A cross border payment is a transaction between banks, financial institutions, businesses, or individuals operating in different countries that may or may not share a border. Cross-border B2B payments are expected to exceed $54.06 trillion CAD worldwide by 2024, up from $50 trillion CAD in 2022, according to a Juniper Research report.
Globalization, digitalization and the rise of eCommerce have changed the way consumers around the world shop, creating a truly global marketplace. In this environment, merchants have the opportunity to enter new markets and access new customer bases — but in order to take advantage of that opportunity, they must first understand the nuances and expectations of consumers in different regions. The entire purpose of cross-border payments is to help merchants adapt their global commerce strategy to local markets; by offering consumers in different regions payment options familiar to them, merchants can both enhance the customer experience and capitalize on new revenue streams. Cross-border payments have traditionally been a time-consuming and expensive process, involving multiple intermediaries and high transaction fees. However, with the advent of blockchain technology, there has been a shift towards a more streamlined and cost-effective way of making these payments. Distributed ledger technology, or blockchain technology, is a game-changer in cross-border money transfers. It accelerates the payment process by employing encryption technology.
In this article, we will explore how blockchain technology is revolutionizing cross-border payments.
With the emergence of blockchain technology and decentralized finance (DeFi), there is a rising demand for cross-border payments in the Web3 ecosystem as more individuals and organizations seek to transact with digital assets. Blockchain cross-border payments are transactions between parties from various countries that are facilitated by blockchain technology. Historically, banking and financial institutions facilitated cross-border payments, which frequently involved a complex network of intermediaries, such as correspondent banks and clearing houses. . The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a messaging network used by traditional banks and financial institutions around the globe to securely and swiftly exchange information regarding financial transactions. However, SWIFT confronts its own challenges, including high costs, limited access, and centralized control. Smart contracts, on the other hand, autonomously enforce blockchain cross-border payment transactions based on predetermined rules. This elimination of intermediaries results in transparent, instantaneous transactions. In contrast, blockchain-based cross-border payments seek to eliminate intermediaries, reduce transaction costs, and increase transaction speed and security. Today, blockchain-based cross-border payments facilitate faster payment solutions for business-to-business and person-to-person blockchain transactions since the payer and payee are operating on the same rails, with the same data formats and protocols, which allows them to transact directly regardless of what country they are in. They are proving to be a game-changing development in international money transfers. This makes international payments and settlements a prominent use case for blockchain technology.
The above payment flow is enabled by a range of features that are inherent to blockchains.
Blockchain-operated cross-border payments offer several advantages over traditional financial methods, and a few of them are as follows:
Faster Settlements: Blockchain technology enables near-instant cross-border payments, eliminating the need for intermediaries such as banks or payment processors. This means that payments can be processed within minutes rather than days, and funds can be transferred directly between the sender and the recipient.
Lower Fees: The cost of making these payments can be significant, with traditional payment methods often charging high fees. However, by using blockchain technology, the fees for these payments can be significantly reduced. This is because blockchain transactions do not require intermediaries, which can reduce the costs involved in processing payments.Lower Fees: The cost of making these payments can be significant, with traditional payment methods often charging high fees. However, by using blockchain technology, the fees for these payments can be significantly reduced. This is because blockchain transactions do not require intermediaries, which can reduce the costs involved in processing payments.
Increased Transparency: Blockchain technology provides a transparent and tamper-proof record of all transactions. This means that both the sender and the recipient can track the progress of the payment and verify its authenticity. This transparency helps to reduce the risk of fraud and increases trust in the payment process.
Global Reach: Blockchain technology is a decentralized system, which means that it is not tied to any specific country or jurisdiction. This makes it an ideal solution for these payments, as it enables payments to be made globally without the need for complex foreign exchange transactions.
Improved Security: Blockchain technology uses advanced cryptographic techniques to secure transactions. This makes it virtually impossible for anyone to tamper with the transaction or steal funds. This enhanced security reduces the risk of fraud and increases trust in the payment process.
Decentralized and accessible: on a blockchain, no single organization is in charge. Compare that with traditional payments, which run across centrally controlled card and banking networks. The owners of these networks can decide who gets access, and how much to charge merchants and customers for using them. Those without permission get locked out, resulting in merchants unable to take payments, or customers unable to pay. Decentralized blockchains are permissible by default. The only entry requirements are an internet connection and a smartphone or computer.
Trust by consensus: The role of nodes, miners and the consensus mechanism eliminates the need to trust in a single authority. Instead, the blockchain relies on the collective incentive of users to maintain the integrity and security of the system.
Built-in redundancy: There are thousands of network participants in any given blockchain and each one maintains a complete copy of that blockchain ledger. This is unlike traditional databases where information is typically stored in a central location. Even if dozens of participants (or ‘nodes’ as they are known) go offline at the same time, blockchain operations continue.
To meet operational and regulatory liquidity requirements, a company's treasury department will need to move money around its organization. When these flows involve moving money between national banking systems, blockchains can be faster than traditional payment rails. And when using fiat-pegged stablecoin (eg USDT, USDC) businesses can overcome the liquidity challenges associated with moving funds from emerging markets.
FX brokers and trading platforms can settle funding payments and payouts from and to markets all over the world at speed and low cost, using fiat-collateralised stablecoin rails.
