The traditional global payment sector faces heavy frictions due to multiple middle-men, and the latency and charges incurred due to them. Moreover, with globalization on the rise, the need for easy cross-border payments make these frictions more apparent.
Blockchain being able to provide a trustable single database that can be accessed by multiple parties without being concerned about the data not being manipulated opens up a lot of opportunities. Companies like Ripple have taken the early entrant advantage to leverage and exploit those opportunities well in-time, and the fruits are, let's say, fruitful.
Value Proposition of Blockchain in Global Payments:
(1) Elimination of Intermediaries
- By using a single trustable database on blockchain, several intermediaries can be removed. Currently, a local bank needs to communicate with the local clearing network, correspondent bank and the payment gateway, and this communication happens on both the sender and the receiver side. All the intermediaries need to maintain the records with proper security alignment. The reports and compliance are essential too. The whole process makes the traditional global payment scenario to cost above 10% in transaction fees between the sender and the receiver, generally the customer and the merchant.
- Take an example of Ripple. Ripple works as a single intermediary between the collaborating banks. The fund transfer between the banks, instead of routing through various entities, goes through Ripple's network. Ripple network works on XRP, its native (crypto)currency which facilitates the transactions and the accounts between banks are kept using a single Ripple network. XRP being immutable, can be reliably used by banks to keep a track of credit and debit between the financial entities bank further deals with, given the institution also implements the ripple technology.
(2) Unlocking the Nostro and Vostro capitals
- Capital institutions need to maintain a heavy sum of currency between other institutions in the form of Nostro and Vostro accounts. These funds ensure the reliability of the capital institution among other use-cases. This capital remains seated without being utilized in any form, unlocking which can help the economy. Moreover since the locked-up capital doesn't allow for returns as an asset investment, this is basically charged to the clients of the institutions in terms of fees. Blockchain technology again, helps unlock this capital.
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