Globalization of the economy, digitalization of finances, and increased demand for ease of payments have provided an impetus to cross-border transactions. Given this background, it comes as no surprise that the global cross-border payment flow is slated to cross USD 156T by the end of 2022 – registering a CAGR of 5%.

Amongst the multivariate factors driving this upward trajectory, technological advancements have played a pivotal role in facilitating this behavioral and institutional transformation. More specifically, the growth and consolidation of Blockchain technology have spearheaded the revolution.

Could Blockchain lead the way in the future of cross-border payments? Here’s a look.

Problems With Traditional Cross-Border Payments

A traditional cross-border payment ecosystem sees many participants and stakeholders. You have the payer and the payee, banks or financial institutions, payment instruments, foreign exchange agents, risk assessors, infrastructure operators, and more. Given such a heterogeneous constitution, such an environment is prone to issues like:

Inconsistent Customer Experience

While cross-border payments will bring about global parity, the customer experience would vary from country to country. After all, the financial maturity of a first-world country cannot be compared to that at the grassroots level of a developing nation. Similarly, cultural barriers may also come in the way of how affairs are handled in each geography.

Poor Rate of Financial Inclusion

While inconsistent customer experience is a macro event, financial inclusion would be a problem on the country-wide stage. Your everyday customer may not have access to financial institutions extending cross-border payment services. At the same time, the lack of financial literacy can pose worrisome blockades to the development on this front.

Regulatory and Compliance Issues

Once again, different regions will involve disparate regulatory bodies, authorities, and jurisdictions. As a result, ensuring compliance and adherence to regulations can be an exhausting and time-consuming process. Whereas, non-compliance could have serious repercussions.

Operational Problems

As a new and growing sector, cross-border payments are yet to witness industry-wide standardization. While the ISO 20022 has attempted to make the message standards uniform, they are yet to take root to combat procedural inefficiencies, redundancies, and problems that render the process costly and resource-intensive.

Lower Cost-to-Benefit Ratio

One of the greatest issues with why financial institutions have failed to make headways in the area of cross-border payments is simply because it is not profitable! The handling of different currencies, managing the process, keeping up with the exchange rates, and the high cost and risks associated with each of it is far too high to justify the effort.

Vulnerability to Fraud

Even though the financial sector has made resounding efforts to address risk and fraud, it still has a long way to go, especially when it comes to cross-border payments. There have been far too many instances of hackers and malicious entities gaining unauthorized access to the Central Banks of one country to reroute cash to accounts in different countries.

How Blockchain Addresses the Issues of Cross-Border Payments

SWIFT, the gold standard for cross-border payment, takes 3-5 days on average to settle payments, with a failure rate of 4%. This fact illustrates how speed, cost, opacity, and performance are the primary pain points linked to cross-border payments, even when the best of the lot is involved.

On the other hand, surveys have discovered that Blockchain solutions enable individuals or financial institutions to complete transactions successfully in a record time of five seconds with a cost reduction to the effect of 60 to 40%!

Here’s a look at how it is made possible:

Procedural Efficiency

Blockchain development services transform every cross-border transaction – be it B2B, B2C, C2C, etc. – into a simple P2P exchange. The establishment of direct contact cuts down the number of parties involved and makes the overall process more efficient. As a result, these decentralized cross-border transactions, in general, are faster, more affordable, and more transparent.

Transparent, Public Network

Blockchains operate on global, public networks. As a result, every transaction is recorded in an immutable, distributed ledger that can be accessed through the network. Such a setup addresses the issue relating to transparency regarding the transfer of digital assets. There will now be greater visibility of cross-border payments.

Seamless Interoperability

In addition to transparency and robust security by establishing a unique digital identity, open Blockchain networks also contribute to seamless operability regardless of geographic divides. Even if the cross-border payments were to take place across different Blockchain networks, the interoperability between them will facilitate lossless data, assets, or information transfer through effective collaboration.

Also Read: Top 5 Safe and Convenient Ways to Buy Bitcoin

Room for Innovation

What we are witnessing in the current time and age is just the tip of the iceberg. Blockchain technologies are bound to further refinement with time and as the rate of adoption ramps up. In fact, we are already seeing how innovations like Smart Contracts are furthering the applicability of Blockchain in financial security.

The Way Ahead

As confidence in Blockchain technology continues to grow, it would be one of the primary enablers of cross-border payments. Given such a trend, Blockchain development services will find newer ways to embrace innovation, enforce compliance, eliminate frictions and barriers to entry, and ensure greater security – all of which will further highlight the role of Blockchain in cross-border payments.