Blockchain-based payment solutions can streamline the process of remittances, enabling faster and cheaper transfers of funds. This is particularly relevant when money is being transferred to countries with high-levels of financial exclusion. Of the top 20 countries where cryptocurrencies are most widely used for payment, ten are lower middle income (Vietnam, Philippines, Ukraine, India, Pakistan, Nigeria, Morocco, Nepal, Kenya, and Indonesia).
Blockchain technology can streamline supply chain payments, enabling you to pay global suppliers and partners quickly and efficiently.
Blockchain payments provide a popular, secure and transparent method for online purchases, reducing the risk of fraud and providing customers with increased trust and confidence in the payment process. Today, most ecommerce is consumer facing, but it is also growing as a B2B sales channel. Ecommerce will become the largest B2B cross-border segment by 2030, worth $22 trillion.
A micropayment is a small, online transaction, usually under $10 and as little as one cent. Examples of micropayments include royalties, tips, pay-per-click advertising, one-off access to specific content, and verification of a credit card or bank account. Blockchain technology enables efficient and secure micropayments, allowing for low-value transactions that were previously not feasible due to high transaction fees associated with traditional payment systems. What’s more, units of cryptos can be shrunk (e.g. in bitcoin 1 ‘sat’ is worth 0.00000001 of a bitcoin), enabling micropayments and micro loans that foster new economic activity.
Blockchain-based payment systems can facilitate decentralized crowdfunding, allowing individuals around the world to contribute funds directly to projects or initiatives without the need for intermediaries, while ensuring transparency and accountability.
Blockchain-based payments can simplify subscription services by automating recurring payments and enhancing security through cryptographic verification, ensuring seamless and secure subscription management.
Despite their advantages, blockchains are not a panacea for cross-border payments. Nor are some of the claims of blockchains altogether true. While in theory blockchain-enabled payments can be instant, users encounter administration time and costs of managing their cryptocurrency, including moving money between wallets and between on and off chain rails. These transfers typically come with an additional processing fee. Businesses should be aware of where blockchains do not represent an improvement on incumbent payment methods. Some of these issues will be solved naturally with time and the evolution of the technology, while some of the complexity can be mitigated by working with trusted partners that take on burden and risk.
For finance teams holding digital assets on their balance sheet, there is volatility risk associated with fluctuating prices. The advent of stablecoins pegged to assets like dollars has helped to mitigate this risk. While there are incidences of stablecoins temporarily losing their peg, major asset-backed stablecoins have proven their utility with a market capitalization at around $130bn, and $30bn in trading volume every day, making them an attractive option for finance and payment teams. Many businesses also choose to work with partners who collect cryptocurrency on their behalf and settle them in fiat.
Blockchain payments require users to have a certain level of technical expertise and familiarity with digital wallets and cryptographic keys. The complexity of the user experience, especially securing private keys and protecting digital wallets, can be a barrier to widespread adoption. Working with an expert payment partner can help here.
As blockchain payments operate across borders and involve digital assets, they raise regulatory and compliance challenges. Governments and financial institutions are still developing frameworks to regulate and monitor blockchain payments, including anti-money laundering (AML) and know-your-customer (KYC) requirements. Not all of them see blockchains and cryptocurrencies positively so businesses must be aware of the rules for each market. While there are varying and inconsistent approaches from regulators right now, in the coming months and years we’re likely to see regulation around digital assets converging and digital assets becoming integrated into the mainstream global financial system.
Achieving seamless interoperability between different blockchain systems, or between blockchains and existing payment and financial software, can pose a challenge. Some fintechs offer a proprietary blockchain (e.g. Ripple) and/or token (e.g. XRP), while other providers integrate with multiple blockchains and are token and currency agnostic (e.g. BVNK). Providers like BVNK can help address this challenge: we’ve built an extensive API layer that allows businesses to move funds seamlessly between different networks.
Blockchain networks that rely on proof-of-work consensus mechanisms, such as bitcoin, consume substantial amounts of energy. The environmental impact of energy-intensive blockchain operations can be a concern for businesses that are obligated to meet climate impact benchmarks.
Cross-border blockchain payments are based on the security-enhancing principles of cryptography, distributed ledger technology, and decentralization. Every network participant has a copy of the distributed ledger, and each transaction is validated by a consensus mechanism before being added to the distributed ledger. This makes it extremely difficult for a single party to alter the data or transaction records. In addition to these technological principles, the majority of blockchain-based payment systems encrypt user information and private keys, which are required to access and transfer funds. This adds an additional layer of security, making it harder for hackers and other malicious actors to access sensitive data. As with any payment system, blockchain-based payment systems are not immune to all risks, and users should take the necessary precautions to safeguard their assets, such as using secure passwords, two-factor, multi-signature authentication, and securing their private keys.
Blockchain technology offers a promising alternative to traditional payment systems for cross-border payments. By eliminating intermediaries, blockchain-based payment systems can potentially reduce transaction costs, increase efficiency, and improve security. This has significant implications for businesses and consumers alike, offering faster, cheaper, and more secure transactions. As blockchain technology continues to evolve, it is likely to play an increasingly important role in the future of these payments