Spring in the UK and Europe is bank holiday season. A friend of mine works for a global fintech company in London. She told me a terrible story that happened on Easter. Over the weekend, she received a call from her IT operations team telling her that customer withdrawals were failing in multiple countries. Her team quickly discovered that lack of funds was to blame. They were working with local partners in those countries, but found the balance with that partner to be negative. It was a bank holiday, so she couldn’t contact her partner. And since international payments take days, she had only one option for her team. It’s about voiding withdrawals and pissing off customers.
Experiences like this are not uncommon in business and highlight the need for a more efficient, accessible and reliable 24/7 global payment system.
Over the past decade, many fintechs have emerged to solve the problems posed by traditional payment infrastructure. Companies like Wise and Airwallex have figured out how to speed up the international payment experience for consumers, while Apple Pay and Google Pay have developed smarter ways to pay using their smartphones.
But behind a great customer UX, the core banking and payment system has a lot of legacy. Wise still relies on underperforming Swiftrail to move money around the world. ApplePay still relies on moving ISO8583 messages between issuing banks, acquiring banks and card networks.
There is a lot of legacy at the heart of global payments, making it increasingly difficult for fintech companies to innovate and meet the needs of their customers. International payments still take 3-5 days, and cross-border transfer fees can still cost a few percent.
Payments should be as accessible and resilient as the Internet. So we need new rails built for the internet age.
Distributed ledger technology (DLT) could be the new payment rail
Distributed ledger technologies (DLTs) like blockchain have the potential to become railroads that replace the foundational layers of the global payments stack, allowing businesses to reach and from previously inaccessible locations. of money can be transferred cheaply and quickly.
As a payment infrastructure, blockchain has several advantages. Operating 24/7 eases business cash flow and eliminates the need for pre-financing. Transactions on the blockchain follow a unified set of rules and experiences regardless of where the payment originates and ends. As settlements are full and final, refunds are at the discretion of the merchant and are not blanket rules that encourage fraudulent chargebacks.
Transaction costs on the blockchain are negligible and anyone with an internet connection can participate. This will immediately reach millions of people around the world who are currently without traditional financial and banking services. Additionally, certain cryptocurrencies act as a single global currency, allowing price standardization across countries and eliminating the need for complex and opaque exchanges of value.
Fiat-Backed Stablecoins Emerge as the De facto Currency for Cross-Border Payments
As a means of payment, fiat-backed stablecoins could emerge as the de facto currency for cross-border payments within a few years. They have abundant liquidity and this is the basis of global payment methods. The stock price level will follow the level of the peg currency and people won’t be bothered by the “digital gold” narrative that makes them “HODL” Bitcoin and other cryptocurrencies. Stablecoin payments will reach nearly $8 trillion in 2022, with a current market capitalization of $132 billion and a 10.59% share of the total cryptocurrency market, proving its usefulness. .
I believe that over time all payments will be tied to DLT in some way. Whether it is central banks exchanging value with Central Bank Digital Currencies (CBDCs), or connecting local payment schemes around the world with stablecoins that replace RTGS and SWIFT infrastructures, consumers can buy local currency stablecoins. Even if you keep the form in the bank.
It is still in its early stages and, like any early technology, there are challenges to be solved, such as regulatory clarification and better interoperability between different DLT systems.
But I believe that by bringing together the best of both worlds in financial technology, legacy banking rails and DLT, we can meet the most ambitious needs of merchants and financial institutions.
And while the ups and downs of crypto finance make headlines in the media, behind the scenes blockchain is growing, transactions are growing, and great payment products are being built. Don’t get me wrong. DLT appears in his B2B payments.