Globalization has transformed business environment with the increasing amount of businesses and individuals using overseas suppliers. This trend is increasing the demand for transactions across borders. The rise global trade e-commerce , and internationalization of production shows that the demand for cross-border payments is expected to continue to increase rapidly. A Forrester study suggests that cross-border eCommerce will extend across at minimum 29 countries in Europe, Asia Pacific, Africa, North America, Latin America, and the Middle East by the year 2022.

Transferring money from one country to another, be it to relatives, friends, or even to pay for services or goods it is more expensive, time-consuming difficult, inconvenient more opaque than payments made in the domestic market. This could be caused by the complexity and complexity international payments that pose more risks and regulations than regular domestic payments.

In order to address these problems blockchain technology has been viewed as a one-stop solution for improving the overall effectiveness of cross-border transactions. A cross-border solution for payment that is based on the blockchain platform Stellar will make sure that financial services are available to those who have limited or no banking services. This includes interconnections between local payment systems, expansion of closed-loop, proprietary systems across boundaries, and peer-to-peer payments systems that are based on blockchain.

What are the problems facing traditional cross-border payment system?

The term “cross-border payment” refers to the process where the funds are transferred from one country and then to the receiver in a different country. The traditional cross-border transaction consists of several entities such as banks or financial institutions, scheme providers, or people looking to transfer funds across territories.

When the funds are deposited then the money is processed and transferred through fragmented financial institutions. Every time, the funds custody shifts and the institution is charged fees in around 1. This process results in an increase of costs for the person who is sending. The total cost is calculated based on the amount of transfer as well as the country of destination. The entire process isn’t just costly, but also lengthy. Because the receiver and the sender don’t share a single ledger, the transaction has to be executed through a number of intermediaries. The need for cross-border payments is essential when procuring goods and services one country to the next. But, they aren’t the most convenient option due to:

• International payment processing via banks is complex and complex.
• Unpredictable currency exchange rates.
• Risques of robbery or hacking or theft.

1. Operating systems that are out of date

Banks typically encounter the problem of the messaging infrastructure when it comes to cross-border transactions. The majority of payments across borders are processed using SWIFT the MT103 messaging format. It is a reliable format, but does not allow for the transfer of large amounts of information beyond the limit of. If you require more information, it’s processed via email. The manual process and non-automated messages for both parties to the exchange render this process unproductive.

2. Inefficient payment processing

Because of a lengthy and complex path that cross-border payments can stop at any time. This can lead to delays and a poor client experiences for the two parties. The cause of the delay could be due to insufficient data on the payment as well as the need to conduct sanction checks or AML checks or fraud. Because of the absence of digitalization in the information sharing process, transactions have to pass through multiple channels of communication that are sophisticated.

For instance the transfer of funds between banks internationally is the most common method of making international payments. The majority of banks are able to hold a restricted amount of currency. If a sender from the US wants for a transfer of funds into the UK and banks do not have enough stock of currency. In such a case they must rely on banks from abroad to complete the transaction. Since the smaller banks are not able to hold foreign currency, they choose for banks that are large to host cross-border transactions for them. This is only a situation, but there are many intermediaries that are involved in these processes and can cause delays to transactions.

The majority of B2B international payments are processed by banks. The transaction needs to pass through intermediary institutions such as banks, central banks and overseas banks. Each one has an accounting system that is independent. This means that the bank accounts require reconciliation and clearing with other counterparties at the same time. This process is slow which results in the need to take longer processing the transactions.

3. Privacy laws

Most banks must adhere to privacy laws for personal information. These regulations determine which client’s information needs to be shared between different areas for processing transactions. The separation, sorting, and organization of this information takes a considerable amount of time. In some countries, banks are not able to communicate information about their clients between various departments. This regulation can be implemented more effectively using a technology to simplify the whole procedure.

4. Transparency and Low Security

Regular cross-border payment uses centralized payment. Customers are required to communicate their accounts as well as other details with intermediaries. Based on this information intermediaries process remittances as well as withdrawals. These massive customer data as well as transaction information shared that are shared with intermediaries could be an easy to target for hackers. When using third-party services for trans-border transactions transaction information is accessible across multiple platforms, foreign merchants and banks. This means that the data could be exposed in these ways. Participants with the transactions can’t keep track of their payments. As a result it is difficult to determine the amount of the final payment and the date of delivery date.

5. Expensive

The fees are accumulated from the bank of the sender to banks that are correspondent to international and national banks and foreign exchange exchange at every stage of the process. The fee is typically at least 3 percent for large-volume international payments. However, it could be increased to 10% when the volumes of transactions and the values aren’t high enough. It is also not clear when financial institutions charge fees to the recipient.

For instance credit cards are a the most popular choice for people who wish to make international payments. All they have to do is fill in their card’s details and then wait for their card to be authenticated. It’s a simple process but there’s more that is happening in the background. The cross-border payments require more effort from the credit card companies and banks for the conversion of the two currencies. This additional work is a cause for cost of the transaction which is then passed on to in the process of making payments.

How can blockchain be used to solve traditional challenges in cross-border transactions?

Blockchain can be described as a distributed ledger system that is capable of overcoming the various issues with traditional cross-border payments. Although it requires a few steps to complete it allows directly-translated transactions between the payer and recipient. The transaction information is recorded in a safe distributed ledger. When the transaction is confirmed the party receiving the payment is able to access the transaction – there are no intermediaries and no delays, plus and no extra fees.

After the payment has been made it is irrevocable and is tied to all previous information in the network of blockchain. It ensures accountability and security. It is impossible to alter one piece of data, without altering the preceding blocks within the chain. The transaction is safe, faster and more affordable, as well as having all-inclusive visibility across the world. It takes about four to six seconds to process the transaction, and it reduces cost by 40 to 80%..

The following characteristics of blockchain distinguish it in the execution of cross-border payments.

Real-time: Payments are completed in a matter of seconds, providing those who need it with quick access to the funds.

Lower cost: A decrease in the number of intermediaries decreases the fees charged on payment and benefits both the financial institutions and customers.

Secured: Information is constantly added using secured Hash (linked back to previous blocks) as well as a unique identity and the time stamp. Therefore, the immutability of blockchain makes transactions secure from tampering, thereby reducing the chance of cyber-crimes.

Blockchain is unambiguous: Since it stores distinct records There is no confusion or duplicate data in the blockchain chain.

Transparent: Anyone on the blockchain is able to view all the transactions in the ledger (or the blocks) of transactions, without privacy concerns.

Through bidirectional messages and other settlement elements included in a blockchain system such as Stellar which ensures the transaction is vetted prior to making a transfer of funds. If the transaction cannot be completed, both banks or other parties are immediately informed and the funds are not transferred.

Traditional methods of sending and receiving international payments can be cumbersome and costly. They are also susceptible to mistakes and can take some time to settle. So, the use of excellent blockchain-based solutions for payment will result in quick smooth, secure, and transparent cross-border transactions. This is why the platform has gained popularity in the remittance industry because of its huge potential advantages.

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