From Days to Seconds: Blockchain’s Transformation of Cross-Border Settlements
Cross-border payments have long been a source of frustration for businesses and consumers alike, plagued by high fees, slow settlement times, and limited transparency.
Traditional banking systems, built on correspondent networks, struggle to keep up with the demands of the modern, interconnected global economy. As businesses expand internationally, the inefficiencies of these legacy systems are becoming more evident.
It’s not uncommon for businesses to wait days or even weeks for payments to clear, particularly when intermediary banks are involved. This delay disrupts cash flow and can lead to unforeseen costs, especially when foreign exchange rates fluctuate during the settlement period.
For example, a company paying suppliers in multiple countries may face delays due to correspondent banks, leading to additional fees and FX losses that are difficult to predict and manage.
These inefficiencies become even more apparent as global trade increases, creating a growing need for faster, more transparent solutions, like blockchain-enabled payments, to bypass many of these traditional barriers.
The Problem with Traditional Cross-Border Payments
Traditional cross-border payment methods involve multiple intermediaries, including correspondent banks, each adding a layer of cost and complexity.
The average fee for a cross-border payment consumer can exceed 11%, particularly for smaller transactions, while fees for B2B payments average 1.5%.
Settlement times, ranging from several days to weeks, create cash flow constraints for businesses.
The lack of transparency further compounds these issues—failed transactions can be challenging to track, eroding trust between businesses and their customers and creating unnecessary overhead for both parties.
For example, in 2023, U.S. eCommerce companies reported an 11% failure rate in cross-border payments, resulting in $3.8 billion in lost revenue.
Regardless of the transaction size, business model, or purpose, there’s a growing demand for faster, cheaper, and more reliable solutions than traditional banking rails.
Blockchain for Cross-Border Transactions
Blockchain and Distributed ledger technology (DLT) address the core issues of cost, speed, and transparency, allowing for direct transactions between parties and eliminating the need for intermediaries.
This can reduce transaction costs by up to 80%, with settlements occurring in seconds rather than days.
Looking ahead, the global crypto payment gateway market is forecasted to skyrocket to $5.4 billion by 2031.
On top of that, Juniper Research predicts that by 2024, blockchain will handle 11% of all B2B cross-border payments, solidifying its role as a key infrastructure for international business.
Traditional financial players aren’t just watching from the sidelines; banks and fintech startups are joining forces to explore blockchain-enabled solutions and digital assets.
Visa B2B Connect, for instance, is Visa’s blockchain-powered service launched in 2019. It allows for seamless bank-to-bank transfers without the need for cards.
Mastercard Send uses blockchain to offer near-instantaneous cross-border payments across millions of accounts, tapping into traditional banking networks and digital wallets.
Blockchain has also mended a historic rift between banks and fintech disruptors, who collaborate as much as they compete.
For example, Ripple, a leader in blockchain payments, has inked partnerships with major players like Santander and American Express, making cross-border transactions faster, cheaper, and more secure.
Stellar, another leading blockchain payments project, has partners like IBM using its infrastructure for global payment processing.
The Growing Role of Stablecoins
Stablecoins, cryptocurrencies pegged to stable assets such as the US Dollar or Euro, are one of the key innovations driving blockchain’s adoption in cross-border payments is the use of stablecoins.
With a collective market cap of about $179 billion, stablecoins facilitate about $150 billion monthly in organic payment activity and a total of $2.2 trillion. According to a Visa and Allium Labs collaboration, the discrepancy results from isolating transactions “initiated by bots and large-scale traders.”
Stablecoin payment settlement far surpasses traditional networks like Mastercard and American Express. In response to this paradigm shift, companies like Visa are exploring stablecoins like USDC for global settlements on the Ethereum network, signaling a new era where blockchain-based payments could soon eclipse traditional card networks altogether.
Stablecoins present several compelling value propositions.
For cryptocurrency holders, stablecoins mitigate crypto’s volatility without needing to exit a blockchain ecosystem and enter traditional bank rails. They provide a reliable medium for transferring value across borders without exposure to exchange rate fluctuations.
For cross-border payments, stablecoins allow the permissionless transfer of immense amounts of value within minutes for minimal fees.
Reflecting the growing mainstream acceptance of these digital assets, PayPal, Shopify, and others have integrated stablecoins into their payment solutions.
They can also be incredibly profitable business models, highlighting the scope of the opportunity and the competition among crypto-native projects and traditional banking companies.
For example, Tether, one of the world’s largest stablecoin issuers with its dollar-pegged USDT, posted an annual profit of $6.2 billion for 2023, beating out the world’s largest asset manager, BlackRock, by $700 million.
Final Thoughts, Challenges, and the Path Forward
The convergence of traditional and digital payment infrastructures is transforming the global economy, pushing the entire financial sector into a more decentralized, efficient, and transparent future.
Despite its potential, blockchain adoption for cross-border payments faces several challenges.
The most significant obstacle is regulatory compliance, particularly as governments worldwide implement different standards for anti-money laundering (AML) and know-your-customer (KYC) protocols.
For instance, while countries like Switzerland have relatively clear blockchain regulations, others, like the U.S. and China, impose strict oversight and restrictions that create friction for cross-border transactions.
A prime example is the European Union’s General Data Protection Regulation (GDPR), which complicates using blockchain’s immutable ledgers by mandating the ability to erase personal data—a concept inherently at odds with blockchain’s permanent record.
Moreover, blockchain networks must improve their scalability to handle a high volume of transactions while maintaining efficiency.
For instance, during periods of heavy network use, Ethereum transaction fees surge, making smaller payments impractical.
To address this, alternative blockchains such as Solana have grown in popularity, and Layer 2 solutions like zkRollups and Optimistic Rollups are being developed to improve Ethereum’s throughput without compromising security.
Interoperability between blockchain platforms and traditional financial systems also presents a challenge.
For example, a bank handling cross-border payments through Swift may find it challenging to reconcile transactions involving cryptocurrencies or digital assets that operate on decentralized platforms like Ripple.
However, initiatives like Project Agorá, spearheaded by the Bank for International Settlements (BIS), aim to integrate tokenized bank deposits with central bank money, signaling the potential for broader collaboration between blockchain and traditional finance.
As blockchain continues to evolve, overcoming these hurdles will be essential for unlocking its full potential in cross-border payments. While challenges remain, the momentum behind blockchain innovation suggests that it’s not a question of if (and who will make a lot of money doing so) but when these obstacles will be addressed, enabling a more integrated and efficient global financial system.
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.
Sources:
https://www.bloomberg.com/news/articles/2024-05-05/more-than-90-of-stablecoin-transactions-aren-t-real-study-finds?utm_source=telegram&utm_content=crypto&utm_medium=social&sref=3REHEaVI
https://www.bis.org/about/bisih/topics/fmis/agora.htm
https://defillama.com/stablecoins
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