The global economy relies heavily on cross-border payments and inward remittance, allowing for the smooth flow of money between countries. These payments facilitate international trade and investment, allowing businesses to buy and sell goods and services across borders.
The rise of the internet, digital technologies and cross-border payment software has made it easier and faster to conduct payments across the globe. However, making cross-border payments can still be complex and costly. Different countries have their own payment systems and regulations, which can create obstacles and delays in transferring funds. Additionally, the use of multiple currencies can add to the complexity and cost of these transactions.
Global cross-border pay, remittance banking and inward remittance economy
In 2022, international cross-border transactions will total $156 trillion. As a result, it has been confirmed as a trillion-dollar market. Per Juniper's research, B2B cross-border payments alone will be worth $35 trillion in 2022.
Historically, the transactions were carried out through a correspondent banking network (CBN). The average cost of remittances is around 7%, according to a World Bank report on remittance prices worldwide. G20 countries have been trying to reduce cross-border remittances to 5% in recent years.
According to the World Bank, remittance inflows contributed to 40% of GDP in some countries, amounting to 716 billion USD in 2019.
Major challenges to cross-border payments and remittance banking economy
As per industry studies, the two most significant factors linked to internal resistance to blockchain adoption are regulatory and compliance issues, which must be addressed. In order to overcome these challenges, there has been a push towards creating a more efficient and standardised global payment system. It includes initiatives such as the Single Euro Payments Area (SEPA) in Europe, which aims to make it easier for businesses to make and receive payments within the region.
There are also a growing number of fintech companies offering digital technologies such as cross-border payment software and blockchain to streamline the payment process and reduce costs. The development of more efficient and standardised payment systems and the growth of fintech will play a crucial role in facilitating this flow of funds.
What makes blockchain a superior solution for cross-border payments and remittance banking economy?
There are several reasons why a blockchain network may be preferred for transactions:
- Decentralization: Blockchain networks are decentralized, which means any single authority or entity does not control them. It allows for greater transparency and fairness in transactions.
- Security: Blockchain networks use advanced encryption and security protocols to protect the integrity of transactions. It reduces the risk of fraud and tampering.
- Efficiency: Blockchain networks can process transactions much faster than traditional systems , reducing the need for intermediaries and transaction costs since the transactions take place over blockchain networks.
- Immutability: When a transaction is recorded on the blockchain, it cannot be tampered with or deleted. It makes sure that the transaction history is accurate and reliable.
- Traceability: Blockchain networks provide a clear and transparent record of all transactions, which makes it easier to track and verify the movement of assets. It can be useful for regulatory compliance and auditing purposes.
The regulatory and compliance requirements can be duly implemented by introducing an additional DATA Layer along the payment process chain involving the blockchain.
As the network becomes more transparent, the number of suspicious transactions for AML and transactions through 'high-risk countries' could be reduced. It is suggested that the best way to get started with Blockchain for intra-group like Closed User Group (CUG) payments is to proceed with caution and in a stepwise manner.
Blockchain implementation would immediately assist banks and financial institutions with the costs associated with generating and processing MT202, MT199, MT999, and other messages. Given the daily volume, it would be a step toward cost savings and reduced turnaround time, as well as experiencing the benefits of modern blockchain and distributed ledger technology. Also, because the scope revolves around intra-group payments, banks will feel more at ease because the payment boundaries are known.
Blockchain can assist in simplifying remittance and payment processes, significantly lowering settlement time and expenses. It enables:
Gross settlement in real time between commercial, central, and independent banks.
KYC/AML data and transaction history can be digitised, lowering the risk of fraud and facilitating real-time authentication.
Blockchain supports a variety of payment methods: Stablecoin, tokenised fiat and cryptocurrency.
Needless to say, the future of Blockchain technology in the cross-border remittance domain appears brighter than ever. We hope this article provides essential insights into the sector's future and the technology you should consider adding to your current stack. For more information on how blockchain will impact the cross-border payments landscape, get in touch with us at Fable | Leading Cross-border payment solutions provider (fablefintech.com)
Blockchain in Cross-Border Payments: A Game Changer? (zeeve.io)
A Look at Blockchain in Cross-Border Payments (paymentsjournal.com)