From PayPal to mobile payments to other segments of the electronic payment industry, convenience is battling with remittance fees. On the one hand, consumers like the idea of being able to send payments digitally rather than paying in cash, using a credit card, or sending a check. However, global payments have consistently been waylaid by banks and third parties that tack fees on top of the payment amount. In most cases, these fees are not billed as flat rates but as percentages.
How high are those percentages? According to the World Bank, the average global payment fee is 7.5% for consumers and over 10% for commercial entities. Those percentages are substantial for smaller payments. Get into bigger transactions and these remittance fees can become prohibitively expensive. The presence of third parties in the global payment market is preventing the financial industry—and consumers worldwide—from embracing the convenience of digital transactions.
Rewriting the global payment narrative with Blockchain
Among its other potential benefits, blockchain cuts the middleman out of digital transactions. Blockchain’s digital ledger technology eliminates a lot of the labor and processing involved with global payment transfers. Third parties charge fees to verify the validity and security of the transaction, make conversions from one currency to the next, and complete other vital processes. There is a reason that remittance charges are often classified as “service fees”: third parties need to provide specific services to make the payments go through, and they are compensated for those services based on the size of the payment.
Blockchain can simplify this process in several ways, eliminating the need for third parties to provide their services while making service fees on global payments a thing of the past. Blockchain can verify the identity of the person sending the money and then deliver a “smart contract” to the recipient’s banking institution. The technology notifies bank regulators of the transaction and uses “liquidity providers” to calculate and automate the currency conversion.
Regulators embrence technologies like Blockchain
Regulators are among the financial industry figures most eager to embrace technologies like Blockchain. In March 2016, the United Kingdom’s Financial Conduct Authority (FCA) published a press release announcing a new agreement between British and Australian financial regulators “to support innovative businesses.” The agreement stated that the FCA and the Australian Securities and Investments Commission (ASIC) would “refer to one another those innovative businesses seeking to enter the other’s market.” In essence, the agreement made it easier for innovations in finance to take root across oceans and boundaries—something that could be of huge benefit to the complications attached to global payments.
Greg Medcraft, the Chairman of ASIC, mentioned blockchain by name when discussing fintech business models “seeking assistance about how to navigate the regulator requirements.” He said that, by encouraging innovation, regulators could break down barriers to entry for new financial technologies, thereby making it easier for those technologies to scale up to the global level.
FCA and ASIC aren’t the only financial regulatory authorities that have entered into this kind of pro-innovation agreement. Comparable agreements exist between the United Kingdom and Singapore, and between Singapore and Switzerland
Blockchain: the Future of digital transactions?
Blockchain’s digital ledger technology takes care of everything from the moment the sender submits a digital payment to the moment the money lands in the recipient’s account on the other. In fact, blockchain technology can make digital payments move faster so that a payment recipient can access his or her funds just seconds after they are sent. No longer will it take payments hours or days to process. And since blockchain has already been touted for its ability to make payments more secure—with protections against fraud, scams, double billing, and more—it seems like it will only be a matter of time before the technology becomes standard in all global payments and digital transactions.
The gpi from Swift
Of course, it’s also worth noting that blockchain technology is not the only innovation with the potential to streamline global payments. Swift, a “global provider of secure financial messaging services,” recently launched a “global payments innovation” service, or gpi. Opened in May, the gpi service connects 12 transaction banks with presences in 60 different countries. Without digital ledger technology, this network of banks allows for live international payments as well as “end-to-end payment tracking.”
The technology doesn’t completely do away with service fees, but it makes them easier to predict and less extreme in pricing. Payments also aren’t instantaneous, as they would be with digital ledger technology, but Swift says they will only take a day to process through gpi as opposed to the old three-to-five-day standard. Critics of the service say it could be improved by incorporating blockchain, but Swift—which claims that 100 additional transaction banks are already signed up to join gpi—looks intent on blazing a different trail.
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