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Blockchain technology can fundamentally affect the decentralized business model used in the financial industry. Distributed ledger technology allows to solve a range of challenges relating to international bank transactions. What exactly does blockchain offer? How is it applied in the financial sector now?
Transferring money across the border is not cheap despite the reduction of remittance fee by 7.32% in 2008 (saving of $90 billion). It is caused by the fact that international transfers involve too many intermediaries, outside organizations. Besides, one should take into account international currency conversion rates.
According to the World Bank, fee expenditures reach on the average about 7.45% of each transaction. This is unprofitable to both customers and financial institutions. Bank cross-border payment expenses are impressive, thus proceeds in this area are not quite high.
Moreover, every examination step adds a small fee to the total cost and requires a certain time: from several hours to five days. Time limits are delayed because of red tape accompanying banking activity. In addition, banks and other financial establishments engaged in foreign remittances are centralized, which makes them vulnerable to hacker attacks.
Therefore, there are three significant disadvantages of centralized bank transfers:
vulnerability to fraud.
Blockchain with its unique features can solve these problems and bring international remittance services to a new level. It will be beneficial to both individuals transferring funds abroad and financial institutions.
Low cost of transfers. Blockchain allows persons to verify international transactions without centralized third parties. As the result, they can save on currency conversion and remittance fee.
High transaction speed. Unlike banks that process money transfers abroad within several days, blockchain-based transfers are conducted almost in real time.
Huge reach. Some citizens of Asia, Africa, and South America do not have an access to banks and conventional financial services but have smartphones. Receiving an access to cryptocurrency wallets, they will be able to transfer money to other countries.
Enhanced security. Blockchain is decentralized, thus it is almost impossible to hack it or correct transactions in the system.
New opportunities. A smart contract, an algorithm based on blockchain, will help to automate payments.
There are top three traditional leaders in the international remittance sector: Western Union, MoneyGram, and Ria. They occupy 25% of the market. They have started testing distributed ledger technology offered by Ripple. Will independent blockchain projects on cross-border payments manage to find their place in this niche?
It is startups focusing on blockchain solutions – Abra, Coins.ph, and Ripple – that compete with centralized international remittance systems.
Coins.ph with a HQ in the Philippines offers a bitcoin wallet app where users can buy or sell cryptocurrencies. It allows to transfer money to Ghana, Nigeria, and Kenya.
Abra. A US-based startup that has drawn attention of some well-known investors. Its customers can use a digital wallet app to transfer and receive funds. Remittances are no-fee and immediate. Abra offers a direct cash transfer technology that does not require any banks. Clients can also carry out transactions using their mobile devices, while the service automatically transfers money to debit cards provided to its users.
Ripple. A cryptocurrency startup cooperating with hundreds of world banks in order to simplify their transactions, including international ones. Ripple has developed a fast decentralized system based on blockchain – RippleNet. Being similar to Swift, it specifies where to transfer money. The system also has a service helping banks to process incoming transactions.
Reportedly, the platform allows to save on the average $3 on every remittance. Taking into account the amount of transactions per year, savings of some financial institutions can reach millions of dollars. The system is utilized by such banks as Westpac, Axis Bank, Union Credit, UBS, NBAD, and others. Ripple has managed to partner with a lot of major financial organizations, including Fidor Bank in Munich, Bank of America, and Santander. In 2018, Ripple’s Interledger payment system was integrated with Apple Pay.
More and more banks from various countries pay attention to blockchain technology. For example, Germany-based Bitbond Bank applies blockchain to conduct international payments instead of a popular bank system called SWIFT. As known, financial establishments use SWIFT to transfer transaction data using a standard code system. However, due to red tape, processing of some transactions lasts for hours or even for days. That is why Bitbond has decided to reduce the international remittance processing time and shift to blockchain. It has helped the company to decrease transfer fees, as there is no necessity to pay to third parties involved in SWIFT.
In summer 2018, the Bank of Thailand announced the integration of blockchain into its system. It is going to apply distributed ledger technology to verify documents, finance supply chains, and conduct cross-border money transfers.
“The integration of modern biometrical and blockchain technologies will allow to guarantee the integrity of financial information and reduce the volume of fraudulent operations,” Veerathai Santiprabhob, Governor of the Bank of Thailand, said.
Blockchain is not a new technology. More and more companies and entrepreneurs understand its concept and realize how it improves operation efficiency. Due to its advantages, blockchain serves as a catalyst able to optimize and change the global remittance industry for the better.
Existing solutions are not yet able to fully replace the operating international payment system, but the technology is consequently finding appropriate niches and areas for integration. This fact is significantly encouraged by the interest of financial institutions desiring to reduce costs as well as the interest of customers requiring low fees and high transaction speed. These aspects will boost the market to use new technologies that transform the industry of cross-border money transactions.