Why have international payments always been so difficult? With high processing fees and long settlement times, they can frustrate both senders and recipients - particularly if payments fail. The problem lies in that these traditional bank payment systems were set up decades ago, only being refined along the way. While things have certainly become easier and faster - and sometimes less costly - they still aren’t an optimal solution given the new technology available to us now. But blockchain payments can be.
Blockchain payments as a new solution
Blockchain technology is maturing and is now a viable alternative to bank payments both for individuals and businesses - with less of the pain points we are used to encountering.
Today, we take a look at both to see their key differences and how blockchain payments are now a healthy alternative to traditional transfer solutions.
How do bank payments work?
Bank payments work in a number of different ways, which means each transfer can take a different amount of time depending on:
- The type of transaction that’s being made
- The sendee bank
- Whether the payment is being made to an owned account or someone else’s
- The type of account the payment is being made to
- The bank on the end of the payment
- Whether it’s an international payment
- How much the payment is for
- Whether the payment is to a new payee or not
This can also depend on the method used to make a payment, whether it’s at a bank branch, via mobile or web, or whether it’s being made on mobile or web in a different location than a home bank.
For other international monetary transfers, there are even more limited options that cost even more and may take more time, such as wire transfers.
This is all due to their being many intermediary parties involved in the transfer process and the limited transparency in the payment chain.
What are the different ways that a bank to bank transfer can be made?
1) Sending money locally
Using a home bank in a home country, using a mobile app, and shifting money from an everyday account to a savings account, the transaction may be near-instant with near-zero fees.
2) Sending money internationally
Using a home bank internationally, sending to a new payee at a different international bank. This may require multiple different authenticators (e.g. passcode, fingerprint) before the transaction is even allowed to be attempted. The transaction may be instant, or it may take days or even weeks in some cases to hit the receiving account. If you’re with a bank in the US, for example, the fee cost might reach $50. When you add things like taxes and customs fees, this can quickly stack up.
3) B2B wire transfers
A wire transfer is chosen to purchase €50,000 worth of goods from Turkey to Europe, using a major wire transfer provider. The fee ends up being €300 and requires a tedious identification process and in-person configuration to conduct. In addition, for businesses that need to make the same purchase multiple times a month, fees and processing times begin to add significant overhead.
Why bank payments may be complicated
- Long processing times
- Bank fees, which can be vary depending on both the sender and the payee’s bank, account, and location
- Lack of transparency (especially in foreign exchange rates)
- Limits on the amount available per payment or day
- Difficulties integrating bank payments into business; for instance, using bank transfer for payments on a website or even integrating into accounting software
- Certain countries have difficulties allowing incoming payments because of a high degree of scams
What are blockchain payments?
If you’ve ever used PayPal to send a payment from one individual PayPal account to another individual PayPal account - for instance, sending money to a friend from your PayPal funds - you will have been surprised at the near-instant way in which this happens.
Blockchain payments seek to replicate the near instantaneity of PayPal payments, while also removing even more of the roadblocks that can inhibit the speed of payments with banks.
Blockchain is set up using different technology systems from banks that can allow for speedy transactions across international borders. A blockchain is like an international banking network, but one that can operate without intermediaries, in a transparent manner, and without the multiple fees at each point in the chain.
How do blockchain payments work?
Blockchain technology is a different way of organizing data. Data is entered chronologically into a block, then each block is linked to the previous block. By stacking blocks, it gives a complete chronological history of data entry - which is usually used for transactions. The majority of blockchains are stored in a decentralized way - across a network of many different machines, across the planet. This makes the record immutable.
When conducting a blockchain transaction, the transaction is sent to this network, where the machines compete to solve an equation that confirms the transaction, then adds this to the block. Once the block is full it’s linked to the previous block, the transaction is complete, and all machines have the entire chain stored for verification and validation.
One blockchain address simply sends money to another blockchain address, and the payment is completed near-instantly - depending on the state of the blockchain itself. Bitcoin and Ethereum suffer from throughput issues because of their popularity - which increases network congestion as well as fees.
Many blockchain networks facilitate dapps (distributed apps), via the use of smart contracts - contracts that exist on the blockchain.
A better way to do international transfers
Blockchain has come a long way from just supporting cryptocurrencies to send money from a payee to a receiver. This tech can also be used to make monetary exchanges with different currencies, rather than a simple one-to-one cryptocurrency transaction, e.g. Bitcoin to Bitcoin.
For instance, Stellar has its own blockchain network, so that traditional fiat-backed stablecoins cryptocurrencies, such as dollar or euro, can be used to make fast international transfers from one currency to another via a decentralized built-in exchange application. These types of applications can perform currency to cryptocurrency (and fiat-pegged cryptocurrency) exchanges, integrate with other payment systems quickly, and perform other financial services.
Because it’s fiat-backed, these cryptocurrencies are the same value as their ‘real life’ counterparts. And with systems in place for fast withdrawal to fiat, it’s quick, easy, and low fee.
In essence, it’s the same result as traditional banking networks - an international currency payment - although with lower fees and time taken to complete the payment. It’s the blockchain tech behind it that makes this possible.
Benefits of blockchain payments for payees
- Reduced payment fees
- Conduct payments near-instantly
- Send funds internationally
Benefits of blockchain payments for receivers
- Receive cross-border payments near-instantly
- Receive funds internationally with ease
- Integrate into your own products
- Build escrow into payments (much like PayPal) using blockchain technology
Want to learn more about how blockchain payments can help your organization, business partners, and new customers? Ask us for more information about DTransfer’s set of mature blockchain payment services.