How Blockchain and Digital Assets Can Free Up Capital Trapped in Cross-Border Treasury Flows

Payments as we know them today involve unnecessary pain points, dysfunction and archaic technology.

Blockchain and digital asset technology have the potential to transform and transcend industries — particularly financial services, which are ripe for innovation. With the promise of faster, more affordable, transparent payments, as well as the ability to offer new financial services to customers and tap into new revenue streams, these technologies will underpin the future of financial infrastructure.

Nowhere is this truer than within the $156 trillion cross-border payments market.

“The primary pain points are around speed, reliability, transparency and cost,” Aaron Sears, managing director of the Americas at enterprise blockchain and crypto solutions provider Ripple, told PYMNTS.

He explained that traditional global payments are fragmented and inefficient, relying on a complex system of correspondent banking. As a result, sending payments across borders can be slow, unreliable, opaque and expensive.

And because existing legacy systems have long been accepted as status quo, ultimately their inefficiencies impact finance leaders’ business decisions and companies’ bottom lines.

Making Frictionless Cross-Border Payments a Reality

While the initial appeal of digital assets may have taken a hit from ongoing industry turmoil, regulatory scrutiny and lawsuits, finance leaders’ confidence in the technology hasn’t waned as it is underpinned by the understanding that it provides several critical benefits to streamlining cross-border payments.

“Legacy cross-border solutions require prefunded accounts, trapping often substantial amounts of capital in foreign bank accounts, so you’ve got a number of correspondent banks in the flow that are charging different fees, and you have the added burden of prefunded accounts,” Sears explained.

Rather than attempting to establish correspondent bank relationships for each new market or territory, businesses seeking sustainable growth should seek a robust, compliant and secure all-in-one cross-border payments solution.

“[This] relieves the finance and treasury function of a variety of different burdens they face using legacy solutions, including wire cutoff times, holidays and banking hours — all of which make traditional cross-border payments a complex labyrinth to navigate,” Sears said.

With blockchain and crypto-enabled payments, value is transferred instantaneously, enabling real-time settlement and payout.

Cross-border payments powered by blockchain and crypto can be made on demand, 24/7/365, Sears noted. The transferred funds are where they need to be, when they need to be there.

Streamlining Global Treasury Flows

Interoperability between payments systems doesn’t just provide better visibility into growing international operations, but can also help ensure compliance controls and B2B experience standards are met.

“When you’re talking about more complex corridors where a payment might need to go through multiple correspondent banks before landing in its destination market, [the benefits of crypto] are obvious,” Sears said.

He explained that for businesses with entities in different markets that need to, for example, make payroll in each of those jurisdictions, there is a “pretty significant” effort that goes into moving money between those entities and rebalancing the treasury because the historical cross-border frictions around time sensitivities, cost and transparency are “amplified.”

Blockchain solutions, like Ripple’s own payments solution, use digital assets as a bridge between fiat currency pairs.

These digital asset bridges are generally fast, scalable and low-cost, making them ideal for payments. For example, transactions using the XRP token typically settle in three to five seconds and cost fractions of a penny.

Financial institutions can use blockchain-based digital assets to source liquidity on demand and avoid prefunding destination accounts, which frees up trapped capital that would otherwise be sitting in a bank account.

Overall, financial institutions and corporate treasury teams around the world would certainly agree that a faster, more affordable and transparent approach to cross-border treasury flows can offer a better path forward and pave the way for a new normal in B2B cross-border payments, Sears said.

“It’s a very exciting time,” he added. “What we’ve seen at a global level on the regulatory front is increasing clarity in many different markets around the world. … In lockstep with that, we’ve seen institutional adoption [of crypto] go way up, which will embolden additional waves of institutional customers.”