International remittance 101: Tackling the issues of cross-border payments

In today’s digital and globally connected age, we often need to transfer money using online banking, but the process is far from easy. From high transfer fees to several day-long delays, transferring money is an expensive, confusing and problematic affair. But blockchain offers a viable solution.

Meet James and Joanne. James runs a small business and needs to pay his overseas supplier, but a bank transfer even for a modest 4-figure sum threatens to eat away most of the profit he makes by using the offshore supplier. Joanne, on the other hand, has just received her first paycheck at her overseas job. She doesn’t have a bank account, so she has to trudge to a Western Union branch to send some money back home, and her mother will then likewise have to travel some distance from her town before she can collect the money from a corresponding Western Union branch. There has to be a better alternative for James and Joanne, right? There is: blockchain.

The global cross-border payments (CBP) and remittance services market is expected to top US $156T by 2022. While B2B transactions like James’ account for the lion’s share at US $150T, remittances conducted by the Joannes of the world make up smaller revenues but generate higher margins.

With the huge opportunity it provides, the market is understandably fragmented, but banks are by far the largest market players. Conducting cross border transactions through banks is costly and confusing, and for those who don’t have bank accounts, that is not even an option.

Velo provides the security, cost-efficiency and speed consumers want

Blockchain technology has been the harbinger of positive change and disruption, seen as the means to democratise many opaque industries and technologies.

Velo Labs is a blockchain-based financial protocol that enables CBP using smart contract systems. The company was founded by serial investor and entrepreneur Chatchaval Jiaravanon in 2018 and powers a global settlement network that makes transactions faster, cheaper and more accessible.

The Velo Protocol-powered Federated Credit Exchange Network is the foundation that allows financial services providers to issue digital credits pegged to any fiat currency. Velo simply plugs its technology to an MTO partner, called a Velo anchor. These anchors can be a number of financial institutions, such as banks, credit unions, crypto exchanges and more. All of them help to bridge the gap between a payment network and the Velo Protocol.

But it is Velo’s security assurance that is the real gamechanger. With the help of the Velo anchor, a transaction can be completed in about 5 seconds, and with the Velo tokens acting as collateral exchangeable for any credit used in the network, the transactions are completely devoid of counterparty risk between users.

Banks are reliable, but this comes with high costs and delays

Banks are currently the most common means to conduct CBPs. And rightly so, since they offer the most secure means of conducting international monetary transfers. Banks possess a wide global network of trusted partners and have stringent regulatory systems in place, made possible by the SWIFT system. However, SWIFT membership is costly, which means banks need to pass on the cost of membership to consumers.

Beyond the cost is the time taken for the transactions. For the SWIFT system to work, as many as 4 banks need to be involved in a single international transfer. Bank #1 receives a payment request, which it sends on to Bank #2. This bank then sends a message to Bank #3 via the SWIFT network. On receiving the instruction, the third bank transmits the value to bank #4, which finally credits the amount in the local currency to the recipient.

Not only does this whole process take 2 days or more, it is also inefficient for banks as they need to maintain a foreign currency account for other banks to make these transactions possible. For example, Wells Fargo in the US needs to have an account in Euros for BNPP, a French bank, to make transactions possible in Euros.

Others have tried to solve the problem, but with limited success

For folks who don’t have a bank account, MTOs (Western Union, TransferWise, etc.) and fintechs (PayPal, Stripe, etc.) provide alternative options to conduct CBPs. However, these pose their own challenges.

The biggest limitations are in the size of the audience (banks take the bulk of the customer base) and geographical coverage (expansion is costly for MTOs as a local branch or a bilateral agreement is required), making them less exciting for consumers.

Even within the blockchain space, there are already players that aim to offer CBP solutions. However, they are often limited in their partnerships, subject network participants to external fees or large pre-funding requirements, meaning they need a lot of capital to get going, transact in volatile and unstable digital assets that expose businesses and individuals to unpredictable price volatility risks, which can severely impact pricing, and, lastly, they operate in closed, permissioned networks, which can significantly hinder volume and liquidity.

So what can Velo do better?

Velo’s blockchain infrastructure bridges the most popular blockchains with the Velo Protocol and Warp Protocol, allowing cross-chain asset transfers. By providing the ability to connect to everything from e-wallets to bank accounts, Velo provides full interoperability, enabling access to price-stable Velo digital credits; providing the ability to manage, exchange and trade the digital credits; and integrate with other licensed entities. And with the Velo token acting as collateral, transactions are made safe and transparent. In stark differentiation from the SWIFT technology that banks are forced to use, Velo’s Stellar network can settle up to 1,000 transactions in a matter of seconds.

In a world where consumers demand near-instant gratification in all things from information to grocery deliveries, Velo offers a unique opportunity to delight users while providing all the security they need.