Blockchain disrupts traditional cross-border payment methods

Making international money transfers has long been a cumbersome and time-consuming process. Individuals and businesses alike had to go through financial institutions, specialized money transfer operators or use informal networks. The advent of blockchain is now disrupting the entire cross-border payments sector.

Oct 31, 2023 – Processing international money transfers has historically been the domain of banks and payment processors. Not only have their services often come with high and opaque fees, but it has also taken several working days for transfers to reach the account abroad. Security issues related to cross-border payments, such as unauthorized transactions, data breaches, forged documents, exchange rate manipulation and more, have also emerged as risks.

The size of this cross-border payments market is probably bigger than you think. This year, its overall market size is set to amount to 191 trillion US dollars, according to estimates published by FXC Intelligence. And there is a strong demand ahead. 

Globalization, e-commerce, digitalization of the economy behind this demand 

The market will grow by 53 percent by the end of the decade, reaching at least 292 trillion dollars by then, FXC Intelligence predicts. Several factors are driving this demand: the globalization of the world, with companies buying and selling products and services abroad and setting up subsidiaries outside their borders, the rise of e-commerce, with sector giants such as Amazon and Alibaba, relying on suppliers located in different countries, a growing digital economy, where people work remotely across the globe, to name just a few examples. 

All these companies and individuals are looking for fast and seamless international money transfers. “In domestic transactions, consumers [already] experience payments that are largely instant and fully traceable. Increasingly, these same expectations are being applied to the more complex cross-border space,” Citigroup writes in its report “Future of Cross-Border Payments.” It is here that blockchain technology comes into the picture.

Fintechs take market shares, as they offer attractive blockchain-based solutions 

Blockchain technology has over the past years become a disruptive force in the cross-border payments industry. It offers several advantages that make it an attractive option for both individuals and businesses looking to transfer money across borders. Blockchain technology – through the use of stablecoins and/or central bank digital currencies (CBDCs) – is not only offers faster, cheaper and more transparent international transfers. It is also very secure. Each transaction recorded on the blockchain is encrypted and linked to earlier transactions, creating a digital print. This makes it next to impossible for hackers to modify data once it has been validated. The transactions are also recorded on an immutable ledger, visible to all network participants, further reducing the possibility of fraud. (Read more about the stablecoin market here, and the status on the adoption of CBDCs worldwide here).

The emergence of blockchain technology about 15 years ago has led to increased competition and innovation, reducing the dominance of traditional financial players. “Competition in the cross-border payments market is increasing. Over 40% of banks have already lost at least 5% of market share to FinTechs, and 89% expect to lose at least 5% of their share to FinTechs in the next 5-10 years,” according to Citigroup, which writes that the flow of international transfers is set to reach 250 trillion dollars by 2027. Payoneer, TransferMate, PayPal and Visa are some of the players that are tapping on this growing sector. 

Demand for cross-border payments is driven by the corporate sector

The demand for international money transfers is clearly driven by the corporate sector. Business-to-business (B2B) cross-border payments revenues account for 98 percent of the  total revenues, with the business-to-consumer (B2C) and consumer-to-business (C2B) revenues, representing a mere 1 percent each, Citigroup data show.

Another consultancy forecasts that B2B cross-border payment transaction values will exceed 42 trillion dollar in 2026, compared to 34 trillion dollars in 2021. “This growth of over 25% is being driven by the increased popularity of eCommerce marketplaces, which are generally cross-border in nature,” Juniper Research writes in its report B2B Payments: Key Opportunities, Vendor Strategies & Market Forecasts 2021-2026. Services such as Visa B2B Connect and RippleNet have “significant” potential, it adds.