Changing Cross-Border Payments with the Blockchain
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The money world is changing quickly, and how we transfer funds is changing as well. There’s a big increase in cross-border payments for a number of reasons – some have to do with remittances, trends in migrant worker population, and the globalization of family life. Others have to do with shipping and business disruption, and new ways to collaborate in enterprise.
Of course, there are challenges to international payments across borders. Countries have their own monetary systems and regulations. Some are more modern than others. Most of them are less than fully efficient in terms of the time and energy that it takes to make international payments work.
This is a prime use and opportunity for blockchain technologies to change the game on international payments. By providing that frictionless and verifiable financial space for money to move between countries, these new technologies are raising the bar for international commerce.
The Basics on International Payments
Some of thinking about new forms of global payments involve understanding how traditional banking works across national borders.
It’s easier if a bank is already established a contact with another bank. Then there’s a direct conduit for this money to change hands. If not, the banks may need to use a third party, and that adds to the time necessary for the transaction.
In addition, the verifications and confirmations needed for international payments take time, too. The traditional method was the SWIFT system, where experts measured transaction delivery in hours, and many transactions need more than 24 hours to be complete.
What if banks and other parties could accomplish these payments in minutes, instead of hours?
Real-Time Payments and International Goals
In theory, an international application of domestic banking standards could be fundamental in making real-time international payments the norm.
Parties could use already established real-time payments systems and make them international, in order to boost the global economy.
Some countries, for example, Singapore, Malaysia and Thailand, have already done this for certain international connections, whether that’s for ongoing trade agreements, or for accommodating workers who are sending remittances to their home countries.
But creating these kinds of efficient links is slow work, and they’re not commonly in place. That dream of handling any transaction in any currency in real time is still far away on the horizon. Blockchain technologies could help.
The Global Promise of Blockchain
With the finance technology that we’ve established over the last few years, it’s likely that the blockchain will help revolutionize money and value. It could help with that specific goal of making real-time payments a global phenomenon.
While it was first created as a sort of digital money system for assets, the blockchain has the ability to create centralized ledgers that are automatically verified without traditional clearing and settlement.
Experts call it the “immutable ledger” – and it works on the principal that transactions are verified by the system itself, and not by bank parties.
In other words, instead of two banks coming to a consensus on the transaction facts, the transaction is transparent, and verified by the community holding the assets on the blockchain.
Think of a wedding – if you want to understand whether the wedding happened or not, whether it was successful, and whether the two parties were effectively joined, you could look at a marriage certificate recorded in a municipal office. Or you could ask the several hundred people who were present, and get verification that way.
Similar, the blockchain relies on that transparency in the community, and frictionless verification of money transfers. Some call this a permission-less system where there are no gatekeepers to confirm or verify, because the blockchain verifies that transaction itself. It can’t be tampered with or manipulated, because it is a clear record.
This could be applied to all sorts of international systems linked to domestic institutions, for example, treasury operations and domestic transfer offices. It can also fundamentally change those markets that deal with heavy volatility and quickly changing asset prices. Liquidity is also another big issue that the blockchain could help to solve.
But one of the main benefits would be faster settlement and easier transaction implementations. Real-time payments could change how we send and receive money across borders.
Using Smart Contracts
The technology around the blockchain goes a step further, though, in creating what people call “smart contracts” – functional code built into the block, chain to trigger events and not just transactions.
Those smart contracts can be applied to transactions, but they can also be applied to other activities as well. All sorts of code modules can be triggered inside of the blockchain with the same verification and easy confirmation that immediate consensus provides.
Central Banks and Currencies
Another benefit would be the blockchain’s ability to work with central banks established by individual nations.
As we move into the new fintech era, the central banks are also creating their own blockchain currencies called central bank digital currencies or CBDCs.
Experts warn that there is still a barrier to interoperability, even if you have digital assets in play. If the systems that are built around the CBDCs are similarly partitioned to the traditional banking systems, parties are still going to face challenges sending and receiving money quickly.
Another major benefit has to do with availability. In traditional banking systems, a human reviewer would need to be available to make confirmations. With automated systems that we have today, and the block chain for verification, systems can be available 24 seven to handle transactions.
Pre-Validation and Other Techniques
Showcasing some of the progress that systems have made with blockchain technologies, there is a significant interest in new validation paradigms, including pre-validation.
This type of proactive work can reduce errors and mistakes that impact transaction processes.
Specifically, blockchain systems often have proof-of-work (PoW) or proof-of-stake (PoS) processes for transaction validation.
This means that intuitive interfaces will be part of the solution. It’s not just bringing data out of where it has been siloed and making it effective – it’s finding ways to make new blockchain systems and real time payment systems attractive to users.
The Power of Ease of Use
To make people want to use something. It has to be intuitive for their needs.
If commercial parties and enterprises aren’t able to use blockchain tools effectively, their reputation will suffer in the market, and they’re less likely to be implemented over the long term.
That means there’s a dual goal in cross-border payments: to work on the effectiveness of systems and their efficiency, as well as the power of the user interface.
With the right changes and the right evolutions, we could be seeing these types of systems take over in global finance.
About the Author
Howard Davidson is the CMO of Almond FinTech
Almond FinTech is a B2B fintech company transforming cross-border payments by empowering financial institutions and their customers with the best possible rates and near-instant FX settlements across all corridors globally. With Almond technology, institutions can guarantee fast, affordable, and transparent cross-border transactions. Finally.