When it comes to international trade and globalisation, there is one factor that can sometimes go unnoticed, and which we do not discover until we come face to face with it. This is international payments.
The moment we pay bills or receive payments from foreign companies, we enter the zone of uncertainty. How much will our bank charge us for issuing or receiving the transfer? will there be any additional intermediary bank fees? how long will it take for the funds to be available to the other party? will we suffer any blockages for trading with countries with restrictions? will there be any problems related to money laundering controls?
In a USD 150 trillion B2B market, fees depend on the method used, destination, amount of payment and exchange rate (with even higher fees for exotic currencies). It is estimated that on average the net costs for international payments are between 0.3%-10% of the amount sent.
Over the last 10 years, with the advent of fintechs and new payment institutions, cross-border payment fees have been progressively lowered. However, these fees account for more than USD 140 billion annually, which enriches the financial sector and hampers international trade.
The good news is that blockchain technology is here to help. Thanks to cryptocurrencies, most of these payments can be managed, with savings of more than 80-90% (USD 120 billion annually). The idea is very simple: first the fiat currency is exchanged for a stablecoin cryptocurrency, then the amount is sent to the recipient’s wallet, and finally exchanged back to the fiat currency of the recipient of the funds.
The use of blockchain for cross-border payments, could save the industry more than USD 120 billion annually.
In this way, the uncertainty of the commissions to be paid and, above all, the time, is largely eliminated, as the entire transaction can be carried out in a matter of MINUTES.
For example, a European company needs to pay USD 100,000 to a Chinese factory. In the traditional way the cost would be as follows:
- Conversion of EUR 90,900 to USD 100,000 with a traditional bank: 1%, i.e. USD 1,000.
- International payment cost: USD 50
- Intermediary bank cost? Depending on the destination country, currency and issuing bank, a second intermediary bank may be involved, which may charge an additional fee of around USD 50.
In total USD 1,100 for a payment of USD 100,000 or 1.1%.
The same example using blockchain technology:
- Conversion fiat-crypto (onramp): 0.10% i.e. USD 100
- Payout: USD 2
- Crypto-fiat conversion (offramp): 0.10% i.e. USD 100
In total USD 202 i.e. 0.20%, 5 times cheaper than the traditional payment.
In addition, blockchain includes the following special features:
- Increased security: Cryptocurrency transactions are recorded on a decentralized ledger (blockchain) which makes them secure and resistant to fraud.
- Certainty in the process: the entire transaction can be traced transparently, thanks to blockchain technology.
- Speed: including both onramp and offramp operations, and the transfer of funds, the whole process could be perfectly executed in less than 1 hour.
- Country agnostic: Independence from the destination country and currency, so less liquid currencies will not increase operating costs.
The use of blockchain technology alone, for cross border payments, could save more than USD 120 billion annually to the industry.
The next step? Cross-border payments using digital currencies issued by central banks (CBDCs).
The methodology is the same, with the additional guarantee that the funds pass through the central bank, with the benefits that this brings. A decentralised system for exchanging CBDCs is still under development. With these digital currencies, the process could be made even cheaper, with savings of up to 95%, and transactions can be executed in seconds or minutes.
It is clear that the use of blokchain technology for a multitude of uses has enormous potential. Cryptocurrencies and their implied volatility will be drastically reduced as their use for real trading rather than speculation becomes more popular.
