The payments market needs a swift kick in the pants. Sending money internationally should be as simple, fast, and cheap as calling a friend on Skype. Yet cross-border payments today are not only a huge drain on resources, gobbling up $50 billion in wire fees every year, but through their opacity and inefficiency tend to cut small businesses out of the $24 trillion per year global trade market, a quarter of which represents small business transactions.
There’s a better way to do business internationally, driven by new technology that’s shaking the archaic banking and wire transfer protocols to the core. It stands to give power back to small business owners, to level the playing field and open up a world of business opportunities that have effectively been shut off from startups and small and medium-sized businesses (SMBs) that can’t afford to slow down for a dated system ripe with roadblocks, inefficiencies, and fees. Here’s what the future of cross-border payments could look like.
Higher fees, slower service – why is the wire still dominant?
When it comes to international wire transfer, small business has become the sacrificial lamb at the mercy of an antiquated system designed for businesses with far more resources and revenue.
SMBs pay the highest fees and have the least leverage with their banks. When sending money internationally, senders and receivers are both assessed transaction fees that average $35 and $23 per transaction, respectively. An additional foreign exchange (FX) fee compounds the initial cost, ranging from three to eight percent.
Negotiating lower charges is straightforward for large enterprises, as banks can offer discounted wire fees in exchange for credit lines and other profitable products. But for SMBs with limited need for these other bank services, bargaining for better rates remains a privilege reserved for big business.
With excessive fees also comes extended processing time. Transfers between accounts with the same bank can take a few hours, between two U.S.-based banks a few days, while sending a wire transfer to a bank abroad often can take up to five days – an eternity for a fast-moving, resource tight SMB. Forced to rely on SWIFT, SMBs face the challenge of trying to reconcile cash flow problems while waiting for a transaction to clear. Delays also result in exchange rate fluctuations, challenging SMBs to manually match payments and invoices. Of course, with such preposterous fees, sending or returning a few dollars to reconcile FX variance would hardly be worth the time and money.
Adding insult to injury, for SMBs wire transactions are a general inconvenience. The majority of modern financial transactions (e.g., purchases, bill payments, credit applications, etc.) are done online. But wire transfers still require a physical trip to the bank, photo ID in hand along with all of your recipients’ banking information. It’s tedious and unsecure for both sender and receiver.
For SMBs using the wire, it’s a bird on a wire situation. Technically, they can do business. But with vast limitations, they can only go so far. Fortunately, new technology is setting SMBs free in the world of global commerce.
Blockchain builds a platform for SMB success
The answer to these issues is simple, profound, and rooted in technology. It’s decentralized and ultra-secure, able to hold, transmit, and transfer value from sender to receiver at breakneck pace. Most importantly, this technology solves many of the problems SMBs face with the wire.
It’s the blockchain, a new global rail for moving money.
On average, sending payment via the blockchain costs a staggering 40 percent less than the wire and 70 percent less than PayPal. At the same time, it accelerates the speed of transactions by more than 50 percent, ensuring funds are received in only one to two days.
Co-managed by sender and receiver in an online portal, security is seamless, as neither party shares bank account details with the other. That security extends to the money itself, as both sender and receiver can watch the payment’s progress as it moves across borders.
The exchange rate discrepancy becomes a non-issue, as the exchange rate is locked at the time of invoice. The sender knows what to send; the receiver knows what she’ll receive and to which invoice it should be applied. Guesswork and mistake-prone manual calculation are removed from the equation.
This new technology is enabling SMBs to cut out the middlemen, decrease fees, and accelerate global commerce. In a world of constant connectivity, it only makes sense that our payment processes follow suit in how we engage our global counterparts.
One possible future of payments
The global impact of better payment systems and faster, less expensive wire transfers will be enormous. Right now the market is fragmented and poorly serviced, creating an opportunity to introduce a simple solution for connecting one business to another no matter where they operate.
While the blockchain is new, we can reflect on other innovative global technologies to predict its future. When first introduced, VoIP provided a solution to an international problem – the cost of international phone calls – now it has revolutionized how people are globally connected. Skype has become as much of a verb as it is a noun.
The blockchain offers similar promise: it can slash wire transfer fees, complete transactions twice as fast, and maintain complete transparency about where the money is and when it will arrive. For SMBs, the wait for a solution to their painstaking wire problems is over – and this is just the beginning of how blockchain will level the playing field for business success.