Payments

What to know about blockchain-powered transborder payments

  • Blockchain technology can make cross-border payments faster, cheaper and more secure.
  • Banks and technology companies are increasingly investing in the technology; the challenge is interoperability among different ecosystems.
close

Email a Friend

What to know about blockchain-powered transborder payments

Could sending money to a friend in another country be as easy as sending a photo on an instant message? Many in the finance world think that should be the desired customer experience, powered by blockchain solutions. Right now, a cross-border payment can involve a handful of humans at either side of the process; it can take days; and, it’s expensive. Blockchain technology allows for the transfer of value without the need for third parties, technology that lets the process happen quicker and more efficiently. We break it down.

By the numbers

  • Value of cross-border payment flows in 2015: $150 trillion (McKinsey)
  • Average time to complete a cross-border transaction: Three to five days (McKinsey)
  • Average fee for outgoing international wire transfers: $44 (Nerdwallet)
  • Average fee for incoming international wire transfers: $10 (Nerdwallet)

How does it work?
Distributed ledger technology can speed up the amount of time it takes for cross-border currency transactions to settle and clear. IBM, which this week launched a cross-border payments system for banks using blockchain technology in partnership with startup Stellar and payments company KickEx, said its system is based on using a cryptocurrency as a bridge asset. It uses IBM’s blockchain for clearing and Stellar’s for settlement.

“The Stellar lumen [cryptocurrency developed by Stellar] serves as a bridge to provide the foreign exchange conversion in real time,” said Jesse Lund, vice president of global blockchain market development at IBM.

For example, if a U.S. customer wanted to send 100 Euros to a friend in Europe, the customer would log into their bank’s user interface to indicate that the target currency is Euros. The U.S. bank system would call the IBM system to initiate the payment. The customer would then be provided with an overview of the fees charged and how long the transaction would take. Once the customer agrees to these terms, the payment leaves the sender and reaches the recipient in 30 seconds.

The transaction would use IBM’s blockchain for clearing and Stellar’s for settlement. For the customer, it would mean a quick transfer of funds, but what would be happening on the back end is the dollars would very briefly be converted to lumens and then reconverted to Euros.

“The banks are interested in the use of digital asset as a bridge currency to facilitate this,” said Lund.

Another method to transfer value over blockchain is through tokenization. Cross-border payments app Circle is currently testing the tokenization of fiat currency.

“It’s the same way you would tokenize a share,” said Circle CEO Jeremy Allaire, who added that while a paper share is a certificate that entitles the shareholder the right to vote, a tokenized equity instead of a paper certificate is a cryptographic token that can be stored, secured and transferred using blockchain technology.

The advantages compared to traditional systems
Security is embedded into the system: “These networks we’re building are permission networks — you can’t download the software and boot it up on your computer,” said Lund. Others say it’s less vulnerable to hacks. “The beauty of blockchain technology is that it’s an immutable ledger — you can’t hack ledgers,” said Allaire.

Blockchain also cuts down on costs. According to Ripple, an active player on cross-border payments enabled by blockchain, its solution cuts 81 percent of payment processing costs.

What’s keeping blockchain-powered cross border payments from wider adoption

  • More use cases for digital currency: For a traditional cross-border payments provider like Western Union, unless a full ecosystem takes shape where digital currency is more widely accepted, it’s taking a ‘wait and see’ approach, instead supporting the development of the technology through an investment in the Digital Currency Group. “We are heavily regulated, operating in more than 200 countries and territories,” said Khalid Fellahi, svp and general manager, Western Union Digital. “Given the amount of regulatory scrutiny we face, any movement into new products or services requires due diligence and dialogue with regulators.”
  • Interoperability: “If you’re a business that’s thinking about how you’re going to integrate this, there’s a proliferation of so many different ecosystems, and there isn’t a sense of how you’re going to participate in the world at large and with all your traditional payments and still have access to what you’re developing,” said Michael Kleinsteuber, director and global head of cross border payments product development at Citi, speaking at the Consensus 2017 conference in May.

 

 

 

 

 

 

0 comments on “What to know about blockchain-powered transborder payments”

Finance Everywhere, Payments

Google launches digital wallet: 5 questions with Payments GM Arnold Goldberg

  • Google launched its digital wallet and virtual cards at its latest I/O developer conference, marking its first move in the payments space since the Plex project was scraped late last year.
  • Tearsheet spoke with Google's head of payments, Arnold Goldberg, about what this means for the Big Tech's journey in financial services.
Iulia Ciutina | May 13, 2022
Member Exclusive, Payments

Payments Briefing: ‘We penetrated the blue ocean opportunity of the Spanish-speaking market’ – NovoPayment’s Anabel Perez

  • This week, we take a look at Miami-based BaaS provider, NovoPayment.
  • We also discuss Bumped, a firm that rewards customers with equity in the brands they shop from.
Ismail Umar | May 12, 2022
Payments, Podcasts

What’s Happening in Payments Ep. 6: Quontic’s payment ring, Visa’s move into NFTs, and the new Square Stand POS system

  • This week, we discuss why Quontic Bank decided to launch a contactless payment ring.
  • We also talk about Visa's recent crypto and NFT-related activities, as well as Block's upgraded Square Stand POS system.
Ismail Umar | May 05, 2022
Payments

Rewarding shoppers with brand ownership: Bumped expands with a new browser extension

  • Bumped runs a service that rewards customers with fractional ownership of partner brands that they shop from.
  • The firm’s new browser extension notifies online shoppers every time their purchase is eligible for a stock reward.
Subboh Jaffery | April 27, 2022
Member Exclusive, Payments

Payments Briefing: ‘We want to be the bank that got people into wearables’ – Quontic Bank’s Steve Schnall

  • This week, we discuss Quontic Bank’s new contactless payment ring.
  • We also take a look at Square’s upgraded Square Stand POS system.
Ismail Umar | April 25, 2022
More Articles