Cross-border payments are changing with the advent of Distributed Ledger Technology (DLT) and blockchain. These technologies will change how we conduct global transactions and reduce costs. The benefits? We reap the advantages of sped-up payments alongside increased transparency. This blog looks into the future of these payments and what it means for users.
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Cross Border Payments
These payments are money transfers between parties in different countries, often facilitated by banks or financial institutions. Historically, they have been slow, with multiple intermediaries, high fees, and long processing times.
The demand for faster and cheaper payment solutions has grown as the world becomes more interconnected.
Here’s an example of these payments to support this explanation:
A small business in the US sells handmade crafts online. European customers who want to buy several items initiate a cross-border payment with their credit card.
The process involves:
- Payment initiation: Customer enters their credit card details on the website.
- Currency conversion: The payment processor converts euros to dollars at the current rate.
- Intermediary banks: Payment requests go through multiple banks and financial institutions to facilitate the transaction.
- Settlement: This happens once the approved funds are transferred to the business’s account without the transaction fees.
- Confirmation: Both the customer and business receive the transaction confirmation.
This shows cross-border payments are more complex, with multiple parties, currency conversions, and fees involved, than domestic transactions.
Distributed Ledger Technology (DLT)
DLT is a digital system that simultaneously records transactions in multiple places for increased transparency and security. Unlike traditional databases managed by a central authority, DLT is a decentralised network where all participants can access and verify the same information.
This is especially relevant to these payments as it can simplify the process and build trust between parties.
DLT in Cross Border Payments
Here are the advantages of opting for DLT in these payments.
- Faster: DLT can reduce the time to process transactions and near-instant payments.
- Cheaper: DLT reduces transaction fees by reducing the number of intermediaries, making these payments more affordable for businesses and individuals.
- More secure: DLT's decentralised nature makes it more resistant to fraud and cyber-attacks and more secure for sensitive financial information.
Blockchain Technology
Blockchain technology, a part of DLT, is most famous for powering cryptocurrencies like Bitcoin. But its use cases go beyond digital currencies. In these payments, blockchain provides a transparent and immutable ledger that records all transactions so all parties have the same information.
For instance, a global company uses DLT to send funds to its subsidiary, cutting out the middlemen. This decentralised platform indicates real-time verification, less cost, and less time. DLT means transparency and security, making cross-border payments easier for global businesses.
Blockchain for These Types of Payments
With blockchain supporting this kind of payment, several benefits are seen. These include:
- Transparency: All transactions on the blockchain are visible to approved parties, as well as trust and accountability.
- Immutable: Once a transaction is on the blockchain, it can’t be altered or deleted, reducing fraud.
- Smart contracts: Blockchain allows for self-executing agreements with the terms written into code. These contracts can automate and streamline payment processes without requiring manual intervention.
Cross Border Payments Today
Despite the benefits of DLT and blockchain, these payments are still a complex space. Traditional systems like SWIFT are still in control, and many banks and financial institutions need to adopt them faster. However, several fintechs are emerging to challenge the norm, using DLT and blockchain to offer new payment solutions.
New Players in CB Payments
Some of the new players in the payment system are listed here. Take a look!
- Ripple: Uses blockchain to enable real-time international money transfers. RippleNet allows financial institutions to send these payments with lower fees and processing time.
- Stellar: Similar to Ripple, Stellar is for payments but focuses on serving underserved markets. Its platform allows for low-cost transactions between any currency pairs.
- TransferWise (now Wise): Not based on blockchain but uses technology to offer transparent and low-cost payments, a favourite among consumers and businesses.
The Future of These Payments
The future of these types of payments is sorted. As DLT and blockchain evolve, these payments look good. The next steps in this regime may include:
- Wider digital currency solutions: Central banks are exploring issuing central bank digital currencies (CBDCs), which could revolutionise cross-border payments by providing a state-backed digital alternative to traditional currencies.
- Interoperability: As more blockchain networks emerge, connecting and talking to each other is key. Efforts are underway to develop standards and protocols to enable interoperability so cross-border transactions can happen seamlessly across different platforms.
- Regulatory frameworks: As DLT and blockchain grow, governments and regulatory bodies must establish clear guidelines to ensure compliance and consumer protection.
Conclusion
DLT and blockchain are redefined cross-border payments. These innovations will solve many problems with traditional payment systems, making them faster, cheaper, and more secure. As the world changes, we need to cope with the times.
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Frequently Asked Questions
What are cross-border payments?
Cross-border payments are payments between parties in different countries. They can use various financial instruments and involve multiple intermediaries, which means higher costs and longer processing times.
How does DLT help cross-border payments?
DLT aids cross-border payments by providing a decentralised and transparent way to record transactions. It reduces intermediaries, lowers costs, speeds up processing, and increases security.
What is the difference between DLT and blockchain?
DLT is a broader term that means any technology that allows for the decentralised recording of transactions across multiple locations. On the other hand, blockchain is a type of DLT that uses a chain of blocks to secure and verify transactions, and it is known for its transparency and immutability.
Are there any challenges to using DLT and blockchain for CB payments?
Challenges include traditional financial institutions' slow adoption of new technology, regulatory uncertainty, and interoperability between blockchain networks. Overcoming these will be key to mainstream adoption in cross-border payments.
