How JPMorgan is using blockchain to make B2B payments 'programmable'

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As a growing number of banks use payment automation to lure business-to-business clients, JPMorgan Chase is expanding its B2B strategy by applying cryptocurrency-style technology to this audience.

JPMorgan on Friday launched programmable payments through Onyx, the bank's digital asset and blockchain unit. The feature is designed for blockchain-based accounts on the JPM Coin digital currency system. 

Programmable payments provide automation based on certain conditions being met, using smart contracts and distributed ledgers. JPMorgan is calling the concept an "if-this-then-that" interface. The bank faces competition from banks and fintechs that are trying to wring inefficiencies out of traditionally paper-based business payments. 

"Money is electronic today, but what is missing is programmability," said Naveen Mallela, head of coin systems for JPMorgan. "That is the holy grail." 

JPMorgan's Onyx unit is adding more flexibility for processing international payments and trading securities. JPMorgan's clients can use programmable payments to create specific rules for how or when transactions are executed. 

These rules can accommodate unanticipated events, such as liquidity shortfalls or changes in a supply chain. Users can additionally create flexible rules for funding accounts, or triggering payments for equities investing following a margin call. 

The bank is trying to move beyond the relatively static rules and conditions that have guided payments, particularly between large corporations. These rules include standing orders, which are generally ubiquitous standards that guide transaction processing. By moving to programmable payments, these firms in theory can create their own parameters for transactions in a "DIY" manner, according to JPMorgan.

"With a typical bank account, there's not much you can do in terms of the rules," Mallela said. "You can set up standing orders, but you really can't be more expressive than that." 

The blockchain can enable these flexible rules and bank accounts to be combined, making direct debits flexible and automatically enabling multiparty escrow accounts. Corporate treasury departments can be more automated and operate faster as a result, the bank contends. 

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This is a good example of how blockchain is beginning to live up to its potential, especially in terms of adding programmability to payments, according to James Wester, co-head of payments research at Javelin Strategy & Research. "It's more than just moving money, it's doing it in ways that enhance treasury, liquidity and cash management lines of business in ways that haven't been available before." 

Also, these services are not often thought of as venues for payment innovation, Wester said. "For a bank the size of JP Morgan to begin offering this type of flexibility to their treasury and cash management clients, based on blockchain no less, is significant."

While the underlying technology JPMorgan is using is designed for cryptocurrency, commercial banking is a good fit for moving large amounts of money using distributed ledgers, according to Mallela. 

Cryptocurrencies have been primarily used as a way to store value and have not been widely used for payments, Mallela said. "To move money at scale, commercial bank money or central bank money and central bank digital currencies aren't quite there yet," he said. 

Technology conglomerate Siemens will use the capability at launch to optimize the use of working capital and apply data-driven business models to govern scale. Two other firms, FedEx and Cargill, will go live in the coming weeks. 

"As we move to 24/7 processing and real-time transactions, you need to be able to respond in a more flexible manner, and that is the driver for creating programmable payments," Mallela said. "You can respond more dynamically to changing conditions than simply working off of preset parameters." 

B2B payments are attracting banks and payment companies looking to gain revenue by helping other businesses shed time and expense from transactions. 

The payments messaging organization Swift partnered with Visa and Wise in September to streamline online B2B payment processing. U.K. challenger bank Revolut rolled out a tagging service for international B2B payments around the same time. 

And BNY Mellon launched Bankify, which enables companies or organizations to send and receive payments directly from bank accounts, using pay by bank or account-to-account transactions. BNY Mellon is using open banking, or the use of permission-based financial data sharing between banks and third parties, to enable a single account to access multiple services. 

One potential advantage of the JPMorgan offering would be reduced costs for cross-border transactions, both in terms of network costs and foreign exchange costs, according to Aaron Press, research director of worldwide payment strategies at IDC. But there are alternatives to the model, according to Press. 

"There's no reason why these types of rules can't be implemented independent of the payment message or token, on any currency," Press said. "There are a growing number of payment APIs that will respond with messages that can be used to trigger additional actions. And similar types of decision models also exist to optimize payment authorizations, some leveraging advanced AI modeling rather than simple rules."