Why Cross Border Payments Are Hard and How Crypto Payments Might Solve It
You might have felt payments friction while trying to:
- Pay for a bus or cab ride in another country, but the driver only accepted cash, and you did not have any.
- Send money to family in another country and paid 10%+ fees.
- Pay an educational institution 15K USD and faced two options: ~5% of the transaction via card or $3 on ACH (but you don’t have a US bank account).
Cross borders payments has friction and is costly. There is opportunity for crypto payments to help with cross border payments. In this post, I will:
- Explain why cross border payments are hard
- Propose how crypto payments might help make cross border payments easier
- Outline challenges that lie ahead for crypto payments to reach its full potential
What are Cross Border payments?
Here are four types of common cross border flows:
- Consumer to business: Payment for goods/services from an overseas retailer. Or payment to an overseas educational intuition.
- Business to consumer: Payroll for a global company, payment to freelancers abroad, off ramps for exchanges
- Business to business: B2B invoice payments to suppliers in another country
- Consumer to consumer: Remittance flows, like migrants sending money home.
Why are cross border payments so hard?
I propose four reasons why cross border payments are so hard. The reasons are non exhaustive, and many are working to solve this.
- Lack of financial inclusion
Over 25% of the world is unbanked (source), which means a sizable population is excluded from cross border payments in the banking system. Even for those who are banked, some rural banks are not connected to the SWIFT network, and have to partner with other larger banks. All this adds layers to the cross border payment transaction.
2. Decentralization: no central authority to streamline systems
There’s no “one world government” to create a central payment system. Each country has its own rails, dominant banks, and different ways of building inter bank transfers/instant payment networks. The different payment systems don’t “talk” to one another, or easily integrate into each another systems to enable seamless cross border payments.
3. Technical legacy: Multiple layers of systems built over time
Multiple parties form the “cross border payments stack”, adding layers of fees and checks. There are many parties in different countries — banks, intermediary banks, clearing houses. Sometimes there are 6+ banks in one cross border transaction. These systems were built and cobbled together over time so there is technical debt.
4. Regulation and compliance requirements
Banks are required to observe compliance standards and scrutinize transactions for anti money laundering. There are large potential fines for non compliance from law enforcement and regulators. Slowing down transactions means more opportunities to verify transactions.
How might crypto payments help make cross border payments easier?
Before I dive into how crypto payments might help make cross border payments easier, there are existing non-crypto based solutions. Crypto payments will develop in parallel to these solutions. Two examples:
- Consumer to business: Cards are the expensive and convenient option that have enabled cross border payments. Currently, an online retailer can sell globally by accepting cards, and paying the higher fees.
- Consumer to consumer: Wise, Remitly are doing great work in this space. An anecdote from a friend moving money from AU to SG. Initially, the fees they paid to an AU bank was up to 5%+, before they switched to Wise, which had significantly cheaper fees. In the public sector, there are ongoing efforts to build real time payment network corridors e.g., Thailand <> Singapore (live and enabling same day cross border transactions, vs 1–2 days).
Consumer to consumer use case
We’ll focus on the consumer to consumer use case. Here’s a simplified example.
Currently, you might bank with X bank in one country, and then wire funds to Y bank in another country via multiple middle banks. With a self custodial wallet, you can “send” digital assets directly to another wallet user. Here is how it works:
- You hold your digital assets in a self custodial wallet (a wallet where you hold your own private keys) like Coinbase Wallet. See here on how to set up a self custodial wallet.
- You can send/receive ETH (as an example) from another wallet holder. See screenshot below. The imperfect analogy is that the self custodial wallet is both a software ledger and a “universal” digital asset account. Now, one can send digital assets to anyone in the world. The transaction happens almost instantly, and is possible 24/7. No worries about SWIFT codes, ABN numbers, bank account numbers, going to a bank branch during business hours etc.
While I focused on the consumer to consumer use case, this wallet to wallet flow could apply the consumer to business use case (consumer sends tokens to the business wallet address) and business to business use case too.
Challenges that lie ahead
What needs to be true for crypto payments to solve the friction in cross border payments? Here are several challenges:
- Speed: How long will it take for a cross border payment to reach the overseas party? To the extent that the transaction is instantaneous (as it is on some blockchains, like Solana), or same day, this will be more compelling than fiat transfers.
- Fees: What’s the cost of each transaction? Regular fiat cross border payments are expensive (e.g., ~10% of transaction), and fintechs have helped significantly reduce this to <1–2% for some cross border corridors. Gas fees may fluctuate and add unpredictability to crypto payment fees, increasing the cost per transaction.
- Volatility: How will volatility be managed? Crypto prices have high volatility (exception: stablecoins). Ideally, the “value” received cross border should be equal to the “value” sent, net fees.
- Ease of use: There are still significant barriers to entry. It is daunting to create a self custodial wallet, securely store the seed phrase, acquire, use and transfer tokens. Sending to a wallet address is irreversible and can feel unerving. Converting token to fiat (“off ramp” is not straightforward — not all exchanges support it in every country). If the token is not widely accepted, then funds are “stuck”. The current power of regular fiat cross border payments is that the funds are immediately usable once you receive them.
Conclusion
Crypto payments have the potential to transform cross border payments. Its greatest strengths are speed, availability (24/7) and no middle layers. However, there is significant work ahead to improve costs, increase predictability, and grow the ease of use for mainstream adoption. I am curious to see how things unfold, so that consumers and businesses around the world can experience truly frictionless, cheap and fast cross border payments.
