Globalization has revolutionized business environment with the increasing amount of businesses and individuals making use of overseas suppliers. This trend is increasing the demand for transactions across borders. The rise in international commerce, ecommerce and internationalization of production shows that the demand for cross-border payments is expected to continue to increase rapidly. A Forrester study forecasts that cross-border eCommerce would span over at least 29 countries in Europe, Asia Pacific, Africa, North America, Latin America, and the Middle East by the year 2022.
The process of sending money from one place to another, be it to relatives, friends or even to pay for goods or services it is more expensive, time-consuming difficult, inconvenient as well as less transparent than regular domestic payments. This could have to do with the complexity involved in payments across borders with more risk and regulations than regular domestic payments.
In order to address these problems blockchain technology is a single-stop solution for improving the overall effectiveness of cross-border payment. A cross-border payment system built on the blockchain platform Stellar will make sure that financial services are accessible to people who have limited or no banking services. These include interconnections with domestic payment systems, expansion of closed-loop systems that are proprietary to boundaries, and peer-to-peer payments systems that are based on blockchain.
What are the problems facing traditional cross-border payment system?
The term “cross-border payment” refers to the process that see the money transferred from one nation and then to a different country. The traditional cross-border transaction consists of several entities such as banks and financial institutions, schemes providers, or even individuals who want to transfer funds across different territories.
When the funds are deposited the funds are processed and transferred through fragmented financial institutions. Each time, the fund’s custody shifts and the institution is charged fees in the range of a certain percentage. This results in increasing costs for the person who is sending. The total charges are calculated based on the amount of transfer as well as the country of destination. The whole process isn’t all that expensive, but it is also lengthy. Because the sender and the receiver do not have a shared ledger, the transaction has to be executed through a number of intermediaries. Payments across borders are essential when purchasing goods and services from one country to the next. But, they aren’t the most convenient option due to:
- The processing of international payments through banks is complex and difficult.
- Unpredictable currency exchange rates.
- The risk of robbery, hacking or theft.
1. Older operational systems
Banks typically encounter the problem of the messaging infrastructure when it comes to cross-border transactions. The majority of payments across borders are made using the SWIFT the MT103 messaging format. It is a reliable format, but can’t carry a lot of information over the limit of. If you require additional information, it’s handled via email. The manual process and non-automated messages in both the transactions render this process inefficient.
2. Inefficient payment processing
Because of a lengthy and complex process that cross-border payments can stop at any time. This can lead to delays and a negative client satisfaction for all parties. The reason for this delay could be the inadequacy of data on the payment as well as the need to conduct sanction checks or AML checks or fraud. Because of the absence of digitization in the data sharing process, transactions have to pass through several sophisticated communication channels.
For instance the transfer of funds between banks internationally is the traditional method to make international payments. Many of the major banks are able to hold a restricted amount of currency. If a sender from the US wants for a transfer of funds into UK. UK however the banking institutions don’t hold enough currency stocks. In these situations they will have to rely on their foreign bank partners for the execution of the transactions. Because the smaller banks don’t have foreign currency, they choose to use large banks to handle the cross-border transactions for them. This is just one situation, however there are many intermediaries involved in these procedures, which can cause delays in transactions.
The majority of B2B international payments are processed by banks. The transaction needs to pass through intermediary institutions such as banks, central banks overseas banks, and the central bank. Each has an accounting system that is independent. This means that the bank accounts require clearing and reconciliation with the other counterparties in a single transaction. This is a slow process which results in the need to take longer processing the transactions.
3. Privacy rules
A majority of banks must adhere to the regulations regarding privacy of personal data. The regulations define which customer’s information needs to be shared across various regions for processing the transaction. The separation, sorting, and arranging of this data takes a considerable amount of time. For instance, in some countries, banks are not able to communicate information about their clients between various departments. This regulation can be implemented with the help of a technological solution to make it easier for the whole procedure.
4. Lack of Security, Transparency and Low Security
Regular cross-border payment uses centralized payment. Customers are required to share their account as well as other details with intermediaries. Based on this information intermediaries process remittances as well as withdrawals. These massive customer data as well as transaction information shared that are shared with intermediaries could be an easy attack for hackers. When using third-party services for transactions that cross borders the transaction information is available across various platforms, foreign merchants and banks. This means that the data is more susceptible to being released in these modes. The parties involved with the transactions can’t keep track of their payments. As a result it is difficult to determine the final amount of payment as well as the time of delivery date.
5. Expensive
Fees are accrued through the bank that sends the money to international and national correspondent banks as well as foreign exchange exchanges at each stage through the process. The cost is typically at least 3 percent for high volume international payments. However, it could increase to 10% if the volume and value of payments aren’t high enough. It is also not clear whether institutions that make payments charge fees to the recipient.
For instance credit cards are a the most popular choice for customers who want to make cross-border transactions. All they have to do is input their card information and wait for their card to be authenticated. It’s a simple process but there’s more that is happening in the background. The cross-border payments require more effort from the credit card networks as well as the involved banks to convert the two currencies. The added workload results in an cost of the transaction which is passed along through the chain of payment.
Read More : https://www.leewayhertz.com/cross-border-payments-on-stellar/
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