Main Takeaways
- Traditional cross-border payments are hampered by delays, high costs and a lack of transparency.
- Cryptocurrencies offer faster, cheaper and more transparent global transaction solutions. International Liquidity Solutions currently offers cryptocurrencies as a bridging mechanism for cross-border payments.
- ISO 20022 standards and decentralized technology can improve the integration of cryptocurrencies with traditional financial systems.
Traditional international payments have long been the backbone of cross-border financial transactions. They help facilitate global trade, financial interactions, and remittances. However, conventional payment methods often struggle with various challenges that impede their efficiency and transparency.
It’s been known that cryptocurrencies are a potential solution. But how do we help users without the skills or knowledge typically required to use them effectively? With international crypto liquidity solutions and improvements to global standards, there’s hope for change and improvements in this legacy international payments system.
The Issues With Global Payments
If you’ve ever had to send money abroad with a traditional bank, you’ve likely already experienced the most common pain points in the system:
- Slow processing times: Conventional international payments frequently involve intermediary banks and clearing systems. Multiple parties often lead to delays ranging from several days to weeks before funds are received by the intended recipient.
- High transaction costs: The complex network of intermediaries in traditional payment systems often results in substantial fees. These include currency conversion charges, correspondent bank fees, and other processing costs.
- Limited transparency: Due to the multiple parties involved, tracking the status of a payment and identifying the point of delay can be difficult. This difficulty often leads to a lack of transparency in the payment process.
- Currency conversion complexity: Traditional methods usually require currency conversions, subjecting payments to exchange rate fluctuations and associated foreign exchange risks.
- Lack of on-demand liquidity: When a business or individual makes a global payment, their funds are tied up during the often lengthy process. This reduces their overall liquidity, making it challenging to allocate capital efficiently for personal or business needs.
In the face of these challenges, the financial industry has explored multiple possible solutions. Pre-funded accounts are one popular legacy option, which we’ll quickly dive into. However, the use of cryptocurrencies has become more popular with individuals or businesses that are able to handle these assets.
Can We Remove the Need for Pre-Funded Accounts?
In the context of international transfers, a pre-funded account refers to an account that is already loaded with the required amount of money before initiating a transfer. This type of account is often used for cross-border transactions to ensure that the funds are immediately available and can be transferred without delays or the need for additional processing.
Let’s look at a simplified example. Imagine you want to send $1,000 to a friend in another country. In this case, the bank or money transfer operator you use to send the $1,000 may already have a pre-funded account with the recipient’s bank, meaning that the $1,000 can be released almost immediately to the recipient.
However, there are some drawbacks here. The pre-funded account has to be carefully managed and topped up using the traditional methods outlined above. Furthermore, capital must be locked in these accounts, potentially causing liquidity issues. There are also fees to pay for the convenience and speed gained through pre-funded accounts.
Therefore, crypto is an ideal solution for many, offering speed, convenience, and low costs. By leveraging blockchain technology, there’s a chance to remove the need for pre-funded accounts.
Conclusion
The future looks bright for transnational payments. Whether it’s due to advancements in heritage systems or decentralized technology perpetration, we can each anticipate a briskly, hastily, and cheaper experience. Exactly how blockchain technology and the traditional payment system will eventually be combined remains to be seen. still, there’s still a wide variety of options to choose from that are perfecting availability for further people and businesses than ever.