Can Blockchain Solve the Cross-Border Payments Puzzle?

With a market projection of $290 trillion by 2030, cross-border payments are the backbone of global commerce. Despite their critical importance, however, these transactions are frequently riddled with friction. According to a recent PYMNTS Intelligence survey, the failure rate for cross-border payments approaches 11%, accounting for $3.8 billion in lost sales in 2023 alone. Traditionally facilitated by financial institutions (FIs) through a complicated network of correspondent banks and clearinghouses, cross-border payments currently suffer from long processing times, high fees and a lack of transparency.

Blockchain could significantly increase cross-border payments’ speed and reduce fees by removing intermediaries, while its ledger technology ensures transparency with verifiable records. Blockchain’s high throughput, low fees and 24-hour availability could remove much of the friction of cross-border transactions, making each one as easy as sending a Venmo payment.

Blockchain payment adoption nevertheless has faced challenges. A 2024 consumer sentiment survey revealed that 44% of non-owners said they would never purchase blockchain-based currencies, with 40% naming unstable value as their greatest concern. These concerns have recently been mitigated with the growth of stablecoins that are pegged 1:1 with the United States dollar (USD).

Crucially, moreover, what once drew institutional skepticism has matured into a technically sound, credible solution to the shortcomings of traditional payment rails, with new USD-denominated assets allaying any worries about cryptocurrency fluctuations. Leading global financial players are now pioneering blockchain-based payment initiatives that are laying the groundwork for a new era in the digital-first global economy. The question is no longer whether blockchain can turbocharge cross-border payments but instead how quickly FIs and central banks can integrate the technology into their financial ecosystems.

Frustration Station: The Hurdles of Traditional Rails

The Blockchain Alternative for Payments Across Borders

On the Vanguard of Blockchain-Based Cross-Border Payments

Leveraging the Power of Blockchain for International Commerce

Frustration Station: The Hurdles of Traditional Rails

High fees, slow settlement times and a lack of transparency on traditional payment rails are crippling cross-border commerce, costing businesses that depend on international sales time, money and trust.

Intermediaries add layers of friction to cross-border payments.

Traditional payment rails have long made cross-border payments a minefield of friction and frustration. Intermediary networks, diverse regulatory regimes and currency-exchange volatility are the omnipresent middlemen hampering the seamless flow of transnational commerce. Consumer cross-border payments of as little as $200 are subject to bank processing fees averaging more than 11%. Add in the rampant issues of fraud and a lack of transparency throughout the process, and the result is the payments equivalent of old steam locomotives operating in the age of bullet trains.

59%

of Citibank’s corporate clients see speed as a significant hurdle in making cross-border payments.

B2B cross-border payments take a bite out of businesses’ profits.

Traditional payment rails are a particular problem for business-to-business (B2B) cross-border payments. A fee structure that siphons an average 1.5% from these transactions along with processing timelines that can drag on for weeks are thorns in the side of international commerce. According to recent PYMNTS Intelligence research, nearly half of Citibank corporate clients see high cost as a top pain point in making cross-border payments, and 59% say the same about slow speed. In a digital age that waits for no one, businesses can no longer afford the sluggish and costly burden of legacy cross-border payment systems.

Why do cross border payments fail so often?

Another issue is the black box presented by traditional rails when it comes to understanding cross-border payments’ high failure rate. In 2023, 82% of eCommerce firms in the United States were unable to pinpoint why payments failed, accounting for an estimated $3.8 billion in lost sales. More than two-thirds of merchants said that regaining customer trust after a failed payment was virtually impossible. This means that cross-border payments’ average failure rate of nearly 11% is jeopardizing the viability of the more than one-third of merchants that rely heavily on international sales.

The Blockchain Alternative for Payments Across Borders

By eliminating intermediaries and providing verifiable records via distributed ledger technology, blockchain-based payments offer a leaner, more efficient and more transparent cross-border payments solution.

Blockchain streamlines cross-border payments.

