How can Stellar Blockchain simplify Cross-border Payments?

cross border payment on stellar

Globalization has completely revolutionized the business standards with the growing number of individuals and businesses tapping into overseas suppliers. This perspective has resulted in fueling the surge in cross-border payments. The advent of international trade, e-commerce and internationalization of production reveals that cross-border payment demand would continue to grow exponentially. A Forrester study predicts that cross-border eCommerce will span across at least 29 countries over Europe, Asia Pacific, Africa, North America, Latin America, and the Middle East by the year 2022.

Sending money from one country to another, whether to family, friends or paying for goods and services, is costlier, time-consuming, highly inconvenient, cumbersome and less transparent than domestic payments. It may be due to the complexity of cross-border payments involving more risks and rules than domestic payments.

For addressing these issues, blockchain has emerged as a one-stop solution to improve the overall efficiency of cross-border payments. A cross-border payment solution developed with a blockchain platform like Stellar can ensure that financial services reach people with limited to nonexistent banking services. These include interconnections between domestic payment infrastructures, expansion of closed-loop proprietary systems across borders, and peer-to-peer payment systems based on blockchain.

The article discusses why we trust the stellar network as the foundation of radically modernized payment infrastructure. The article sheds light on answering some of the following interesting questions revolving around Stellar’s adoption in cross-border payments.

While stepping ahead to answers these questions, here’s a brief overview of challenges faced by traditional cross-border payments.

What are the challenges faced by the traditional cross-border payment systems?

Cross-border payments are the transactions in which the funds are sent from one country to the recipient in another country. The traditional cross-border payment comprises multiple entities like banks, financial institutions, scheme providers, or individuals looking to transfer the funds across the territories.

When the payments are initiated, the funds are processed and moved through fragmented financial institutions. Each time, the fund custody changes and the corresponding institution charge the fees in some percent. This sequence results in increasing the price for the sender. The overall charges are taken into consideration based on the transfer amount and the destination country. The entire process is not only expensive but also time-consuming. As the sender and receiver do not share a common ledger, the transaction is processed through numerous intermediaries. Cross-border payments are necessary while sourcing goods and services from one country to another. However, these payments are not convenient because:

    • International payment processing through banking channels is sophisticated and challenging.
    • Unpredictable currency exchange rates.
    • Risks of robbery, hacking, or theft.

Here are some of the significant challenges that are faced in cross-border payments:

challenges cross-border payments

1. Outdated operational systems

Banks usually come across the issue of messaging infrastructure in cross-border payments. The majority of cross-border payments are executed using SWIFT MT 103 messaging format. The format is reliable but cannot carry vast information beyond a specific limit. If you need additional information, it is processed through email. The manual processing and non-automated messaging on both sides of the transaction make this method inefficient.

2. Slow payment processing

Due to a long and complicated path, cross-border payments may stop at any point. It leads to delays and an unsatisfied customer experience for both parties. The reason for the delay could be incomplete payment information, the need for sanction conduct, or AML checks and fraud. Due to the lack of digitization in the information sharing process, the transactions need to go through multiple sophisticated communication channels.

For example, international bank transfers are the long-standing way to place cross-border payments. Most of the large banks hold a limited stock of currencies. Suppose that a sender in the US is looking to transfer money to the UK and the banks do not hold sufficient currency stock. In such situations, they have to depend on foreign banking partners to execute the transactions. As the small banks do not hold foreign currencies, they opt for large banks to host cross-border payments on their behalf. This example is just a scenario, but many intermediaries are involved in such processes, resulting in transaction delays.

Most of the B2B cross-border payments are processed through banks. The transaction has to go through intermediary institutions like banks, the central bank, overseas banks. Each of them possesses an independent accounting system. Therefore, the bank records need clearing and reconciliation with other counterparties simultaneously. This sequential path is slow, thereby resulting in more time-consuming to process the payments.

3. Privacy regulations

The majority of financial institutions need to follow personal data privacy regulations. These regulations interpret which client’s information is to be shared across different jurisdictions for processing the transaction. The differentiation, sorting and organizing of this information take a lot of time. For example, in a few countries, banks cannot share information about clients within different departments. These regulations can be adopted better using some technological solution to ease the complexity of the entire process.

