Why tokenization will revolutionize financial infrastructure (1/2): bank transfers

At Spiko, we firmly believe that tokenization is set to transform the very foundations of financial system infrastructure in the coming decade. The goal of this article is to explain what tokenization is and why we’re so confident in its potential. No need to be a financial plumbing expert—we’re starting from the ground up!

How Bank Transfers Work

To understand this coming revolution, it’s essential to grasp how the current system works and its limitations. Let’s begin with the most basic financial operation: a bank transfer.

Imagine Alice wants to send €10,000 to Bob. Alice has an account at BNP Paribas, and Bob has an account at Société Générale. Each bank has its own internal system to manage customer account balances—let’s assume BNP Paribas uses Excel (in reality, their software is much more sophisticated) and Société Générale uses LibreOffice.

When Alice gives BNP Paribas the order to make the transfer, the bank takes two steps:

• It notifies Société Générale through an interbank communication system that it will transfer €10,000 for Alice’s payment to Bob.
• It deducts €10,000 from Alice’s account in its Excel system.

Société Générale, upon receiving BNP Paribas’s message, also performs two actions:

• It credits €10,000 to Bob’s account in its LibreOffice system.
• It informs Bob that he has received the transfer.

But something crucial is still missing in this process: the actual movement of money between BNP Paribas and Société Générale. This happens through their respective accounts at the central bank. At the end of the day, BNP Paribas transfers €10,000 from its central bank account to Société Générale’s central bank account. The central bank itself uses its own system to manage these accounts—let’s imagine it uses Google Sheets.

The diagram below summarizes this process. Technically speaking, the transfer requires entries in three separate databases: Excel (BNP Paribas), LibreOffice (Société Générale), and Google Sheets (the central bank).

Interbank Communication Systems

For this system to function, it is crucial that the entries in these three databases are processed in sequence and correctly. This is why significant investments have been made in the development of interbank communication systems.

• For international transfers, the most widely used communication system today is SWIFT. Tens of millions of messages flow through this network each day.
• For domestic transfers, each country or economic area has developed its own messaging system. For example, the United States uses the ACH system, and the Eurozone uses SEPA.
• Other communication systems have been developed for card-based transfers, such as CB in France, Visa, and Mastercard. Their operation is similar to the diagram above, with some added complexities due to the involvement of cards and payment terminals.

These systems are technological marvels without which the synchronization of bank databases, enabling money transfers, would be much more difficult. However, they still have some notable flaws:

1. They are slow. You might feel like you’re paying a merchant instantly with your bank card, but in reality, the merchant doesn’t receive the money until several days later.
2. They are not available 24/7. Transfers don’t go through on weekends, at night, or on holidays. Recently, SEPA was down for four days over the Easter weekend.

3. Finally, they are expensive. These costs are not always visible on a daily basis, especially since SEPA transfers and bank cards are often free for individuals. However, they are actually passed on by merchants in the prices of goods and services you purchase.

Why not use a single shared database instead?

Now, let’s imagine Alice is making a transfer to Charles, who, like Alice, is a BNP Paribas customer. This transfer happens instantly and can occur at any time. The reason is simple: there’s no need to synchronize different databases with an interbank communication system, because the transfer is happening within BNP Paribas's own system (let’s say their Excel database).

So why not drastically simplify the system and apply this same model across the entire economy? It’s easy to say, but much harder to implement. There are two main options to consider:

Option 1: Everyone has an account at the central bank. This solution, which would eliminate the need for commercial banks to act as intermediaries between the central bank and customers, could technically work. However, it presents significant drawbacks. For both economic and political reasons, it’s healthy for private financial institutions to exist and compete.

Option 2: Ensure that all banks use the same shared database. This option is the most promising and is the focus of extensive research, including at the Banque de France, which is a pioneer among central banks on this issue. In the financial industry, this is called "tokenization," as it involves representing an euro as a token that is exchanged on a shared database, similar to a blockchain. The key challenge is developing distributed database technologies capable of operating on a large scale.

At Spiko, we firmly believe that Option 2 will deeply transform the financial system. Our conviction is that the technologies that will prevail will be open and operate with open-source protocols accessible to all, much like the internet does today.

What will tokenization change in your life?

Tokenization has the potential to remove the limitations of the current system. This means, in practical terms:

• Instant transfers and payments everywhere, globally, no matter the amount, currency, or banks involved;
• Drastically reduced costs for these transfers;
• Financial infrastructures operating continuously, regardless of time of day or day of the week.

That said, while your experience with financial services will be vastly improved, the interfaces you’re used to will likely stay the same, as the tokenization of financial infrastructure is not meant to be visible to users. Just as you don’t wonder today what database technology BNP Paribas or Société Générale uses, you won’t be concerned tomorrow about the next-generation infrastructure they rely on to provide their services.

And where does Spiko fit into all this?

To understand the products we are building, we need to look beyond bank transfers to the buying and selling of financial instruments. In other words, what happens when Alice wants to buy a Danone stock that Bob owns, rather than just making a simple transfer? This operation is much more complex than a bank transfer, and will be the subject of the next article in this series 😊