80%

Estimated potential cost savings from using permissioned DeFi in cross-border payments

Blockchain is an example of a distributed ledger technology (DLT), a secure means of conducting, recording and storing transfers of digital assets that obviates the need for a central authority, such as a correspondent bank. DLT is “distributed” because far-flung participants all share copies of the ledger. In the case of blockchain, new transactions are added in “blocks” that are cryptographically secured, permanent and linked to previous blocks in a “chain.” Examples of DLTs include Ethereum and Solana, the latter being designed for payment use cases by focusing on speed, cost and throughput.

By facilitating direct transactions without the need for intermediary banks and authorities, blockchain-based payments cut through the complexities that inflate costs and prolong times along traditional payment rails. Consequently, payments can zip across borders in seconds rather than days, and fees plummet. In addition, blockchain features such as automated recordkeeping and self-executing smart contracts that handle currency conversions and regulatory compliance guarantee payments’ transparency and seamlessness. These features are poised to alter the fundamental fabric of cross-border commerce.

Stablecoins could become the go-to currency for cross-border payments.

In the popular conception, blockchain technology is often conflated with cryptocurrencies, such as Bitcoin and Ethereum — digital currencies that are subject to notorious fluctuations in value. In reality, however, blockchain is a storage technology for data on decentralized networks, whereas cryptocurrency is a medium of exchange that uses blockchain as its transaction ledger. One of the obstacles to blockchain’s adoption for cross-border payments has been the volatility of well-known digital currencies, which has instilled misgivings in business stakeholders who otherwise have much to gain from a blockchain-based cross-border payments system.

Blockchain, however, is not wedded to any single digital currency. Stablecoins, for example, represent a digital asset that is as stable as the U.S. dollar. By having their value pegged to fiat currencies, stablecoins reduce the risk of volatility for both senders and receivers in cross-border transactions. This makes them a strong candidate for this use case. The adoption of stablecoins is significant, with Visa reporting the transfer of several trillion dollars’ worth of the currency every month. Moreover, tokenization, the conversion of traditional financial assets into digital tokens on a blockchain, is another payment strategy being pursued. Blockchain’s capacity to serve as the transactional infrastructure for any number of digital assets on the back end — whether stablecoins, digital tokens or others — means that users ultimately may need never see anything other than fiat currency in their transactions.

Permissioned DeFi raises the bar for cross-border payments security.

Some blockchain-based models offer greater advantages for cross-border payments than others. One key difference between distributed ledgers is whether they are “permissioned” or “unpermissioned.” Unpermissioned ledgers are generally public, allowing any participant to conduct transactions and thus possibly placing them at greater risk for fraud — another argument that has deterred adoption of blockchain at scale for these payments.

Permissioned ledgers, on the other hand, admit only trusted users to transact, still instantly or in near real time. Fusing know your customer (KYC) protocols with the efficiencies of blockchain raises the cost-effectiveness of cross-border payments to a level that legacy payment rails cannot rival. The Boston Consulting Group recently estimated that permissioned decentralized finance (DeFi), as this model is called, could reduce cross-border transaction costs by up to 80% compared to those on traditional rails.

There are new hybrid solutions that offer all the controls of a permissioned network on an unpermissioned ledger. As a specific example, the Solana blockchain allows asset issuers to create digital assets or tokens using a standard called “token extensions” that have built-in controls over transfers, reversibility and accessibility. This standard allows regulated entities to issue and transact with digital assets with full control over how those assets move and are used.

On the Vanguard of Blockchain-Based Cross-Border Payments

Top-tier FIs, FinTechs and central banks are all leading bold initiatives to harness blockchain’s potential to electrify cross-border payments and commerce.

Visa, Shopify and PayPal are trialing stablecoin rails for cross-border payments.

With a market capitalization topping $150 billion and an annualized transfer value soaring to $7 trillion in Q1 2024, stablecoins are experiencing explosive adoption for cross-border payments — and big players are getting on board. Both Visa and Shopify have teamed up with blockchain platform Solana to pilot the use of stablecoins for cross-border payments, marking significant strides toward mainstream acceptance.