4. Low Security and Transparency

Regular cross-border payment uses centralized payment. Customers need to share their accounts and other information with intermediaries. Based on these details, intermediaries complete remittances and withdrawals. Such massive customer information and transaction details with intermediaries can be an easy target for hackers. While using third-party for cross-border payments, the transaction details are accessed across different platforms, overseas merchants and financial institutions. So, the information is more likely to get leaked in such modes. The participants involved in the transaction process cannot track their payments and hence, it becomes difficult to predict the final payment amount and the scheduled delivery.

5. Expensive

Fees get accumulated right from the sender’s bank to national and international correspondent banks and foreign exchange at every step in the process. The charge is usually up to 3% for high-volume cross-border payments. However, it may rise to 10% if the payment volumes and values are low. Moreover, it is not even clear when the financial institutions charge fees to a recipient.

For example, credit cards are popular go-to options for many consumers to place cross-border payments. All they need is to enter their card details and wait for authentication. The process seems very simple, but there is more going on behind the scenes. The cross-border payment needs more work from the associated credit card networks and involved banks for converting the two different currencies. The additional workload incurs the increase in charge that is passed down the payment chain.

How can blockchain overcome traditional issues in cross-border payments?

Blockchain is a distributed ledger technology capable of solving the numerous challenges of traditional cross-border payments. Despite completing several steps, blockchain provides direct transactions between the sender and the receiver. All the transaction details are stored in a secure distributed ledger. As soon as a transaction is recorded, the receiving party has direct access to the payment – no middlemen, no delays, no unnecessary fees.

Once payment is entered, it is irreversible and is linked to all the previous data in the blockchain network. It fosters security and accountability. One cannot alter a single block of data without changing all the previous blocks in the chain. The transaction is secure, quicker, and cheaper and has end-to-end visibility anywhere in the world. It takes around 4-6 seconds to execute the transaction and reduces the cost up to 40-80%.

The following features of blockchain make it distinguishable in executing cross-border payments.

  • Realtime: Payment transfers are completed within seconds, assisting the beneficiaries with early access and better utilization of funds.
  • Low cost: A reduction in the number of intermediaries reduces the Fees applied on the payment and is beneficial to the customers and Financial institutes.
  • Secured: Information is continually added with Secured Hash (linked to the previous block), Unique identity and Timestamp. Hence, the immutable nature of blockchain makes the transaction tamper-proof- eliminating the risk of any cyber-crime.
  • Unambiguous: Since blockchain stores unique records, there is no ambiguity or duplicate data present on the chain.
  • Transparent: Any participant on the blockchain can view the ledger (or blocks) of transactions without any concealment of information.

With bidirectional messaging and settlement components incorporated in a blockchain solution like Stellar, it ensures that the transaction is validated before transferring funds. If the payment is not processed, both the banks or parties are immediately notified and no funds are transferred.

The traditional sending and receiving cross-border payments are cumbersome, costly, prone to errors and take a couple of days to settle. Therefore, incorporating stellar-based blockchain payment solutions results in fast, secure, seamless and transparent transactions in cross-border payments. Hence, the stellar platform has gained traction in the remittance sector due to its immense potential benefits.

Here’s a brief overview of the Stellar platform with its basic terms and features.

Basics of Stellar

Stellar is an open-source blockchain platform capable of executing reliable international cross-border payments. It is a blockchain-powered distributed ledger network and refers to three different aspects: Stellar, Lumens, and XLM. Lumen is its native digital currency used to initialize accounts and execute transactions for a stellar network whereas, XLM is the coin symbol.

Stellar is used for creating, sending, and trading digital representations of all forms of money—USD, SGD, Euro, Bitcoin, ETH, and more. It is designed to interoperate financial systems on a single network. Stellar is a borderless, limitless, and robust open network for storing and moving money. As the public owns it, it runs across a decentralized network and handles millions of transactions every day. Stellar depends on blockchain to keep the network in sync, but it is more energy-efficient than typical blockchain-based systems.

While understanding about stellar, it is essential to know that stellar network mainly comprises four components. They are stated below. These components work together to create a quick and secure payment network.

Stellar Core

It is open-source software that acts as the basis for participants in the network to reach a consensus. Also, it is used to refer to a network node and the network has stellar cores. It uses the Stellar consensus protocol to validate transactions and store the recent copy of the ledger comprising comprehensive transaction history right from the beginning.

