Addressing Challenges of Cross-Border Payments with Blockchain

From a global perspective, high costs and inefficiencies in cross-border payments are making banks, businesses, and consumers to move from traditional to digital solutions. According to experts at Oodles, blockchain' distributed ledger-based financial solutions can enable institutions as well as individuals to make cross-border payments in a secure, efficient, and cost-effective manner. A cross-border payment solution developed with a blockchain platform like Stellar can ensure that financial services reach people with limited to nonexistent banking services. 

Cross-Border Payments: Challenges

With no direct connectivity between transacting parties to lacking factors like traceability and transparency, cross-border payments are like a black box. Additionally, costly fees to process transactions from one network to others that, eventually, end users bear, limit financial providers’ market and downgrade their service capabilities. Also, no standardization across global networks influences data transfer, which often causes threats and risks to transactions and other information of users. 

It is forcing businesses and consumers to move from banks to Fin-tech providers using blockchain solutions, which more appropriately fulfills their demands. 

Blockchain to the Rescue

Blockchain is like a digital ledger distributed (shared) across the network, which stores information about each transaction made on it in an immutable way.

For companies and people who make regular cross-border payments, blockchain can provide features like transaction security, transparency, efficiency, and speed. 

According to a Deloitte study, blockchain can enable institutions and individuals to make transactions in less than 5 seconds with reduced costs up to 40-60%. 

Using blockchain for cross-border payments can make companies pay either a single fee or nothing at all. It will prove beneficial for international businesses that send payments across geographies regularly. 

Pain Points in Cross-Border Payments

Transaction Speed: According to McKinsey research and analysis (2015) on cross-border payments, it takes an average time of three to five business days to complete a cross-border transaction. 

Transaction Cost: At each step in the process, fees accumulate, including transfers from the sender’s bank to the national and international correspondent banks and foreign exchange. For high volume cross-border payments, the charge is usually average 2% to 3%. However, it can go up to 10% where payment volumes and values are low. Moreover, it’s also not clear when institutions even charge costs to a recipient.

Transaction Opacity: It’s usually complex for participants involved in transactions to track their payments while they are in transit. It creates uncertainty about both the final payment amount and scheduled delivery. It also becomes difficult to quickly track transactions with problems, such as incorrect account numbers.

How Blockchain Addresses these Pain Points 

Cost-efficiency

Cross-border payments become expensive because banks often do not have direct relationships with one another in a global scenario. Then, they turn to intermediary banks to make indirect fund transfers. The intermediary bank levy a fee for this service, which it deducts from the total transfer amount. Sometimes, the remitter and the beneficiary incur this cost or either party pays the complete amount. It occurs on top of fees charged by the remitter bank or the recipient bank. 

At Oodles, our blockchain experts suggest that Stellar blockchain development services can provide efficient payment solutions while eliminating the need for intermediaries. It reduces the fees for sending cross-border payments dramatically. The fee paid by transacting parties is then limited to charges levied by the distributed ledger technology-based solution operator. 

According to reports, banks experienced 40% savings on average using these blockchain platforms like Stellar and Ripple.

Fast Settlements

According to an R3 report, it takes two to five business days to make a cross-border transaction that involves intermediaries. A significant time zone difference between two involved currency jurisdictions plays a crucial role. It requires a remitter to transfer funds through relevant regional payment systems. The remitter also needs to consider the working hours of these systems that vary across international time zones. Ripple platform for blockchain solutions boasts transaction times of between two to five seconds. Currency transactions made through Ethereum blockchain solutions operate with an average time of between 15 seconds to four minutes. 

Also Read: Examining Cross-border Payment Solutions Powered with Ripple Blockchain

Strengthened Security

Records on a cross-border blockchain become secure via cryptographic security mechanisms. All network participants possess their private keys assigned to specific transactions they make, which act as digital signatures. If someone tries to alter any record, then the user’s signature becomes invalid. It results in the peer network identifying that something has occurred.

As blockchain is decentralized and shared across a peer-to-peer network, its participants get the ledger’s same updated and synched version at a given time. It means that there is no single point of failure across the ledger and changing its state is almost impossible. Altering the data stored on the blockchain requires permission from up to 51% of the participants at the same time. Also, it requires an enormous computing power to compromise the network.

For instance, in the Bangladesh bank heist, criminals hacked credentials from the country’s central bank to siphon more than $81 million via SW

The damaging Bangladesh Bank heist, which involved criminals using credentials lifted from the country’s central bank to siphon more than $81m via SWIFT messaging. It is an incident that proponents of blockchain technology at Oodles, a blockchain development company, suggest would not have occurred with a DLT system. The system would have detected attackers’ attempts to erase their actions from the database. It would have also made it easier to track where the money had been transferred. 

Transparency and Visibility

Our in-house team of blockchain experts believes that blockchain platforms like Corda can significantly simplify the compliance process. 

In a public blockchain solution, while the identity of a user is hidden, the holdings and transactions of each address remain open to viewing. With an explorer and the public address, individuals, auditors, as well as regulatory authorities can view all transactions carried out by that address.

Furthermore, in a private blockchain solution, the details are only viewable by permissioned participants involved in a transaction. 

In 2018, the Financial Executives Research Foundation published a report, it stated that blockchain-based fintech systems can eliminate traditional financial reporting bodies. The transparency powered by Corda blockchain solutions can also eliminate checks and balances requiring considerable resources and manpower. 

Conclusion

To conclude, sharing transaction information across involved participants in a common format can reduce data discrepancies, facilitate fast reconciliation, and optimize burdensome back-office operations.