Payments

Rethinking Cross-Border Payments

Embracing Digital and Blockchain Innovations for Global Efficiency

August 21, 2023

Cross-Border Payments

Globalization means that cross-border payments in different currencies are processed daily between companies. Without them, international trade in its current form would be unthinkable. It is estimated that in 2023 there will be approximately 14 billion cross-border B2B transactions with a total value of USD 39.3 trillion, i.e., about 38 million transactions with a total value of USD 411 billion per day.

However, traditional banking solutions such as the SWIFT network have so far been characterized mainly by long transaction times coupled with high costs. It can take up to 2 weeks for a supplier in the USA to receive their payment. For many companies, this is a significant risk.

However, there are already first innovative approaches to solve these problems. In addition to new solutions from neobanks and fintechs, blockchain technology offers opportunities to handle international payments more efficiently, thereby saving time and money and minimizing settlement risks for all parties.

Digital Reference Banks: A Cost-Efficient Alternative

So-called digital reference banks have increasingly carved out a niche in the financial ecosystem in recent years by offering faster and cheaper cross-border payments.

Platforms like Wise use a vast network of their own local bank accounts around the world and enable users to "skip" the international transfer. The money is moved within local borders, drastically reducing the costs and time associated with conventional bank transfers. This is not a new concept and has been practiced by existing banks for a long time. What is new is that this is done in conjunction with a fully digitized infrastructure, and the user seemingly receives their payment in real-time, while the digital reference bank merely makes a transfer in the background.

The provider Currency Cloud offers a similar product, with the focus here on enabling companies to simultaneously convert, hold, and manage multiple currencies - all via a modern API. Here again, the technical overhaul of an existing bank service represents the innovation.

Blockchain-Based Payments: Speed and Transparency Redefined

The advent of blockchain technology has given cross-border payments an additional new dimension. Blockchain protocols such as Stellar, Arbitrum, and Polygon are not just alternatives to the overloaded and expensive traditional systems but represent a complete re-conception of what it means to move values across borders. Transactions in these networks can be completed in seconds, regardless of national borders, and at a fraction of the cost. Furthermore, the inherent transparency of blockchain technology means that all parties can track the flow of money in real-time, creating unprecedented clarity and laying the groundwork for the settlement of blockchain-based assets such as tokenized securities.

For example, the Stellar blockchain protocol is designed for issuing and transferring digital representations of all types of money - dollars, pesos, bitcoin, pretty much anything. It is designed to enable all the world's financial systems to work together in a single network. However, successful use cases with banks acting as a trustworthy "anchor" in their respective countries, ensuring the exchange from traditional "fiat" money to digital representation, are still lacking.

Arbitrum and Polygon, originally focused on scaling Ethereum transactions, have expanded their utility to enable fast and cost-effective cross-border payments, with security and efficiency at the forefront.

In summary, with the increasing interconnectedness of the world, the need for innovative cross-border payment solutions becomes ever more critical. Neobanks are at the forefront of this change, leveraging digital reference banks and blockchain technology to offer B2B2C customers the speed, cost efficiency, and transparency they need.

Philipp Doppelhammer

CFO & Co-Founder

Transforming Banking for the Digital Age