Stellar Consensus Protocol

In the Stellar network, transactions are added to a shared and distributed public ledger. A decentralized network of participants validates transactions in a process called consensus. Stellar uses a consensus algorithm based on the Federated Byzantine Agreement (FBA), called the “Stellar Consensus Protocol” (SCP). Stellar’s consensus protocol is independent of the entire network for approval of the transactions. Instead, the Federated Byzantine Agreement (FBA) algorithm enables faster processing of transactions.

Each node in the Stellar network selects another set of “trustworthy” nodes to approve the transaction. The network of these trustworthy nodes is known as Quorum Slices. As long as the quorum slices overlap, the stellar network can reach a consensus on valid transactions. The stellar network is high-speed and is said to process as many as 1,000 network operations per second.

Horizon API (Application Programming Interface)

It allows users to interact with a stellar network. It is used in conjunction with online payment or trading technologies, including mobile wallets and exchanges. Based on the functionality, it is divided into three segments.

  • Transactions API facilitates payment activity where the users can send transactions and validate information, like ledger numbers, transaction amounts, account balances, and payment confirmations.
  • History API maintains all information history right from the beginning.
  • Trading API keeps updates of order book information and data on completed transactions.

Stellar Smart Contracts

They are the programmed composition of transactions that are connected and executed based on chosen constraints. Some features of stellar smart contracts include:

  • Multisignature: It specifies the number of signatures of multiple parties for initializing the transactions.
  • Batching: It is related to numerous payments of respective parties from a single transaction.
  • Sequence: It refers to the series of transactions to be processed with certain conditions.
  • Time bounds: It states that the transaction can only occur within a specified period.

Which benefits of Stellar make it an ideal blockchain platform for cross-border payments?

Stellar is a global exchange network capable of hosting thousands of exchanges between currencies and tokens per second. Hence, it holds undisputed value and utility. Besides enabling fast microtransactions, the following are stellar benefits that make the stellar compatible for cross-border payments.

Benefits of Stellar

  • High Speed
    The processing time for a stellar network is about 2000 transactions per second. Hence, each transaction gets validated within 5 seconds. The tremendous processing speed makes the stellar network suitable for cross-border payments.
  • Decentralization
    Stellar is a decentralized and open-source network. It means that Stellar operates without depending on a specific central authority, such as a few bank employees. The decentralized nature of stellar moves money quickly and efficiently to bring coherency to the validation process.
  • Low Transaction Cost
    The average XLM transaction cost in a stellar network is $0.0000006. This cost is less than that of other digital assets. Hence, it is even cheaper than the fees charged for each transaction in international wire transfers.
  • Enhanced Tech Elements
    Stellar comprises smart contracts with advanced features like multi signatures to enhance the functionality of the payment protocol.
  • Secure and Transparent
    The Stellar network incorporates users and validators in a system. Each validator determines which other validators to trust for an accurate version of the latest ledger. As validators are identified and selected by other validators based on trust, it becomes impossible for unknown validators to carry out a malicious attack on the network. The stellar network offers a great deal of transparency as all the transactions are recorded and publicly viewable.
  • Permissionless
    In a stellar network, anyone can participate as a user, validator, or stellar anchor. Stellar anchors are responsible for holding user’s deposits and issue credits to exchange digital currencies or other assets. Most of the anchors include organizations like central banks, saving institutions and remittance companies.
  • Multicurrency Transactions
    One of the most significant advantages of Stellar comes from its seamless transactions across currencies. Like any payments system, Stellar allows one user to send currency to another. When looking to exchange USD for EUR, the stellar platform will find someone else looking to exchange EUR for USD and complete the transaction. Also, you can send and exchange money in a single transaction. It is called a path payment. It’s a powerful innovation for international payments; for example, an American company can pay an invoice in Mexico by spending dollar tokens while the vendor receives peso tokens. Neither side incurs exchange risk or delays. Both sides get only the currency they want.

Understanding the benefits of stellar gives the insight to adopt it in executing cross-border payments. The following section will help you understand and explore how stellar is responsible for streamlining many transactions efficiently in cross-border payments.

How can stellar help in streamlining cross-border payments?

