If you’re a business owner and you sell products or services around the world, one of the problems you’ve likely encountered is getting paid in a timely manner. In today’s society, same day settlements are rare and usually take between 2-5 business days to process. For well-capitalized companies, waiting for a payment to settle or meeting necessary prefunding requirements may not be an issue. Prefunding is the requirement to pay in advance for transactions processed by a bank regardless of the payment due or value date (1). This can pose a challenge for undercapitalized organizations and continues to be a major pain point for those in developing countries making cross-border transactions. 

Other challenges with cross-board transactions include the difficulty of tracing and predicting settlement times, high costs and lack of transparency of costs, compliance with payment service provides (PSPs), and access constraints for the unbanked who choose to send money in other ways (e-payments, mobile, digital assets, etc.). 

In a traditional financial transaction there are a number of entities involved. A typical cross-border, financial transaction works as follows: 

PSP —>Bank—>Foreign Exchange—>PSP—>Bank 

Each of the the entities involved may have different fees, standards, and processes to adhere to, which in turn contributes to the amount of time it takes to complete the transaction. In many cases this can take several days (or longer). One of the problems is the lack of standardization among industry participants. Since 2004, The International Standards Organization has been working to create “a single standardization approach (methodology, process, repository) to be used by all financial standards initiatives (2).” Better payment standards will bring legacy payment infrastructure into the modern world and help to enable global interoperability (3). 

In addition to implementing universal payment standards, one of the other revolutionary trends is the inclusion of blockchain technology into the payments technology stack. Blockchain technology is the engine that enables value to be digitally transferred from one place to another (often) in a decentralized system. Blockchain has powerful use in payments due to the enablement of real-time settlement of transactions, payment transparency, improved and immutable data quality, and significantly reduced costs (4). There is a growing list of companies who help businesses integrate blockchain technology into their payments/remittance systems. A few of those companies include Ripple, Ethereum, IBM Blockchain, and Stellar.org.  

Blockchain technology is helping to make payments processing simpler, less expensive, and more accessible. It is also the core element powering the shift from web2 (aka The Internet of Sharing) to web3 (aka The Internet of Value). Having an efficient, reliable, and robust payment system is critical to the development of web3 or “The Internet of Value or Metaverse”(4). We are still in the early phases of this evolutionary and technological shift so naturally there are still challenges that need to be ironed out. The most commonly cited challenge to mass adoption of blockchain enabled technologies is a lack of understanding of how it all works. Fortunately, more and more corporations and financial institutions are recognizing the value of adding crypto/tokens as way to to send or receive payments and see it as a value-add for their customers.

It’s an exciting time that we’re living in and I look forward to tracking the evolution of this industry over the coming years.  

Cheers -KM 

Sources: 

(1) https://www.rbcroyalbank.com/ach/cid-212748.html 

(2) https://www.iso20022.org 

(3) https://ripple.com/insights/iso-20022-shaping-the-future-of-cross-border-payments/ 

(4) https://ripple.com/lp/new-value-report/ 

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