One of the biggest challenges faced by the contemporary financial system is the ease (or lack of) making international payments across borders. All Pakistani’s and Indians know exactly how tough it is to send money to loved ones at home and abroad. Whereas have largely resolved the problems with making quick bank transfers between banks on panel, the complexities of coordination between geographically scattered entities working under different banking frameworks and legal regulations is an issue that has yet to be tackled effectively.
A SWIFT Challenge
The present system faced many clear challenges that can be classified into two aspects: technological and regulatory. The most popular contemporary protocol for making international transfers is through the SWIFT
- The protocol uses a dedicated communication system to send and receive financial information ‘transfer amount, sender, sendee’ across the network.
- The process can take several working days due to the time taken in clearing and reconciling payments in the sending and receiving bank as well as all intermediary banks (if any).
- There are further issues with regards to exchange rates and failed transactions which make the network inefficient for the requirements of modern trading entities.
- The SWIFT network has witnessed several attacks and fraudulent activities over the years; the system has shown weaknesses in countering the effects of coordinated cyber attacks.
Paypal, Transferwise and Others
PayPal is big: almost 40 percent of all online payments in the United States are made using the PayPal network; which is just behind the two leading credit card providers. PayPel is secure, convenient and accessible; making it ideal for small and medium size merchants as well as the transfer of small amounts across the network.
There are a myriad of other services that are propping up each year. One of the major risers has been TransferWise, However, there are some significant setbacks with these protocols:
- Financial limits. A number of domestic regulations and safety protocols translate to limits set on the maximum amount that may be transferred.
- Lack of international spread. PayPal’s network has spread across many countries across the world, but is still not truly ‘worldwide’. Citizens of countries such as Pakistan, Nepal and much of Africa still cannot apply for a PayPal account.
The Blockchain Factor
The ability to make cross-border payments instantly and without middleman has been one of the advertised benefits of cryptocurrencies and the blockchain technology behind them. The eventual adoption is imminent: more powerhouses are joining the effort to develop solid cryptocurrency-based solutions to the hassles of making international payments. Proponents of the blockchain bandwagon claim several benefits over the current mechanisms in place:
- It’s cheaper. Transaction amounts may be getting higher for cryptocurrencies such as bitcoin; but several altcoins have been designed to ensure that transaction charges remain as low as possible.
- It’s secure. Although not entirely safe from the efforts of fraudulent entities, a blockchain transaction is relatively more secure due to it’s transparent nature. The absence of a middleman also reduces the risk of being defrauded. On the other hand, this same feature may translate to little support in case something goes wrong.
- And most importantly: it’s fast. For major cryptos such as bitcoin, individual blocks are confirmed and added onto the blockchain within an average of 7-10 minutes.
There are some factors that will hamper or slowdown the ability of blockchain technology to revamp the international payments and transfers system.
- Firstly, there is the learning aspect. It takes time to understand just what cryptocurrencies are and how they work. A majority of the world will be unwilling to trust their money to a technology they understand very little about.
- Secondly, there are procedural issues such as the exposure to volatile exchange rates twice during a transaction. These inefficiencies will need to be addressed to make cryptocurrencies convenient for larger amounts.
- And then there’s the issue of legality. Entities, especially institutional ones, will be wary of using the technology when bound by laws and regulations that define the legal means and terms by which they can take part in financial transactions.
Addressing these concerns will require a holistic effort on part of global institutions, regulators and entrepreneurs; blockchain is here to stay and the time is nigh for all stakeholders to plan towards it’s optimal realisation within the international payments industry.