Fintech companies and blockchain technology are changing the way payment processing happens worldwide. The emergence of crypto-currency and the advancement of international payment systems are opening a world of opportunities for businesses to connect with customers across borders.
Whether you are looking to expand your business across borders or want to explore different payment systems, this guide will help you understand how cross-border remittances work and how blockchain technology is making them more secure.
What is Cross Border Remittance?
Cross-border remittances are transactions where the payee and the payer are from the same or different countries. However, the processing of these transactions often seems complex.
International payment systems make these cross-border transactions safer, faster, and more accessible. They are the fuel that enables cross-border trade and investments.
While international payment systems are essential for the economy's growth, there is certainly room for improvement in the infrastructure of the cross-border payment system. Let's discuss these challenges in detail to understand them.
High Costs
Cross-border payments require a large infrastructure with many intermediaries. The charges, regulatory fees, and hidden charges could add up, making it difficult for businesses to find customers ready to pay such high transaction fees.
Especially since the onset of COVID-19, exchange rates have skyrocketed. Furthermore, costs vary due to market segments, service levels, and transaction volumes. The costs associated with retail payments can also vary.
For instance, if you are performing a transaction from Europe with a credit card, you may be charged 2% as a merchant fee. But if you are engaging in similar transactions from Latin America, you may be charged 7%.
Longer Time
International payment systems can take up to 5-6 working days to approve a transaction. The settlement of these transactions may even take a longer time.
A slow turnaround time is one of the biggest drawbacks of cross-border payments. While time-related issues may not affect customers directly, they may affect a company's liquidity. Slow transactions ultimately lead to a cash crunch that affects operations.
Inadequate Transparency
A common issue with cross-border payment is a lack of transparency. Real-time visibility of transactions is difficult due to the involvement of multiple intermediaries.
A recent study states that 64% of businesses want an international payment system with real-time tracking capability. Enterprises also want visibility regarding the fees and deductions involved in cross-border payments.
An increasingly fragmented global market calls for a system that provides them visibility across all transactions.
Here's How Blockchain is Resolving These Challenges?
Digital transformation is changing how we process information. The introduction of IoT and blockchain is further strengthening this transformative change.
Given the shortcomings in cross-border payment systems, blockchain and Hyperledger technology are making a buzz in the fintech industry.
In simple words, a blockchain is a shared ledger that records and tracks assets in a business network. The technology lets businesses track anything virtually on an enterprise blockchain network, cutting costs and the time involved.
Let's talk briefly about how blockchain is transforming cross-payment systems worldwide:
Real-Time Visibility
Blockchain is a universal ledger with a distributed network that makes real-time verification of transactions much more transparent with no intermediaries involved. It allows for verification without the involvement of a third party.
The logic behind distributed ledger enables banks to have a bilateral and visible transfer of value as transactions and data are recorded identically at multiple locations.
Cost and Time Benefit
By streamlining permissioned blockchain with cross-border payments, transactions are completed much faster and more efficiently.
With the blockchain network, you don't need to reconcile multiple ledgers or wait for documentation. The clearing and settlement process happens much faster as there is no third-party meddling. On the other hand, you can deduce charges incurred through multiple correspondent banks.
Greater Security
Increased data transparency can enhance the security of transactions. Furthermore, the details of the transactions are encrypted and hashed, so there is a lesser possibility of fraud and unauthorized authority.
Better Traceability
Permissioned blockchain eliminates the risk of discrepancies. As a decentralized ledger, it holds a verifiable data repository and distributes it to authorized users, leading to better traceability.
Conclusion
A recent study states that banks can cut costs for cross-border payments by up to $10 billion by 2030 using blockchain technology. Blockchain is the future of cross-border payments and has surpassed traditional payment systems in terms of security and reliability.
Furthermore, the introduction of crypto-currency and far-reaching regulatory compliances has increased the adoption of blockchain technology. Companies are starting to realize its potential and have begun to explore different ways to integrate it into their payment systems.
The status quo is changing across the finance industry, so it's time to leverage innovative technology and improve the bottom line.
