The world is now your oyster, endless possibilities to start a business as a digital nomad where its easy to locate wherever suits you best. First step, open a bank account, transfer funds to a new jurisdiction and start building a dream. International business moves fast, emails are instant, phone calls are real time so why is international money transfer taking a week to get from one bank account to another. It makes little sense in this post-post age.
Cross-border payments are generally slow, inefficient, and costly processes restricting business efficiency and delaying people’s lives and livelihoods. That is not to say that transactions can't be made, and business cannot be done right now, but good cashflow is all about timing - delays are an opportunity cost that cannot be recovered. The time has come for this cost to be eliminated. It’s time for a cross border payment revolution. Instant cross-border transactions are a very real future.
But how will this happen and who will lead it, when the traditional and well-known systems for international payments are so well trusted and ingrained. First let us look at why it needs to happen. The UK Office for National Statistics (ONS) shows that despite the impact of COVID, imports and exports will continue to grow. The recent 2-year anniversary of Brexit and the need for policy to support economic growth out of a looming recession will see business looking to take advantage of free trade agreements the UK has signed with Australia, New Zealand and Singapore, and others on the horizon.
SWIFT is the main payment technology systems used to transfer money between the UK and abroad but its speed is limited by inefficiencies. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is actually not a payment technology at all but rather, a sophisticated messaging system. It provides communications services to facilitate transfers between jurisdictions but the pace it can operate at is limited by the relationship between sending and receiving parties. If a sending and receiving party do not have an existing ‘correspondent relationship’, they must seek a third party to step in to help with the transfer. At each point, a party is required to carry out sanctions and anti-money laundering checks. These checks are what causes a simple payment transfer to take many days to clear.
Advancements have been made in cross border payments systems. The Single Euro Payments Area (SEPA) system has allowed Euro transfers between participating countries to be as easy as a single country bank transfer. While this innovation highlights the benefits of cross border competitiveness in terms of labour mobility, economic efficiency and competitiveness, it is a legal framework to regulate ‘trust’ and not a technology to make the payment faster. Similarly, innovation within the SWIFT systems attempt to increased trust in communications between its members but not to change the payment technology.
The technology for instant cross border payments is already here in the form of crypto currency. This digital currency is nearly impossible to counterfeit. The decentralised, peer to peer networks of blockchain allow participants to confirm transactions without involving a clearing authority. The distributed ledger technology (DLT) works by keeping records across multiple computers, known as ‘nodes’. The technology is resistant to hacking because if one ‘node’ is hacked, it does not alter the information stored by other nodes and can be easily identified and corrected.
Currently the process of transferring a digital currency is not ‘instant’. The most well-known cryptocurrency, Bitcoin, taking around ten minutes to complete a transaction. It is however significantly faster than current transfer systems like SWIFT, with the added benefit of immutable transactions that are permanently recorded and viewable to anyone. Although Bitcoin has been around for over a decade, it has still not entered the mainstream payments world. It could be considered risky to use for transfers due to volatility in its valuation but there are alternative digital currencies which are ideal for payment transfer.
Enter the concept of Stable Coin. Stable Coin was conceived from the same blockchain DLT, but it is pegged to a regular fiat currency such as GBP or EUR. This is where the instant cross border transfer finishes. The coin maintains its value from one time point to the next, and is redeemable for the corresponding value of assets it is pegged to. There is a clear future in the use of stable coin for money transfers with many stable coins already embracing traditional AML-KYC processes, and steps are being taken to regulate their use as currency and give consumers protection similar to those given to cash assets.
Imagine sending £100k to Australia to purchase something in Australian dollars. It’s a lot of money. The less time the money is in transit the better. A regulated payments firm, could make the transfer. They would convert the £100k into a Stable Coin. The Stable Coin would be transferred using blockchain technology. The institution at the other end converts the Stable Coin into Australian dollars on the same exchange. In practical terms the transfer will be going from one digital wallet to another digital wallet. Once it is in the local jurisdiction under local regulation it can also be instantly transferred to any ‘bank.’
The regulation of the middle part of the transfer should not be required. The regulation of the transaction is subject only at either end, and this allows the cross-border payment to take minutes. The security of blockchain DLT recording not only the transaction, but also additional information like identity and life of the transfer. This would finally see instant cross border payments finally facilitating global trade.
About the Author: Rupert Lee-Browne is founder and CEO of Caxton, a payments Fintech based in London. He led the revolution in FX payments becoming the first currency exchange firm to be regulated by the FSA. Caxton has seen incredible growth in its 20 years, offering transparency and fair pricing combined with legendary service to become one of the most trusted payment companies in the market trading over £I billion a year.