Blockchain, the solution to cross-border payments
In 2022 global cross-border payments reached 156 million dollars but what are cross-border payments?
Several global messaging systems handle traditional international transactions and connect a network of banks. A remittance transfer is a monetary transaction across borders by a company that partners with banks, credit unions, or financial services institutions.
These require a lower transaction fee than a bank transfer. In traditional cross-border payments, the ledger is not the same between sender and receiver. Thus, adding a security concern to the entire settlement process.
Blockchain, the solution to cross-border payments
Based on this detected need, blockchain arrives to revolutionize the way in which these processes are being carried out. Blockchain technology is a game changer in cross-border money transfer as it speeds up the payment process through the use of encryption technology.
The traditional banking model, both cumbersome and expensive in a world of cheap and instant payments, has led to the intensification of non-bank providers.
In the next five years, an acceleration of B2B cross-border payments is expected, according to a survey carried out by PwC in 2022. A recent pilot project by Faster Payments Service, owned by the UK Payments Authority, recorded the fastest ever payment from Australia to a UK payee: all processes confirmed in just <36 seconds.>
Another quite interesting project that is worth mentioning is the case of the payment company ‘Strike’ and its new remittance service available in three African countries.
Strike, a Bitcoin Lightning Network (LN) based payments company, is making cross-border payments easier, faster, and cheaper for people in Africa. The company announced the launch of its new service called “Send Globally” which enables instant and low-cost payments to Nigeria, Kenya and Ghana. The service is launched thanks to a partnership with the African payments platform Bitnob.
Leveraging technology from the LN (Lightning Network), a Layer 2 network for Bitcoin scalability, the new service allows users in the US to send money to any of the three African countries mentioned, without transaction fees. By comparison, other remittance services charge fees, and some like Western Union (NYSE:WU) can charge upwards of 10%, as Cointelegraph notes.
Payments are made in cryptocurrency but are instantly converted into local fiat (paper money) currencies naira, cedi or shillings and deposited directly into the recipient’s bank, mobile money or Bitnob account, the company said.
“High fees, slow settlement and a lack of innovation in cross-border payments have had a negative impact on the developing world,” said Jack Mallers, founder and CEO of Strike.
The point to keep in mind here is that blockchain will not only improve cross-border payments, but will also boost the overall health of any industry by ensuring supply chain management, logistics, etc.
Cross-border payments using blockchain as the intermediary technology are a significant advantage. Merging blockchain technology with cross-border payments is a win-win situation for both sender and receiver. Some of the characteristics of blockchain technology are:
- Information not manipulated
- payment in real time
- No intermediaries
When we talk about blockchain adoption for payments, we cannot help but understand that there are two crucial parts of the transaction: the gateway and the customer; no banking institution in between. A person living in the US can send money to Italy using an on-ramp service provider. The provider will convert the Fiat money into cryptocurrency. The cryptocurrency can be kept in a crypto wallet. One can find multiple crypto wallets, choose anyone, and set up an account; After that, one can initiate the transfer from a bank or credit card.
Finally, you need to have the address of the receiver’s wallet to send the required amount to the receiver. Once the money reaches the receiver’s wallet, the receiver can convert it into fiat money after receiving the cryptocurrency. Crucial steps to transfer money are:
- A consumer or a business wants to purchase a product or a service. Here we require consumer ID, retailer ID, amount of transaction, and timestamp.
- Smart Contracts are for implementing currency exchange according to the real-time exchange rate.
- In the block record all information about the transaction is made.
- The block information is added to the blockchain consensus mechanism following a technical regulation.
- The hash value of the previous block is added to the new block. This is an essential step to make the chain tamper resistant.
- The same information is also updated in the node. The node transmits the information more thoroughly. The block is verified.
- Finally, the transaction is completed and the cryptocurrency reaches its destination.
Cross-border payments using blockchain as the intermediary technology are a significant advantage. With the start of the online business, there has been an increase in cross-border payments. Some of the advantages related to the use of the blockchain in cross-border payments are:
Any blockchain-enabled cross-border payment takes a few seconds or minutes. Unlike regular payments, which take 3-5 business days. Various issues, such as time zone differences and currency value differences, do not affect transaction time, since cryptocurrency is a globalized currency. The average time is in the range of 141 minutes to six minutes. When all transactions are done online, it eliminates cumbersome office activities.
The banks have to take the help of the intermediary banks to process the transaction. As often, the banks do not have an alliance with the other nation’s bank.
The intermediate third party charges a fee, and the cost is split between the sender and the recipient. When using the blockchain network for cross-border payments, the transaction fee will only be there for the operator of the blockchain network.
Just like in the cryptocurrency network, everyone has a private key. The key acts as a digital signature, and if there is any reason, the system is hacked. The signature itself will not be valid. As we know, the blockchain is synchronized simultaneously. Therefore, an attacker would not be able to access information across multiple computers quickly.
Greater transparency in transactions
In the future, traditional financial information companies will become obsolete. Similar to blockchain technology, every transaction and holding is easy to view in a browser. Even for a permissionless private blockchain, the participants involved can view the transactions. System inputs are validated. By sharing the information across all platforms, there will be a reduction in data discrepancy.