In a global economy, financial institutions support the activities of business. The mobility of goods, services, capital, and people has created the need for interconnected financial networks that can transfer value where it is required.
A Network of Intermediaries
With cross border payments, there are a series of institutions involved who operate as financial intermediaries.
The transactions tend to be run through banks representing each party. Even when using a credit card, the purchaser has a bank from which the account balance is paid from. The merchant also has a bank where it receives payments from a company such as Visa.
The cost of cross-border payments carries a higher cost than domestic. Having so many intermediaries tends to make the process more expensive.
Blockchain is being touted as a technology that will revolutionize cross-border payments.
With cryptocurrency operating on top, the ability to operate as a medium of exchange and transfer value is present. Since there are no geographic boundaries recognized, the a transaction is simply between wallets. Where they are accessed from is not pertinent to the network.
Another benefit is the cost associated with transactions. Users are sending value on a peer-to-peer basis, with one wallet transacting with the other. There are no financial intermediaries involved. We also see one ledger instead of each institution having their own.
Settlement is much easier and quicker. As soon as a block is irreversible, the transaction if fully settled. Within the existing financial system, this could require days (or weeks) to complete. On blockchain, this can take place in seconds.
This could provide some competition for the existing financial system.
Types of Cross-Border Payments
There are basically two types of payment:
These are typically between financial institutions, either to support the financial institution’s customers’ activities, or its own cross-border activities.
This can include:
- borrowing and lending
- foreign exchange
- trading of equity, debt, derivatives, commodities and other securities
Governments and larger non-financial companies also use wholesale cross-border payments for large transactions generated by the import and export of goods and services or trading in financial markets.
These are typically between individuals and businesses. The key types are person-to-person, person-to-business and business-to-business. They include remittances, most notably money that migrants send back to their home countries.
Trillions of Dollars in Payments
The market for cross-border payments is into hundreds of trillions.
In 2022, it topped $150 trillion in business-to-business transactions. Customers added another $2.8 trillion interacting with businesses.
Estimates are that we are going to see this number grow to $250 trillion by 2027.