Cross-border payments are a substantial global phenomenon that can provide a massive opportunity for small and medium enterprises. In fact, there are about 150 billion dollars worth of cross-border payments done by SMEs alone, growing at an impressive rate of 5% p.a. However, most of these payments still suffer from traditional challenges, especially structural ones like lack of transparency in terms of time and cost, poor analytics, and expensive FX spreads and fees.
Although SMEs contribute massively to cross-border payments, they are not getting the products or the support they require. So, can stablecoins and blockchain networks provide a greater ability to solve cross-border payments? This article will explain why we believe so.
Where it All Started
Many people recall Satoshi Nakamoto’s original whitepaper (Bitcoin: A Peer-to-Peer Electronic Cash System). This document, published in October 2008, discussed the initial plan and protocol to execute global peer-to-peer (P2P) payments as part of a new emerging technology and led to the start of Bitcoin and the development of the Web3 space.
Since then, there’s been various evolutions, and we’ve seen the industry grow in leaps and bounds - in many cases through speculative projects, but in others solving real-world issues. However, the potential for payments hasn’t been fully realized yet. Most solutions remain expensive, time-consuming, and simply unreliable.
We believe that cross-border payments, in particular for small and medium sized businesses, offer a massive opportunity for the Web3 space. We also think many of these developments are likely to come to fruition soon, especially due to the emergence of stablecoins and the growth of the lightning network in the Bitcoin sphere, and the increasing ways in which we can see them getting under a regulatory umbrella.
The Issues with Cross-Border Payments Today
As we mentioned, the market for cross-border payments is massive, with billions of dollars assigned to SMEs alone. However, there are many challenges we still have to face when making these types of payments.
For example, collateral requirements on both sides, particularly for Nostro and Vostro accounts, make it very expensive to make payments. There’s also a lack of transparency and trust, so banking network requirements that need to be created and delay exchanges. Lastly, because payments and settlements are disjointed, the time it takes to do transfer and reconciliation is even longer.
These are structural issues, but if you look at small and mid-sized businesses, they face even more problems that are beyond what regular users encounter.
Visibility and Traceability
For one, there isn’t sufficient transparency on what’s happening to the actual payments. You don’t know how many correspondent banks are involved in the process (though the number of correspondent banks has generally decreased globally) and what foreign transaction (FX) fees you’ll have to pay in the end.
Costs
Costs can also be very high, with expensive fees that make it almost impossible to get transactions done. We’re talking about $30-$100+ per transaction!
Speed
The speed of transactions is slow (it takes 2-5 days to settle on average), and the error rates for international payments can be extremely high; 4 to 6%, in fact. If any of these payments gets misplaced, you could end up spending months trying to recover it. Add that to poor customer service, and you end up with slow and complicated recon and lengthy settlement times.
Regulations
Compliance checks and regulations across jurisdictions also make it particularly difficult for SMEs because they don’t have all the resources to comply. Compliance checks and regulations in some jurisdictions lead to delays in the final payment or potentially block the use of funds until additional documents are provided. On top of that, if financial institutions provide legacy platforms and technology with fragmented data formats, the whole thing becomes even more problematic for SMEs to get good results.
Lack of Sophistication and Value Added Services
Lastly, SMEs get no access to financing and invoice discounting and have to deal with overwhelming tech requirements that subsume merchants’ limited tech resources and capabilities. There is little in terms of plugins to other business applications and insufficient support for handling complex regulatory requirements (for example, for submitting documents on foreign currency inflows and outflows). And there’s generally poor analytics and MIS access, such as those surrounding conversion rates.
The Opportunity in Cross-Border Payments
Over 70% of businesses surveyed worldwide believe accepting new forms of payment is fundamental to business growth. However, legacy platforms and technology are costly to maintain and make it impossible to integrate new systems that are built on modern technology, and the fragmentation in data formats has led to every bank focusing on their own priorities (something the CBPR+ specification is meant to resolve, although it’s unfortunately been pushed to March 2023).
As we can see, there’s a big problem with the quality of service for cross-border payments. In the last ten years or so, a number of fintech businesses have emerged that have attempted to solve some of these issues; for example, Wise and Revolut. However, while their efforts have been commendable, the problem seems to be much bigger than what these companies and institutions are capable of dealing with. And when they do find ways to do so, their focus has been far more effective within a European context or in specific parts of the world.
Going forward, we see an opportunity in dealing with these issues by enabling cross-border payments using stablecoins or the lightning network - something that could make these payments trackable in real-time with no need for corresponding banks or Nostro and Vostro accounts because trust is instant. This would be particularly effective for SMEs because their contribution is huge, yet they don’t get the right product and support.
These are early times, so the promise of blockchain in solving payments has had many false starts in the past. However, we believe that with the impending regulating frameworks, we can see stablecoins and new formats more mainstream. We think this will lead to a greater ability to solve cross-border payments, in particular for small and medium-sized enterprises.
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