41%

of central banks plan to launch central bank digital currencies within five years.

Similarly, PayPal’s cross-border money service Xoom recently began allowing users to make transactions with PayPal’s USD stablecoin, indicating the broadening appeal of this usage beyond blockchain enthusiasts. The Solana network processed $1.4 trillion in stablecoin cross-border payments in March alone — a testament to the technology’s scalability.

Banking giants helped break ground on blockchain’s use for the industry.

J.P. Morgan has been at the forefront of the movement to leverage blockchain to improve banking processes and was the first major U.S. bank to introduce its own digital token, JPM Coin, for use back in 2019.

Most recently, J.P. Morgan joined with Thailand’s Kasikornbank to launch Project Carina. This blockchain-based payments initiative utilizes JPM Coin and Q-money — Thai Baht eMoney on blockchain — to reduce transaction settlement times from 72 hours to just five minutes 24/7 year-round. The project is slated to begin piloting cross-border transactions in May 2024.

Central banks are orchestrating a blockchain-based revolution of their own.

With a spotlight on progress, central banks — including the Federal Reserve Bank of New York and the Bank of England — are spearheading initiatives to streamline cross-border payments through the use of blockchain technologies. The Bank for International Settlements (BIS) has partnered with seven central banks on Project Agorá — a collaborative push to test the pairing of tokenized commercial bank deposits with tokenized wholesale central bank money on a public-private programmable financial platform.

They are not alone. Forty-one percent of central banks globally are eyeing the launch of a central bank digital currency (CBDC) by 2028, with 31% naming CBDCs the most promising means for improving cross-border payments.

A 3,500-mile blockchain handshake made history.

Earlier this year, the United Arab Emirates sent its first cross-border payment via the country’s CBDC, the Digital Dirham. The historic 3,500-mile payment to China via the mBridge platform was a major endorsement of blockchain’s potential for institutional cross-border payments, shaving costs by 50% and trimming transaction time to seven seconds.

Leveraging the Power of Blockchain for International Commerce

For too long, cross-border payments have been shackled by high costs, slow settlement times and the lack of transparency inherent to the traditional payment rails over which they run. This friction imposes a punitive burden on businesses operating in multiple markets.

The recent blockchain initiatives across the institutional spectrum illustrate growing public and private confidence in the technology, suggesting that blockchain-based cross-border payments are transitioning from experimental to essential. The broader integration of these technologies into financial ecosystems has profound implications for competitive dynamics.

PYMNTS Intelligence offers the following actionable roadmap for businesses engaged in cross-border commerce:

Partner with a FinTech to leverage blockchain-based payments. Integrate an advanced blockchain payment platform for businesses that simplifies cross-border payment processing and facilitates seamless digital-to-fiat currency conversion, ensuring a streamlined cross-border payments experience.

Offer stablecoin payment options. Utilize payment platforms to incorporate stablecoins into your business’s payment system. Doing so offers cross-border customers a fast, dependable and cost-effective alternative to traditional payment rails that boosts transaction speed and lowers currency-exchange risks.

Adopt permissioned DeFi platforms for cross-border B2B payments. Implement business-friendly permissioned DeFi solutions that automate and secure B2B transactions through smart contracts. These solutions diminish reliance on traditional payment rails, accelerate payment cycles and significantly bolster transaction security and transparency.

Educate customers. Develop comprehensive informational resources, such as guides, FAQs and tutorials, to inform customers about the benefits of blockchain-based cross-border payments and empower them to use these innovative payment solutions with confidence when conducting business with you.

Advocate for blockchain-based solutions with banks and FIs. Proactively communicate with banks and FIs about your interest in blockchain-based cross-border payment solutions. Highlight the advantages these solutions would bring to your business. Advocacy can accelerate industry change and encourage more banks and FIs to adopt and support this next-generation cross-border payments technology.

The inefficiencies of traditional payment rails are no longer the inevitable cost of international commerce. Blockchain-based alternatives promise businesses a new chapter of secure, fast and inexpensive cross-border payments.