In this third article of our miniseries titled "Demystifying Cryptocurrencies: Blockchain-based Applications and Opportunities in the B2B Payments Space", in partnership with Ripple, we look at how blockchain can expedite international payments.
Cross-border payments for any sized company doing business internationally are integral to the operations of the business itself. Every process should be efficient - in the name of international payments, this means delivering payments quickly, in a secure manner, and at a low cost. Traditionally, this takes 2-3 days, via bank wire, and with a fee you'd like to trust is reasonable. These are the usual terms for executing international payments and until recently, these were was as 'efficient' as corporate payments could get.
However, major innovations to the finance industry driven by the maturing of blockchain applications have financial professionals buzzing about how they can leverage this technology to power their own corporate overseas payments. Using Ripple as an example, we'll outline how the face of international payments is changing and how corporates can leverage blockchain to benefit from a more effective payments option.
Efficiencies of payments via blockchain
Corporate financial officers increasingly view blockchain, the global, decentralized distributed ledger platform, as a game changer for cross-border payments. Blockchain technology promises to facilitate fast, secure, low-cost international payment processing services (and other transactions). It relies on encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearing houses. The technology was initially used to support the digital currency Bitcoin, but is now being explored for a wide variety of applications that don’t involve Bitcoin.
promises to facilitate fast,
secure, low-cost international
payment processing services.
International payment processing services and retail remittances involving bank-to-bank transfers on behalf of corporate clients is the main area of blockchain activity that is experiencing live deployments in 2018. This area is ripe for disruption because the existing system (SWIFT) is old, slow, and costly, according to a report by Credit Suisse, which notes that today’s cross-border wire payments can take days to clear and involve fees as high as 10 percent.
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Ripple, for example, the world's only enterprise blockchain solution for global payments, leverages blockchain to optimize the world of payments in three distinct and competitive ways:
- Lower costs: Blockchain helps lower FX costs and liquidity requirements. And with instant payment settlement, funds aren't tied up in transit for days at a time. As a result, FX payment savings can range from 40% to 80% (or more) per transaction, according to Deloitte.
- Speed: Blockchain provides faster transaction times of four to six seconds on average, compared to two or three days with conventional payment systems. Payment is instant and on demand.
- Transparency: Every transaction has a verifiable record on the blockchain and each party involved can track settlement. This type of validated transaction provides each party with a critical layer of transparency.
It's no surprise that finance professionals are researching how they can leverage this new technology for their cross-border payments versus traditional methods.
Who benefits from blockchain efficiencies?
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The biggest beneficiary of blockchain technology over the next decade will most likely be companies doing cross-border payments on digital platforms. According to a recent report by McKinsey & Company, the worldwide payments industry will exceed $2.2 trillion in value by 2020, a number that could grow if financial institutions act to curb the high back office costs in managing traditional cross border payments. McKinsey estimates that businesses will need to dramatically slash costs by 90% to maximize their payment area's value over the long term.
This is where blockchain will be critical.
Ripple provides one frictionless experience to send money globally versus traditional payment methods that often involve more than one banking institution, long transfer times, and often fraught with delays. This revolutionary change to international payments is powered by blockchain.
Leveraging blockchain, “financial institutions can process their customers' payments anywhere in the world instantly, reliably and cost-effectively," Ripple states. Businesses and payment providers can use digital assets, like XRP, to further reduce their costs and access new markets that they normally could not reach.
Blockchain applications also offer companies a payment network protocol and distributed exchange, built on decentralized open platforms. Going forward, expect more financial institutions to use blockchain-based distributed ledger technologies to speed up client payments and cut down on costs. That means more satisfied clients, more transactions, and more opportunities to use streamlined blockchain payment systems to revolutionize the global cross border payments market—one transaction at a time.