Blockchain technology to change cross-border payments
The term “cross-border payments” refers to transactions across different countries. Cross-border payments are important for individuals, companies, industries and international development organisations. However, cross-border transactions often become difficult due to exorbitant fees and long processing times. Using blockchain in cross-border payments will make the whole process easier and also boost the global economy.
Blockchain, or distributed ledger technology, is a feature of cross-border money transfers. With encryption technology, the payment process becomes faster. Currently, many blockchain-based payment platforms exist, and many more will appear in the coming days. In this article, we will discuss the existing cross-border payment system and how blockchain technology makes it faster and more efficient. We will also evaluate the big changes that are about to come and the future of blockchain in cross-border payments.
Global economy for cross-border payments
Global cross-border payments will reach $156 trillion by the end of 2022. According to Juniper Research, B2B cross-border payments alone will be a $35 trillion economy by the end of 2022. And with growing technology, cross-border payments with distributed ledger technology are increasing. A World Bank report says the average cost of remittances is around 7% and G20 countries have tried to lower cross-border remittances to 5%. Countries such as North America, Latin America, Asia and Africa are the new trendsetters in cross-border payments.
Traditional cross-border payment system
Various global messaging systems operate traditional international transactions and are connected by a banking network. A money transfer is a cross-border money transaction carried out by a company linked to banks, credit unions or financial institutions.
In the case of traditional cross-border payments, the ledger is not the same between sender and recipient, which adds security considerations to the entire process.
Why is blockchain important?
First, immutability is not compromised in blockchain. Here, the centralized authority is replaced by a decentralized network. A group of nodes validates the monetary transaction. Second, in a blockchain network, a transaction is completed in real time due to fewer dealers. Many public blockchains can transfer money worldwide. Finally, blockchain supports transparency and traceability. It solves the pain points in different industries. Basically, all transactions are done quickly and with a minimum fee.
Features that distinguish blockchain technology
Blockchain technology in cross-border payments has an advantage for both sender and receiver. Some of the features are:
- Untampered Information: Information extraction is difficult because each block of information links it to the previous block
- Real-time payment: This is a game-changer for businesses that need quick funds. Payment is immediate with transaction information integrated into it
- Decentralized: The flow of client information across different jurisdictions can be prevented
- No intermediaries: The recipient has direct access to the payment without delays, unnecessary fees or transfers involved
How blockchain works
The most important transaction parts are the gateway and the customer with no banking institution in between. A person in Delhi can send money to Italy with the help of an on-ramp service provider. The provider converts the fiat money into cryptocurrency that can be stored in any crypto wallet. One can choose a cryptocurrency and open an account and then initiate a transfer from a bank or credit card. Finally, one needs a recipient’s wallet address to send the amount. Once the cryptocurrency reaches the recipient’s wallet, he/she can convert it into fiat money.
Changes in blockchain-enabled cross-border payments
Mainstream financial companies have also started using blockchain to pilot transactions. The technology on the upper layer remains the same, but a small adjustment in the core makes it work on the blockchain. Now, government organizations are increasingly using blockchain technology to manage financial settlements, improve existing legal frameworks and provide payments.
Challenges
The big challenge is that most people are still ill-equipped to use the technology. There is not much clarity regarding crypto market regulations. Fintech giants, such as Wise or SWIFT, are currently hesitant to use blockchain or distributed ledger technology. They will deploy blockchain networks when more central banks adopt it for cross-border payments.
Disclaimer
The views above are the author’s own.
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