HOW CAN STELLAR BLOCKCHAIN SIMPLIFY CROSS-BORDER PAYMENTS?

Globalization has revolutionized business environment with the increasing number of companies and individuals using overseas suppliers. This has led to increasing the demand for transactions across borders. The rise in international commerce, e-commerce , and the internationalization of production indicates that demand for cross-border payments will continue to expand rapidly. A Forrester study forecasts that cross-border eCommerce will extend 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, whether for friends, family or to pay for services or goods costs more, takes longer and extremely inconvenient as well as less transparent than regular domestic payments. This is caused by the complexity and complexity payments across borders with more risk and regulations than regular domestic payments.

To address these issues Blockchain has been viewed as a one-stop solution that can improve the overall effectiveness of cross-border transactions. A cross-border solution for payment that is based on the blockchain platform Stellar will ensure that financial services are accessible to people who have limited or no banking services. These include interconnections with domestic payment infrastructures, the expansion of closed-loop, proprietary systems across borders, as well as peer-to peer payment systems that use blockchain.

What are the problems that 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 the receiver in a different country. The traditional cross-border payment consists of several entities such as banks and financial institutions, schemes providers, or people looking to transfer funds across different territories.

When the funds are deposited then the money is processed and transferred through fragmented financial institutions. Every time, the funds custody is changed 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 cost is calculated based on the amount of the transfer and the country of destination. The whole process is not just costly, but also lengthy. Since the receiver and sender do not have a shared ledger, the transaction has to be handled by a variety of intermediaries. Payments across borders are essential when procuring goods and services one country to the next. However, they aren't convenient due to the following reasons:

The processing of international payments through banking channels is extremely sophisticated and difficult.
Unpredictable currency exchange rates.
The risk of robbery, hacking or theft.

1. Operating systems that are out of date

Banks typically encounter the issue of messaging infrastructures in cross-border transactions. Most cross-border transactions are processed using 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 more information, it's handled via email. Manual processing and non-automated messages in both the transactions makes this process inefficient.

2. Inefficient payment processing

Because of a lengthy and complex process crossing borders can cease at any time. This causes delays and a negative customers' satisfaction for all parties. The reason for this delay could be due to insufficient details about the payment process as well as the need to conduct sanction checks or AML checks or fraud. Because of the absence of digitalization in the data sharing process, transactions must go through multiple channels of communication that are sophisticated.

For instance the transfer of funds between banks internationally is the traditional method to make transactions across borders. The majority of banks have a small amount of currency. Imagine that a recipient in the US wants for a transfer of funds in the UK and banks do not have enough currency stocks. In these situations they will have to rely on their foreign bank partners to complete the transaction. Since the smaller banks are not able to hold foreign currency, they choose for larger banks to handle cross-border payments for them. This is just one situation, however many intermediaries are involved in these processes which can lead to delays in transactions.

The majority of B2B transactions that cross borders are processed by banks. The transaction must pass through intermediary institutions such as banks, central banks and overseas banks. Each one has an accounting system that is independent. Thus, bank records require clearing and reconciliation with other counterparties at the same time. This is a slow process which results in the need to take longer processing the transactions.

3. Privacy rules

Most financial institutions must comply with the privacy rules for personal data. These regulations determine which client's data is required to be shared between different regions for processing the transaction. The separation, sorting, and organization of this information takes a considerable amount of time. For instance, in certain countries, banks are not allowed to communicate information about their clients between various departments. This regulation can be implemented with the help of a technological solution to simplify the whole procedure.

4. Transparency and low security

Regular cross-border payment uses centralized payment. Customers must share their account as well as other details with intermediaries. Based on this information intermediaries handle remittances and withdrawals. These massive customer data as well as transaction information shared that are shared with intermediaries could be an easy to target for hackers. When using a third-party to make trans-border transactions transaction information is available across various platforms, foreign merchants as well as financial institutions. Therefore, the information could be released in these modes. Participants during the process of transaction are unable to keep track of their payments. As a result it becomes hard to estimate the amount of the final payment and the time of delivery date.

5. Expensive

The fees are accumulated from the bank of the sender to banks that are correspondent to international and national banks and foreign exchange exchange at every stage of the process. The cost is typically at least 3 percent for large-volume international payments. However, it could increase to 10% if the volumes of transactions and the values aren't high enough. It is also not clear when financial institutions charge fees to the recipient.

For instance credit cards are the most an option that is used by many people who wish to make international payments. All they have to do is fill in their card's details and then wait for their card to be authenticated. It's very easy however there's a lot more that is happening in the background. Cross-border transactions require more effort from the credit card companies and banks for the conversion of the two currencies. This additional work is a cause for cost of the transaction which is then passed on to through the chain of payment.

How can blockchain be used to solve traditional challenges in cross-border transactions?

Blockchain can be described as a distributed ledger system that is capable of overcoming the many problems of traditional cross-border transactions. Although it requires a few steps to complete it allows immediate transactions for the sending party and recipient. The transaction information is recorded in a safe distributed ledger. Once an transaction is recorded the recipient is able to access the transaction - there are no intermediaries or delays, and there are there are no fees that are unnecessary.

After the payment has been made it is irrevocable and linked to all previous data on the Blockchain network. It promotes security and accountability. It is impossible to alter one chunk of information without altering the preceding blocks within the chain. The transaction is secure, speedier and less expensive, and it has all-inclusive visibility across the world. It takes about 4 to 6 seconds to complete the transaction, which reduces cost to between 40 and 80%.

The following attributes of blockchain differentiate it when it comes to executing cross-border transactions.

Real-time: Payment transfers can be completed in just a few seconds, helping the recipients with quicker access to the funds.

Lower cost: A decrease in the number of intermediaries decreases the fees charged on payment, which is advantageous to the Financial institutions as well as the customers.

Secured: Information is constantly added to the blockchain using secure Hash (linked back to previous blocks) as well as a unique identity and the time stamp. This is why the immutable nature of blockchain makes transactions secure from tampering, thereby reducing the chance of cyber-crime.

In the event that blockchain records individual records it is not ambiguous or duplicate data within the network.

Transparent: Anyone on the blockchain is able to view the entire ledger (or the blocks) of transactions, without hiding of data.

By using bidirectional communication and the settlement features included in a blockchain system such as Stellar it guarantees that the transaction is verified prior to making a transfer of funds. If the transaction isn't accepted, the bank or the parties are immediately informed and the funds are not transferred.

Traditional methods of sending and receiving cross-border transactions are time-consuming and costly. They are also susceptible to mistakes and can take several days to settle. So, the use of the most efficient blockchain-based payment systems can result in speedy safe, smooth and clear cross-border transactions. This is why the platform has gained popularity in the remittance industry because of its enormous potential advantages.

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