A cost-efficient, faster and secure cross-border payments system will boost international business, while ensuring that migrants aren’t charged exorbitant rates for sending money home and more people are included into the present financial system. The blockchain technology can make it all a reality.
How Blockchain Is Being Used To Solve Cross-Border Payments Problems
It has been nine years since Bitcoin came into existence, enabling fast, low-cost and transparent peer-to-peer transactions. Over these years, Bitcoin has seen both—glory and gloom. Today, it lives on and so does its underlying technology—blockchain—which has captivated various entities, especially financial institutions and banks. With the hope that the distinct advantages of Bitcoin can be replicated by imbibing the blockchain technology into their ecosystems, many monetary institutions have been exploring it.
Over the last few decades, there has been a steady rise in global businesses and international trade along with diaspora contributing to an increase in intricate cross-border payments. Cross-border payments account for about 40% of global payments transactional revenues with payment flows of more than $135 trillion during 2016 (as per McKinsey).
One crucial limitation of the system is its inability to cater to the unbanked population (38% according to the World Bank data) as well as those residing in regions where Corresponding Banking Relations (CBRs) have been withdrawn (such as Caribbean region).
Blockchain Solutions for cross border payment
To overcome the current structural weaknesses, financial institutions and banks are adopting blockchain to offer near instant cross-border payments at lower costs, higher security and more reliability. With blockchain, payments are tamper-proof and accurate, thereby trimming costs associated with investigation of cases and litigation.
Since its launch in 2009, bitcoin has often captured headlines for the wrong reasons. Variously associated with criminal activity, theft, and a libertarian movement that focuses on disintermediating banks, it has generally been deemed inappropriate for mainstream financial services. Nonetheless, the average dollar-equivalent value of daily bitcoin transactions has risen steadily to $160 million in recent months, equivalent to 25% of global consumer-to-consumer remittance flows processed by MTOs (and larger than the daily volume processed by digital-only MTOs). Meanwhile, several technology startups have received substantial venture capital backing to launch pilot programs that offer cross-border payment services based on bitcoin transfers.
Successful application of blockchain in the cross border payments
Align Commerce is a good example. It has leveraged the liquidity of bitcoin to local currency exchanges in strategic cross-border corridors to offer real-time, transparent, and low-cost cross-border payments to small and midsize enterprises. Its platform provides a unique visual dashboard that enables counterparties to track the progress of payment transfers with up-to-the-minute accuracy and implicit payment guarantees.
Abra has followed the mobile “uberization” trend by offering peer-to-peer, real-time, cross-border payments via roving mobile tellers who can accept cash payments in exchange for instant-payment bitcoin transfers to any recipient with online or mobile access. And funds can be withdrawn from a similar mobile teller in the destination country such as a teller agent in the active corridor between the U.S. and the Philippines.
It is widely believed that over 90% of bitcoin’s daily transaction volume is generated by speculators, rather than by buyers of traditional goods and services. (The average value of daily exchange-traded volume is close to $30 million). However, the substantial volumes and endurance of bitcoin are prompting some to look more closely at its underlying technology and to explore how it might be used to more rapidly and securely execute and track transfers of value while creating an immutable audit trail.
The year 2017 started with SWIFT launching a Proof of Concept (PoC) to help banks that are challenged with monitoring and managing their international nostro accounts—crucial for streamlined cross-border payments. This is a part of SWIFT’s global payments innovation initiative that is looking to set new standards in cross-border payments.
SWIFT, short for Society for Worldwide Interbank Financial Telecommunications, can be considered a synonym for international payments. To test and validate the PoC’s blockchain application, 22 additional banks joined the initiative in July 2017.