In
today's interconnected world, cross-border transactions are essential for
international trade, remittances, and financial interactions. Current payment
platforms evolved decades ago and continue using the same old-fashioned method often
suffer from inefficiencies, high costs, and delays; leaving individuals and
businesses longing for a more efficient and cost-effective solution.
After extensive research on various technologies and solutions, I have
developed a game-changing architecture, based on blockchain technology. This
solution has the potential to revolutionize how we manage current cross-border
payments.
In
this blog, we'll explore a brief idea of implementing a
blockchain-powered cross-border payment system. I have considered Amazon
Managed Blockchain Service to design this solution, and it is a hyperledger-based solution.
Current Traditional Cross-Border Payments boundaries:
Before delving into the
design of the new solution, it is important to understand some of the key
issues associated with traditional cross-border payment systems. These problems
include:
High Transaction Costs:
Conventional cross-border payment systems
include numerous intermediaries like correspondent banks, which charge fees at
different stages of the process. These fees can accumulate, making transactions
expensive for individuals and businesses.
Slow Transaction Speed:
International
transactions often require several days to complete due to the complex routing
and settlement processes involving multiple banks and financial institutions.
Delays can impact business operations and limit financial flexibility.
Lack of Transparency:
Traditional
systems often lack transparency in terms of fees, exchange rates, and
processing times. Customers might not have a clear understanding of the total
cost or the status of their transaction.
Risk of Errors and Fraud:
The involvement of multiple
intermediaries increases the risk of errors, discrepancies, and fraud during
the transaction process. This can lead to funds being lost or delayed.
Limited Working Hours:
Traditional banking systems operate
within specific business hours, leading to further delays for cross-border
transactions that fall outside these hours.
Inconsistent Payment Hours:
Due to time zone differences and
varying business hours, some international payments can only be processed
during limited windows, leading to additional delays.
Vulnerability to Economic and
Political Changes:
Economic or political changes in a country might have an impact on the stability and availability of cross-border payment services.
Why Blockchain based:
Some of my colleagues have expressed the need for blockchain technology while there are already available other options such as VISA Direct, Western Union, and Open API from Banks and questioning the necessity of this new solution. They are concerned that it may only replicate the functions of the existing alternatives. In some way It is true but if you look at proprietary solution like VISA Direct, it works only when the debit/credit card is issued with VISA, Western Union have its own limitation like limits in the transactions and it is not made for account to account transfer, Open API is a kind of proprietary solution from the individual bank that has its own facilitation issues like authentication, authorization, and message integrity etc.,
However, the key advantages of a blockchain-based solution are decentralization, transparency, and immutability. These characteristics help to establish trust and confidence among all parties involved.
Reduced Transaction Fees:
Blockchain operates by utilizing multiple nodes. Those who become part of the network will possess their individual nodes, and the cost associated with this will be charged to their respective banks. A minimum maintenance fee will be applied by the central hosting company, which will not be dependent on transaction volume. Since there are no multiple hops involved, transaction fees can be noticeably lowered.
Immutability:
Once data is recorded on the blockchain and confirmed by the network's consensus mechanism, it becomes part of the permanent historical record. It cannot be deleted or modified without the consensus of the majority of the network participants, which is highly unlikely in a well-established and secure blockchain network.
Transparency:
Every transaction on a blockchain is recorded in a transparent and immutable manner. This transparency enhances accountability, reduces the risk of fraud, and ensures that both parties have a clear view of the transaction's status.
Decentralization:
Blockchain networks are typically decentralized, meaning that copies of the blockchain ledger are distributed across many nodes in the network. This distribution makes it extremely challenging for a single entity of group of entities to alter the data on a majority of nodes and simultaneously.
Security:
In a blockchain, each block contains a cryptographic hash of the previous block's data, along with its own data. This creates a chain of blocks where each block's hash depends on the data in the previous block. If even a small change is made to the data in a block, its hash will change significantly. This linkage ensures that any tampering with the data in a block will be immediately detectable.
