Cross-border payment methods haven’t evolved much within the past decade. It still takes days and requires a substantial fee to complete a transaction between people or companies from different countries. To address this issue, one quite powerful solution was released — blockchain.
How Blockchain Facilitates Transactions
The word “blockchain” has become popular in recent years, yet only a few understand its meaning and potential. Blockchain is a ledger-like system that contains information about all transactions that have ever been made within it. Every new piece of data is put in a block and linked to the previous one, forming a kind of immutable chain. Thus, blockchain records all payments between parties. And the features that help it stand out are its biggest strengths: safety, speed, and transparency of cross-border payments.
What’s Wrong With Traditional Systems?
Today, if one company sends money to the other, there is always at least one extra player between the parties — a bank. The sender asks a bank to complete a transaction abroad. The bank gets in touch with a bank in the country, where the money should go. The contacted bank accepts the payment and provides it to the receiving company. Both banks charge fees at every step of the process. As a result — too many steps, too many players, too long and too pricey transactions.
The cost of such transactions is 7% on average. Besides, it takes days for financial operation to complete. Finally, it’s not entirely safe, because the bank can be hacked, robbed, damaged, etc.
Blockchain is a solution for companies and people who make regular cross-border payments. It is a secure, quick, cheap and transparent way to transfer money.
Even though blockchain technology seems hard to understand and explain, it has a simple procedure. Instead of completing several steps, blockchain provides direct transactions between the sender and the receiver. Besides, it stores all the related data in a secure distributed ledger. The payment can’t be reversed and is linked to all the previous data in the blockchain network. This fosters security. You can’t hack a single block of data without hacking all the previous blocks in the chain.
All in all, blockchain technology allows companies and individuals to run transactions within 4-6 seconds and reduces the cost up to 40-80%, according to Deloitte.
Using blockchain, companies will have to pay either a single fee or nothing at all. This would save a fortune for major international businesses that have to send payments over the border regularly.
What Are The Benefits Of Payments Via Blockchain?
Blockchain is definitely a technology with strong potential that we should not ignore. Around 30% of global organizations are involved in experimenting with blockchain. What is the reason?
- It offers direct payments from company to company, or from individual to individual;
- It reduces the cost of international payments;
- It reduces the time for the money to reach its destination;
- It maintains data on each and every detail of the transaction;
- The data is encrypted, so it is a highly secure process;
- The payment transparency is increased.
The biggest challenge of blockchain, though, is its poor regulatory reporting. However, there are various thoughts on how to deal with the issue. Some suggest that adding the extra data layer along the payment process can solve it. The layer should consist of data on the banks/individuals/parties involved in transactions.
How Blockchain Transactions Work?
This May, Singapore’s Central Bank (Bank A) sent a payment to the Bank of Canada (Bank B) using blockchain technology. And here how it looked like.
Let’s say, Bank A had $100 to send. The first step that would be implemented is Bank B generating a random number to create a hash and sending it to Bank A. Bank A would deposit $100 in an escrow account on the blockchain and send the hash to the intermediary bank’s local branch. The intermediary bank would check the smart contract to make sure that money is in escrow for real and send the hash to its Canadian branch. The Canadian branch would also deposit the money in another escrow account within the blockchain, and send the hashed time-locked contract to Bank B. It, in its turn, would check the contract and make sure that there is the right amount of money. Then with the use of that first random number generated, it would unlock the funds from the escrow account. Finally, it would send the secret key to its branch that would share it with Singapore’s branch, so that it can also unlock the escrow account.
The whole process is completed within seconds, not days, and is completely safe. Parties have the same access to the data in blocks in one place.
A Final Word
Current options for international payments are full of drawbacks. Money transfers are pricey, take a long time to finalize and involve intermediaries. Thus, more and more companies are seeking a better way to send and receive funds. Fortunately, there is one.
Blockchain technology is still new and poorly tested to be common worldwide. However, big-name companies are exploring it and providing valuable data in favor of the method. Blockchain has everything that current international payment methods lack: safety, speed and transparency.
Perhaps, we are witnessing a new shift in the trends. Companies that are jumping on the blockchain bandwagon are likely to gain a competitive advantage over those who stick to traditional methods.
- Blockchain contains information about all transactions that have ever been made within it which records all payments between parties
- A bank always an extra player between the parties which requires you to pay multiple fees with your transactions
- Blockchain offers direct payments from company to company, and reduces costs for everyone involved
- Blockchain allows banks to check the contracts involved to see if the right amount of money was provided which is done in seconds, saving people so much time and stress
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