How Blockchain is Disrupting Cross-Border Payments and Remittances?
In this globalized world, cross-border payments as well as international remittances have gained immense importance. Today more people are living and working and also conducting various business operations across the borders. The demand for fast as well as affordable and transparent ways of fund transference on an international level is growing.
But it so happens that the traditional remittance services are facing a lot of challenges when it comes to meeting the different needs such as affordability, transparency. High fees are charged — “up to 11% per transaction”, a lot of time is invested for processing the transactions, there is also lack of transparency when it comes to dealing with the fees and also the foreign exchange rates.
Blockchain technology holds the potential to bring about transformations in the various processes associated with international transactions. Blockchain is actually a decentralized and distributed ledger and it offers security, transparency as well as immutability and the time invested for processing transactions is considerably lesser. By making the best use of blockchain technology, Cross-Border Payments can be facilitated by banks that are cheaper and quicker and also easily traceable.
Blockchain ensures that the costs are reduced to a great extent by eliminating the unnecessary intermediaries. With globalization there comes the need for seamless worldwide transactions and banks can always utilize blockchain solutions for providing remittance services in an efficient manner.
The pain points of traditional cross-border payments
Traditional Cross-Border Payments happen to be quite a time-consuming process and the process may be halted at different points. This leads to delays and a poor experience for everyone associated with the process. The delays happen due to incomplete information and also different screening processes to detect fraudulent activities. Standardization — this is something that is often lacking when it comes to dealing with the processing of international payments.
Cross-border payments may take a longer period of time to get processed through the traditional systems of banking. This happens because of the involvement of a large number of intermediaries which includes correspondent banks and also the clearing-houses. Each of the intermediaries adds sufficient time as well as cost to the transaction. For businesses this kind of delay can lead to disruption of cash flows, and create several other problems.
Cross-border payments are associated with various fees and this includes foreign exchange conversion costs, the intermediary bank charges, and the service fees. Higher costs of transactions can affect the profitability of the business in an adverse manner and it becomes a challenge to deal with the global competition.
Businesses dealing with cross-border transactions must be adept in navigating the various complexities associated with the exchange rates that keep fluctuating. A business might incur financial losses due to the factor of currency volatility and in case a payment gets delayed or if an exchange rate that is favorable for the business changes before the processing of a particular transaction. This can be particularly challenging for the SMEs as they might not have the adequate resources to get associated with advanced techniques of financial management.
One of the major pain points associated with Traditional Cross-Border Payments revolves around the lack of traceability as well as transparency. When a cross-border payment is initiated by a business through a traditional bank then there is often lack of clarity as to where the fund is present at a given point of time. There are a number of banks and intermediaries that are involved in the processing of the transaction and there are high chances of errors and delays and the status of the payment remains unknown.
Businesses require robust security measures to protect their international transactions from fraudulent attacks, cyber threats, money laundering and so on.
How does blockchain technology simplify and speed up cross-border transactions?
Innovative solutions are provided by blockchain technology and that comes as an answer to the different challenges that the industries face today. So how is it that blockchain manages the processing of transactions so very efficiently?
On a blockchain, every transaction is recorded on a public ledger and this makes it visible to all the participants.
The chances of fraudulent activities are reduced because of this transparency and it helps to increase the trust among the different users.
Blockchain makes use of cryptographic techniques for the purpose of securing data and this makes hacking or data alteration almost impossible.
Each block is linked to the previous one and this makes tampering with data quite difficult because of the chain that is created.
Blockchain works on a decentralized network and this minimizes the risk associated with a single point of failure and helps to increase the system resilience.
Blockchain helps to streamline the processes as the intermediaries are eliminated and thus transaction time and cost are reduced.
Execution of agreements does not require manual intervention.
Integrity of information is ensured as once recorded data cannot be deleted or altered.
Regulatory and compliance challenges in blockchain-based cross-border payments
Blockchain faces quite a bit of a challenge when it comes to navigating the compliance as well as legal frameworks.
The different jurisdictions have different regulations and also legal frameworks for cryptocurrencies, smart contracts, token offerings and other activities related to blockchain. It becomes important to understand and comply with the particular requirements of each jurisdiction.
Blockchain stores data in a decentralized and immutable manner and this raises enough concern about the data privacy as well as protection. Complying with the regulations associated with data privacy is critical when there is involvement of personal data.
Products and services that are based on blockchain need to adhere with the consumer protection laws as well as regulations. It is important to ensure transparency, disclose appropriate information to maintain trust of the consumers and compliance with the frameworks associated with consumer protection.
Complying with the laws associated with the international money transfers, foreign exchange controls and international payment regulations is needed in order to avoid penalties and legal issues.
It is crucial to understand the various legal implications associated with smart contracts and ensure compliance with the compliance regulations and laws in the relevant jurisdictions.
The Future of Blockchain in Global Remittances
Blockchain technology can provide insurance and banking services to that segment of the population that do not have access to the banking facilities. Thus in a way it leads to the creation of economic opportunities.
Blockchain projects like Stellar are being developed that would facilitate cross-border transactions and provide financial services to the communities that remain underserved.
Celo is another project that is going to make financial tools accessible to anyone who has a mobile.
Thus it can be said that the Future of Blockchain is indeed very promising.
Final Note
Global finance is being revolutionized by blockchain technology as it enhances efficiency and transparency of operations. The decentralized nature of blockchain helps to reduce costs and the risks associated with the different fraudulent activities. Different projects are being developed to make the entire system even more efficient and also accessible to communities that stay underserved.