The globalization of production, cross-border e-commerce, and increase of international trade suggest that demand for cross-border payments will continue to develop and improve. However payments sent from one country to another are often unhurried, expensive, and less transparent than private payments. This may be partly because cross-border payments are more complex, involving more risk, and more rules than private payments.
What are the challenges of cross-border payments?
There are many people who think: "Oh, please. What problems can be in modern society with technologies and different transactions?" However you faced such problems as expensive and slow transactions using cross-border payments. So, what are the reasons for such challenges?
1. Antiquated operating systems.
The most popular system for cross-border payments using nowadays is SWIFT MT103. It is a highly reliable technology but rather limited in terms of the amount of information it can carry.
SWIFT MT103 is as slowly as expensive because it provides for manual processing and non-automated messaging on both sides of the transaction. So, it takes much time, a bank worker's concentrating and limited in terms of information quantity.
2. Slow payment processing.
The main reason of this problem is the information amount you need for a successful transaction. You forget about a certificate proving you are not a fraud? Sorry, you must wait some days or months or years during the all information about you will be found out.
It could be a joke, but delays include incomplete payment information, anti-money laundering checks and fraud, and the need for sanctions. Due to the serious lack of digitization and standardization in the exchange of this information, your checks usually need to go through many channels of complex communication.
3. Personal data privacy regulations.
Different provisions as to what information can be shared or not, without mentioning the interpretation of these regulations, only further complicate the already complex transmission process. Banks need to follow these rules carefully, spending a lot of time trying to organize what information can be passed on in different jurisdictions.
What is blockchain and how it is transforming cross-border payments?
The CaponeResearch (CR) system operates as TPP (3rd party payment provider) in the EU. It triggers Bob's bank API to initiate transactions from his bank to CR's domestic bank. Once CR's domestic bank received a payment, it updates transaction by triggering smart-contract on Quorum's blockchain. Every time transaction is updated on the blockchain the smart-contract emits the appropriate event, as these events are private they are broadcasted to the blockchain peers via Tessera component of Quorum. At last CR backend has workers that are polling smart-contract for new events and execute appropriate business logic when the event is received.
Such cross-border payment is profitable for the business. Firstly, directive PSD2 is cheap for remittance. Also Transparency and immutability of ledger - key attributes of the system that creates trust between service, investors and regulators.
How blockchain can help facilitate cross-border money transfer?
If you doubt the benefits of blockchain payments, you must know about the innovation this technology gives to Cross-Border Payments. The cross border payments using blockchain helps you to automate fraud-detection cases based on ledger's history and business processes based on smart contracts feature. Do you have more than two parties involved in the transactions? So, cross-border money transfer using blockchain provides an ability of controlling data visibility for each member of transactions and opening data for new parties as easy as one, two, three. Moreover, the network is unlimitedly scalable to include as many participants as needed when the network grows. Still don't believe in the benefits of blockchain? Well, we show you how blockchain is transforming cross-border payments.
Here are some of the another major advantages of this technology: • Unmodifiable, verified transaction records store the entire structured history forever; • Provenance, resistance to forges, and transaction transparency are the core properties of the ledger protected with cryptographic hash links and physically replicated to all the participating enterprises; • Permission to join the distributed ledger as a peer organization is controlled by the standardization committee or a similar collegial entity.
Summary, the main application value of blockchain technology in cross-border payment is solving the problem with the slow and expensive cross countries wires.
The use case of Quorum blockchain.
The Quorum technology was built and open-sourced by J.P. Morgan based on Ethereum (Largest Ecosystem of Developers, Tools, DApps). Why is it good for cross-border payment? The Quorum has a replaceable consensus algorithm, so it is reliable, fast enough for remittance case and scalable.
How Blockchain Is Transforming Cross-Border Payments
The remittance system based Quorum blockchain delivered by our 4ire Labs team.
We create a remittance system based on DLT for immutability and auditability and use JP Morgan Quorum for a blockchain solution. The network peers (nodes) are divided by user-roles:
CaponeResearch – provides the service;
Investors – provides liquidity;
Regulators – for audibility.
Transactions processing is based on EVM events and domestic remittances initiated via TPP PSD2 integration with Banks providing peers as a service in cloud (kaleido)s or on premise should be discussed separately. CaponeResearch nodes are maintained on Kaleido platform so parties (investors/regulators) peers may be provided as a service both inside (kaleido) / outside infrastructure.
High-level architecture vision on integration context
Update transaction/remittance request state on the blockchain
Process transactions based on events received from the blockchain
Store users identities in local-storage only
Move payment processing into separate service
Data is captured into the blockchain on the earliest possible stage
Local storage cannot run out of sync with ledger
Simple integration of new banks via OpenBanking
The unique value divides into three great innovations to compare outdated technologies:
Security – cryptography protected history stored on different peers;
Immutability – once event is captured it's no longer can be changed;
Auditability – in case of disputes between parties (end-user – bank – investor) ledger history will be used as a trusted proof; any manual human-related action (e.g. manual accountant work in case of the false-positive failure detected by the system) is captured and easily verified later.
Blockchain transactions may not contain personality identity and privacy data and will store only a reference id to the corresponding data in the original storage. All transactions have timestamps and protected by cryptography.
So, the blockchain naturally fits business case for cross-border remittances to be used in case of disputes between different parties – users, banks, investors, regulators via history traceability. Also, it is cheap, quick, and safe.