Marcelo Gracietti, CEO of Cheesecake Labsa software consulting, design and engineering company that helps create successful technology products.
As CEO of a company that develops mobile digital wallets for different countries and applications, I have a global vision of blockchain technology and its transformative potential. Its potential for cross-border payments, in particular, will be crucial for the global economy.
Traditional cross-border payment methods are often plagued by high costs, slow processing times, and a lack of transparency. Blockchain technology has the potential to transform this landscape by offering faster, more affordable, and more transparent payments.
This article explores the current state of cross-border payments, highlights the challenges of traditional methods, and demonstrates how blockchain could transform the industry.
Challenges facing traditional cross-border payment methods
The cross-border payments industry serves a variety of needs, including corporate transactions, small business (B2B) transactions, business-to-business (B2C) transactions, consumer-to-business (C2B) transactions, remittances, and other consumer-to-consumer (C2C) payments.
In 2023, remittances to low- and middle-income countries reached $669 billion, an estimated growth of 3.8%. Mexico received $61.2 billion in remittances, making it a significant recipient of cross-border payments. The Philippines received remittances estimated at 9.3% of its GDP in 2021. In Brazil, 84% of recipients used digital methods, highlighting its global lead in the adoption of digital applications for remittances.
Despite the growing volume of digital transactions, cross-border money transfers remain more complex and costly than domestic payments. Many citizens of other countries working in the United States, for example, often face challenges setting up bank accounts, establishing credit, and sending money home.
Similarly, workers from the EU and the US may need to use the SWIFT network, which can involve additional intermediary banks, leading to higher fees and slower processing times. The World Bank highlights the inefficiencies of the current system: a $200 transfer costs an average of 6.35%, with banks charging around 12.66%. Despite efforts to reduce costs, the SWIFT network is targeting a 3% reduction by 2030, which is still a long way off.
Traditional money transfer companies like Western Union, MoneyGram, and Remitly offer fast cross-border payments, often completing transactions in less than two minutes. However, these companies offer faster services at the cost of pre-funding. Many traditional money transfer services also lack transparency, leading to unclear fees and processing times.
Navigating regulatory and compliance requirements across countries can also be challenging, leading to longer processing times and higher costs. Similarly, inclusion issues persist, as people in places with poor financial infrastructure or strict regulations struggle to receive money.
These challenges highlight the need for more innovative solutions that can reduce costs, improve speed and transparency in cross-border payments. In the competitive landscape of cross-border payments, understanding user needs is essential. According to Mastercard’s Borderless Payments Report, the top drivers influencing users are lower fees, faster delivery and simplicity.
The role of blockchain in cross-border payments
Businesses now view blockchain technology as a customer-centric digital product that can help payment providers create faster, cheaper, and more transparent solutions.
Companies in this space include JP Morgan, Circle, Ripple, and solutions leveraging the Stellar network, such as Moneygram Access, FinClusive, Anclap, BOSS Money, and Airtm. (Full disclosure: My company, Cheesecake Labs, is a Stellar development partner.)
Developing a competitive blockchain-based payment product involves considering both payment and product attributes. As the Visa Economic Empowerment Institute points out, an effective payment solution must consider multiple attributes.
For blockchain-based solutions, these attributes include, but are not limited to:
• Robust security against fraud.
• High reliability of transactions.
• Rapid recovery from disruptions.
• Near instant processing.
• Clear information on prices and timetables.
• Consistent reliability of transactions.
• Wide accessibility across different user groups and locations.
Once the right blockchain infrastructure is in place, key attributes of a great payments product should include:
• Build or leverage a trusted brand.
• Design an intuitive user interface.
• Provide strong customer support.
• Ensure seamless integration with other financial processes.
• Provide value-added services such as rewards and alerts and maintain the highest standards of privacy and data protection.
By combining these payment and product attributes, businesses can develop a blockchain-based payment product that meets user needs for security, speed, cost-effectiveness, and ease of use, which can help alleviate challenges associated with traditional cross-border payment methods.
Conclusion
Blockchain technology can prove crucial in addressing traditional money transfer challenges and meeting evolving user needs through well-designed products. It has the potential to revolutionize the financial landscape and drive greater financial inclusion around the world, but challenges remain for broader adoption.
In addition to showing users the benefits of the technology, the industry will need to work to overcome regulatory hurdles in some countries and design user-friendly solutions for non-tech savvy individuals. Overcoming these hurdles will be critical for blockchain to be fully adopted and realize the potential of cross-border payments.
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