A High-Level Logical Representation:
The diagram below showcases the logical
representation of a simple fund transfer requirement. Please note that this
diagram does not cover the additional checks and systems on the participant
banks' side like Financial Crime protection systems like Name Screening,
Transaction Screening, AML, and Fraud Management systems that notify regulatory
Banks which come under the jurisdiction of the respective countries.
To
put this solution into action, there needs to be a centralized organization
that facilitates payment technology and acts as the primary intermediary
between banks.
Personas
|
Sender
|
The person who is sending / Transferring the money.
|
|
Sender Bank
|
The Bank where the Sender hold the account and initiating Fund
Transfer.
|
|
ChainRemit
|
Blockchain based payment platform.
|
|
Beneficiary
|
The person who receives the money.
|
|
Beneficiary’s Bank
|
The Bank where the Beneficiary hold the account.
|
Components Layer-wise
|
Sender Layer
|
|
1
|
Mobile Banking / Internet Banking / ATM / Branch
|
Channel services provided by the Sender’s Bank
|
|
Sender’s Bank Layer
|
|
1
|
Payment System
|
Platform developed/owned by Sender’s Bank which caters payment
transactions.
|
|
2
|
Reconciliation System
|
Reconciliation system owned by Sender’s Bank
|
|
3
|
Settlement System
|
Settlement System owned by the Sender’s Bank, which helps to settle
the Correspondent’s Bank by the end of the payment cycle, it could be via
traditional SWIFT payment.
|
|
ChainRemit – Blockchain Platform
|
|
1
|
AWS Managed Blockchain Service
|
Hyperledger Blockchain managed by AWS and it is owned by ChainRemit
Payment Platform
|
|
2
|
On-Boarding Application
|
Microservices based application owned by ChainRemit and deployed on
AWS EKS.
|
|
3
|
Compliant Registration & Tracking Application
|
Microservices based application owned by ChainRemit and deployed on
AWS EKS.
|
|
4
|
AML
|
Anti Money Laundering System owned by ChainRemit Payment Platform
|
|
5
|
Fee Collection System
|
Fee Collection System to collect commission from the Banks
|
|
6
|
Notification Engine
|
Microservices based application owned by ChainRemit and deployed on
AWS EKS.
|
|
Beneficiary Bank
|
|
1
|
Payment System
|
Platform developed/owned by Sender’s Bank which caters payment
transactions.
|
|
2
|
Reconciliation System
|
Reconciliation system owned by Sender’s Bank
|
|
3
|
Settlement System
|
Settlement System owned by Sender’s Bank, which helps to settle the
Correspondent’s Bank by end of the payment cycle, it could be via traditional
SWIFT payment.
|
|
Beneficiary
|
|
1
|
SMS, Email
|
Notification Medium which is provided by Beneficiary’s Bank
|
Fund Transfer Flow:
Below is the Fund Transfer Flow which shows how the Banks can be integrated with BlockChain-based technology. The diagram is self-explanatory and doesn't require any further explanation.
Challenges expected during implementation:
Blockchain operates across
borders, which can make it challenging to adhere to different regulatory
requirements in various jurisdictions. Determining liability and legal recourse
in case of disputes or errors can be challenging in a decentralized and global
blockchain ecosystem. The immutability of blockchain transactions means that
incorrect or fraudulent transactions are challenging to reverse. While this is
a security feature, it can also make dispute resolution more complex.
Overcoming these challenges requires a combination of technical innovation,
regulatory adaptation, and user education. As the technology matures and more
use cases are explored, solutions to these challenges are likely to evolve as
well.
Conclusion:
By harnessing the unique
attributes of blockchain technology, the global payment landscape can be
transformed into one that is seamless, secure, and cost-effective. As this
blueprint is refined and implemented, we can stand on the cusp of a future
where international payments are no longer constrained by geographical
boundaries, intermediaries, or excessive costs. The journey towards
blockchain-powered international payments has begun, and the destination
promises a world where financial transactions unite economies, empower
individuals, and reshape the very fabric of global finance.