This article has been contributed by Balaji Jagannathan, Co-founder and Director, Paycorp.io.
The global landscape of trade and commerce has witnessed remarkable advancements in recent decades, particularly in terms of the speed at which goods and services can be transferred across borders. However, the same cannot be said for cross-border payments, which have historically lagged behind in terms of efficiency and cost-effectiveness.
FXC Intelligence is a prominent provider of data and intelligence for cross-border payments, which empowers companies with invaluable strategic insights, expertise, and market awareness. According to FXC Intelligence's data analysis, the market size of B2B cross-border payments is projected to reach $39.3 trillion in 2023. Furthermore, the industry is anticipated to witness substantial growth, with a projected increase of 43% by 2030, reaching an impressive market size of $56.1 trillion.
SWIFT and the Emergence of Blockchain Technology
For many years, cross-border payments heavily relied on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, which provided a reliable method for transferring funds internationally. SWIFT has also played a crucial role in standardizing payment processes across different countries and currencies, becoming the de facto mechanism for the majority of cross-border transactions.
However, the past decade has brought about significant competition for SWIFT, driven primarily by the emergence of distributed ledger technology, commonly known as blockchain technology. This technological innovation has paved the way for alternative payment solutions that challenge the traditional dominance of SWIFT. In response, SWIFT has recognized the need to embrace technology, including blockchain, to stay relevant and address the changing landscape of cross-border payments.
Blockchain: Transforming Cross-Border Payments
Blockchain technology, though relatively new, has emerged as a transformative solution in the realm of cross-border payments. By leveraging distributed ledger technology, blockchain offers enhanced security, transparency, and efficiency in the transfer of funds across borders. It enables direct peer-to-peer transactions, eliminating intermediaries and reducing transaction costs. Blockchain's decentralized nature ensures real-time verification and immutability of transactions, mitigating the risk of fraud and error. Additionally, smart contracts on the blockchain automate payment processes, streamlining cross-border transactions. With its potential to revolutionize the cross-border payment landscape, blockchain is poised to reshape global commerce, facilitating faster, more secure, and more cost-effective international transactions.
Evolution of Domestic Instant Payment Networks
Furthermore, we are witnessing a rapid evolution of domestic instant payment networks in various countries. The United States, for instance, is making significant strides in Real-Time Payments through initiatives such as The Clearing House's RTP environment and the Federal Reserve's FedNow environment. These domestic instant payment systems are gradually converging, laying the foundation for instant cross-border payments.
Instant Cross-Border Payments Empowering Global Trade
The prospect of instant cross-border payments is not far off, and it promises to be a game-changer for global trade and commerce. Imagine the seamless movement of funds from any currency to any currency, from anywhere to anywhere, all in an instant. This transformative capability will eliminate the time-consuming hurdles associated with traditional cross-border payments, fostering a truly interconnected global marketplace.
When conducting international sales and receiving payment in your currency, such as US dollars, a fee of 0.60% is levied. On the other hand, if you sell a product to a customer in their local currency, regardless of which currency it is, a fee of 1.00% will be incurred. When dealing in exports, this money can amount to a large sum. The aim of introducing new technology is to lower this cost and make this system cost-effective as well as time-saving.
Thus, we can be assured that the advent of instant cross-border payments is expected to significantly reduce the cost of transactions. As the volume of transactions increases and economies of scale come into play, the cost per transaction is projected to decrease. This phenomenon can be likened to the telecom industry's transition from special fees for long-distance calls to a single tariff for calls made anywhere in the world. Once the technology became ubiquitous, the increased volume justified the drop in cost.
The implications of instant cross-border payments extend beyond efficiency and cost-effectiveness. The newfound ease and certainty of receiving instant payment upon delivering products or services across borders will instill confidence in exporters, encouraging them to expand their operations and engage in higher volumes of trade. This newfound level of trust and convenience will virtually erase geographical borders, transforming the world into one vast marketplace for trade and commerce.
The realization of efficient and cost-effective cross-border payment solutions will undoubtedly reshape the global business landscape, creating new opportunities for businesses and fostering economic growth worldwide. As technologies continue to advance and cooperation between domestic instant payment networks strengthens, the vision of instant cross-border payments will soon become a reality, unleashing the full potential of global trade and cementing the world as a unified marketplace for commerce.