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How Blockchain Is Used for Cross-Border Payments

Topics: Credit & Payments

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.

blockchain based(source)

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.

Cross Border Payments: Disadvantages of Traditional Payment 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 sends it to the receiving company. Both banks charge fees at every step of the process. As a result, there are four clear disadvantages to traditional cross-border payment systems: 

  • too many steps
  • too many players
  • too long
  • too expensive transactions

The cost of such transactions is 7% on average. Besides, it takes days for the financial operation to complete. Finally, it’s not entirely safe, because the bank can be hacked, robbed, damaged, etc.

bitcoin cash(source)

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 Blockchain for B2B Payments?

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?

In May of 2019, Singapore’s Central Bank (Bank A) sent a payment to the Bank of Canada (Bank B) using blockchain technology. To explain how Bank A would send money to Bank B, let’s say Bank A had $100 to send.  The following steps would take place:

  1. Bank B generates a random number to create a hash and sends it to Bank A. 
  2. Bank A deposits $100 in an escrow account on the blockchain and sends the hash to the intermediary bank’s local branch. 
  3. The intermediary bank checks the smart contract to make sure that money is in escrow for real, and sends the hash to its Canadian branch. 
  4. The Canadian branch also deposits the money in another escrow account within the blockchain and sends the hashed time-locked contract to Bank B. 
  5. Bank B checks the contract and makes 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. 
  6. Finally, it sends the secret key to its branch that would then 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

Popular 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. 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. Enterprises that are jumping on the blockchain bandwagon are likely to gain a competitive advantage over those who stick to traditional methods. In summary:

  • The blockchain contains information about all transactions that have ever been made within it, which records all payments between parties
  • A bank is 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 time and stress

Looking for a tested, safe B2B international payment solution for your business? What about something even better than the blockchain? Apruve can help you easily extend risk-free credit to your international customers. Learn more about Apruve's international services or contact Apruve’s specialists to sign up for a demo today!

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