end of the year to open this more fully to all kinds of customers,” Kevin Greene, CEO of Tassat Pay, said in an interview. “We use only a private permissioned blockchain to enable banks to make real-time payments around the clock securely,” Greene said. “The network allows them to do that across banks. And we have a plan to expand the network over time.”