How blockchain and digital assets can release capital trapped in cross-border financial flows

Payments as we know them today involve unnecessary pain points, dysfunction and archaic technology.

Blockchain and digital asset technologies have the potential to transform and transcend industries – especially financial services, which are ripe for innovation. With the promise of faster, cheaper, transparent payments, as well as the ability to offer new financial services to customers and tap into new revenue streams, these technologies will underpin the future of financial infrastructure.

Nowhere is this more true than in the $156 trillion cross-border payments market.

“The primary pain points are around speed, reliability, transparency and cost,” Aaron SearsCEO of the Americas at blockchain and crypto solutions provider Rippletold PYMNTS.

He explained that traditional global payments are fragmented and inefficient, relying on a complex system of correspondent banking services. As a result, sending payments across borders can be slow, unreliable, opaque and expensive.

And because existing legacy systems have long been accepted as the status quo, their inefficiencies ultimately affect CFOs’ business decisions and companies’ bottom lines.

Make frictionless cross-border payments a reality

While the initial appeal of digital assets may have taken a hit from ongoing industry unrest, regulatory investigation and lawsuitCFOs’ confidence in the technology has not waned as it is underpinned by the understanding that it provides several key benefits in streamlining cross-border payments.

“Legacy cross-border solutions require pre-funded accounts, which often capture significant amounts of capital in foreign bank accounts, so you have a number of correspondent banks in the flow charging different fees, and you have the added burden of pre-funded accounts,” explained Sears.

Instead of trying to establish correspondent banking relationships for each new market or territory, companies seeking sustainable growth should seek a robust, compliant and secure all-in-one solution for cross-border payments.

“[This] relieves the finance and treasury function of a number of different burdens they face using legacy solutions, including transfer times, holidays and bank hours – all of which make traditional cross-border payments a complex maze to navigate, Sears said.

With blockchain and crypto-enabled payments, value is transferred instantly, enabling real-time settlement and payout.

Cross-border payments powered by blockchain and crypto can be made on demand, 24/7/365, Sears noted. The transferred funds are where they need to be, when they need to be there.

Streamlining global financial flows

Interoperability between payment systems not only provides greater visibility into growing international operations, but can also help ensure that compliance controls and B2B experience standards are met.

“When you talk about more complex corridors where a payment may need to go through several correspondent banks before it lands in the destination market, [the benefits of crypto] are obvious,” Sears said.

He explained that for businesses with entities in different markets that, for example, need to pay wages in each of these jurisdictions, there is a “quite significant” effort involved in moving money between these entities and rebalancing the treasury because the historical cross-border frictions around time sensitivity, costs and transparency is “enhanced”.

Blockchain solutions, such as Ripple’s own payment solution, use digital assets as a bridge between fiat currency pairs.

These digital asset bridges are generally fast, scalable and inexpensive, making them ideal for payments. For example, transactions using XRP the token usually settles in three to five seconds and costs fractions of a penny.

Financial institutions can use blockchain-based digital assets to obtain liquidity on demand and avoid pre-funding destination accounts, freeing up pent-up capital that would otherwise be in a bank account.

Overall, financial institutions and finance teams around the world will certainly agree that a faster, cheaper and more transparent approach to cross-border financial flows can offer a better way forward and pave the way for a new normal in B2B cross-border payments, said Sears.

“It’s a very exciting time,” he added. “What we have seen globally on the regulatory front is increasing clarity in many different markets around the world. … In tandem with that, we have seen institutional adoption [of crypto] go way up, which will encourage further waves of institutional clients.”