In the digital age, disintermediating the “hopscotch” between banks as payments make their way across the globe can have positive ripple effects.
Justin Rice, head of ecosystem at Stellar Development Foundation, said open-source networks and blockchain could transform cross-border payments — improving financial inclusion and modernizing B2B transactions.
At a high level, he said, open-source networks foster innovation because they allow people “from all over the world to build together on a common platform.” That means users and developers, collectively, have access to information and technological tools that can be used to create new products and services that can, in turn, be deployed in their local communities. He pointed in particular to Stellar, which operates as an open-source platform with a common ledger upon which anyone can issue an asset. Anchors (regulated financial institutions), money service businesses or FinTech companies can issue one-to-one fiat-backed tokens.
Read more: Stellar: Blockchain Is the Next Big Disruptor of the Cross-Border Payments Category
As he explained it, “there are currency endpoints all over the world that are represented on a common ledger. And if people all over the world can build on top of that ledger, that means that they can create apps and services that access those real-world currencies to solve real-world problems for real-world users.”
Solving real-world frictions is especially urgent within cross-border payments, said Rice, as those payments can be expensive, inefficient and opaque.
Sidestepping the ‘Hopscotch’
“If you want to send a payment from one economy to another, from one currency to another, generally that payment has to go through a sort of hopscotch with banks. It has to be passed from one correspondent bank to another, until it reaches its final destination,” he said. Open platforms can disintermediate that hopscotch effect, making those cross-border — and cross-currency — interactions much more direct.
Though “we’re still at the beginning of this transformation,” he said, and most payments still go through legacy rails, an increasing number of money transfer operators, FinTech companies and regulated financial institutions are realizing the power of open networks. They are issuing digital versions of their real-world assets onto those platforms and addressing new use cases.
Drilling down a bit into different technologies, he said blockchain has the potential to connect payments across borders — improving remittance payments where people send funds back home to support their families.
See also: New Data: Almost 25% of US Cross-Border Remittance Senders Use Crypto
Blockchain is also good for improving B2B payments, he continued. Those payments are remarkably similar to remittances, at least in terms of being tied to the traditional correspondent banking system. But in emerging economies, such as in Africa, “it’s actually a lot easier to plug into blockchain rails where you can make direct payments.”
That direct connectivity will improve emerging markets as supply chains become more efficient, streamlining the interactions between buyers and suppliers. Transactions on networks such as Stellar’s cost fractions of a cent (and thus are much cheaper than traditional rails) — and settle within seconds.
Looking ahead, he said the Stellar Development Foundation has been working to boost financial inclusion and create new markets between various asset classes and pairings — which in turn improves cross-border activity. In November, SDF will be releasing a new protocol (a version of the code that runs Stellar) to create automated market makers that allow users to pool liquidity. These liquidity pools can, in Rice’s words, “crowd source liquidity and create better markets at scale.”
As he told PYMNTS: “This is a pretty exciting time. Over the next several years we’ll see a lot of the pain in cross-border payments disappear — and that pain is felt most by people in emerging economies.”
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