The liquidity rail is a solution built on top of the Celo blockchain that enables real-time transactions among financial service companies, without the need for the currently used pre-funded float account to settle the transactions.
Why do Pre-funded Float Accounts Exist?
A prefunded account is used by service providers to let 3rd party vendors and payment service providers to resell their products, for example a telecom company will require a fintech to pre-fund with them in order to allow them to sell their airtime and data bundles through their wallet.
This is done because there is no trust between the telecom and the fintech, the main reason behind this gap in trust is due to how the current payment infrastructure was implemented. In the current set up, the notification layer is separate from the settlement layer, this means that if the fintech wants to transact with the telecom, they need to first send a settlement payment through the banking system which is used to credit their float account at the telecom then thereafter they can start sending transaction requests for products through an API integration with the telecom.
The telecom utilizes the float account model in order to reduce counter-party risk and provide services in real-time. This setup works but it is disadvantageous to the fintechs and vendors because it increases their overhead costs as they scale their services and reduces their overall operational efficiency.
This problem is quite massive globally because it affects most fintechs, digital service providers, telecoms, utilities and banks as it is estimated that more than $10bn is stored in float accounts in Africa at any given moment. The current model makes the cost of service delivery high which in turn impacts the success of many financial inclusion initiatives around the world.
In the example below we shall use a money remittance platform as the fintech in order to illustrate the current model.
Img 1: illustration of the transaction flow in the current model
- The PSP sends money through the banking rails (SWIFT) to the Aggregator/ Bank.
2. The Aggregator credits the Remitter’s account on their system with float.
3. The aggregator sends money to the telecom
4. The telecom credits the aggregator’s account with them (OVA)
Note* at this point the cash settlements are done and now the transaction requests can begin.
5. The Remitter sends a transaction notification to the aggregator.
6. The aggregator forwards that notification to the telecom.
7. The telecom debits the aggregator’s account and credits the final beneficiary.
Introducing the Liquidity rail
In order to solve this issue MUDA created a platform that combined the notification and settlement layer in to one single transaction. Using the Celo Blockchain a liquidity rail that uses tokens to send the notifications and settlement simultaneously was developed.
This new infrastructure enables counter-parties to transact with each other without a pre-funded float account. It replaces the float account with a simple API that enables companies to integrate with the rail and set-up a wallet for stable coins which they use to execute the transactions. The advantages of utilizing tokens is that they provide instant interoperability between network participants on a global scale and can be liquidated to almost any fiat currency with ease.
This rail infrastructure will enable fintechs to reduce their costs and utilizing their capital in the most efficient manner it will also enable the service providers to easily scale their vendor reach through the network.
The Celo blockchain was chosen because of two main reasons;
I. Extremely low fees and fast transaction times which will enable the community to easily experiment and implement different types of use cases.
II. Alignment in our core mission which is to further financial inclusion.
The image below illustrates how the liquidity rail will be used to eliminate float accounts and increase financial services interoperability and scale.
Img 2: liquidity rail transaction processing flow remittance use case
How it works
1. Remitter sends money to the bank’s issuer account.
2. The bank issues tokens that are equivalent to the received amount and sends them to the remitter’s wallet.
4. The remitter thereafter uses the tokens to transact directly with the different telecoms on the network.
5. The telecom then sends the received tokens back to the bank.
6. The bank then coverts the received tokens into fiat currency and settles the telecom.
A test net has been deployed and we are inviting the community to come and interact with the application, integrate it with their existing applications and provide feedback. Interested teams and organisations may access the API documents here.