Stellar can pave its way into streamlining multiple transactions at a time. Consider a scenario to understand how a Stellar-based payment solution can strengthen and simplify cross-border transactions in three simple steps.

John resides in the USA and wants to transfer the funds to Jennifer in Greece. John and Jennifer have digital wallets to store, send and trade the tokens in the stellar network. Now, John decides to transfer the amount in USD, but Jennifer needs the amount in her local currency, EUR. The cross-border payment process involves two users (John and Jennifer), two wallets and two anchors (USAnchor and EURAnchor) on the stellar network. The following tables depict the three main stages of the entire workflow. Each stage involves various steps executed on the stellar network corresponding to the user’s actions.

Stage 1: John deposits the funds in his account.

When John funds his account, stellar undergoes a sequence of corresponding steps in the backend. The following table will help you get a clear insight into how stellar works through the user’s sequential steps.

 

The user performs the following steps. Stellar network undergoes the steps given below in the backend.
Step 1: John enters the amount that he wants to deposit in USD.
  • John’s wallet proceeds USAnchor’s stellar.toml to search and get the asset information.
  • On opening the wallet, John chooses the option to deposit USD.
  • The wallet goes through the USAnchor’s/info endpoint to search and show the up-to-date fee information.
  • The wallet goes through USAnchor’s WEB_AUTH_ENDPOINT, visits through challenge/ response, and gets a JWT token for authenticating user sessions.
  • The wallet generates a request through /transactions/deposit/interactive endpoint for initiating the deposit.
  • As a response to this request, USAnchor’s/transactions/deposit/interactive generates a URL for a web app. John uses this web app to complete his transaction.
Step 2: John’s KYC Verification. John submits his KYC information to USAnchor using a web app. If John is depositing for the first time, he needs to enter all KYC details. Once submitted, USAnchor analyzes John’s KYC information.
Step 3: John follows instructions for the deposit, sends money via ACH and gets USD tokens in his wallet. On completing KYC verification, Laura’s funds transfer to USAnchor’s account via ACH. Further, USAnchor detects John’s deposit and transfers USD tokens to his wallet’s Stellar account within few seconds.

 

Stage 2: John transfers money to Jennifer.

While transferring the amount to Jennifer, lots of steps are involved, including currency conversion. Here, the table shows detailed steps executed in a stellar network corresponding to the user’s actions.

The user performs the following steps. Stellar network undergoes the steps given below in the backend.
Step 1: John makes the payment. With the help of a funded wallet, John enters the USD amount and mentions the currency EUR in which Jennifer would receive.
Step 2: Currency Conversion from USD to EUR The wallet executes the payment by debiting the amount from John’s account and converting it into EUR with built-in orderbooks and crediting Jennifer’s account with EUR. It takes place in a single transaction.
Step 3: The payment gets completed. Jennifer receives the amount in her wallet in few seconds.

Stage 3: Jennifer withdraws funds from her wallet.

After the transfer of funds from John, Jennifer has to undergo various steps to withdraw the amount. The following table shows how the stellar network executes the fund’s withdrawal with authentication and other necessary steps.

The user performs the following steps. Stellar network undergoes the steps given below in the backend.

Step 1: Jennifer proceeds for withdrawal.

  • Jennifer’s wallet proceeds through AnchorGreece’s stellar.toml to search and show the asset information.
  • On opening her wallet, Jennifer finds John’s payment and submits the amount to be withdrawn in EUR.
  • Moving through the AnchorGreece’s/info endpoint, the fee information is displayed.
  • Further, the wallet pings AnchorGreece’s WEB_AUTH_ENDPOINT for authentication and goes through response to get JWT tokens.
  • On reaching AnchorGreece’s/ transactions/withdraw/interactive endpoint, the wallet prepares for withdrawal.
  • On request, the AnchorGreece’s/transactions/withdraw/interactive response with URL for a web app. Jennifer uses this web app to withdraw her funds with a wallet ID to track her transactions. 

Step 2: Jennifer’s KYC verification.

  • Jennifer enters her bank account details and KYC information with the help of the anchor web app.
  • AnchorGreece examines Jennifer’s KYC details.

Step 3: The withdrawal process gets completed.

  •  The wallet goes through AnchorGreece’s/transaction endpoint with ID to check if Jennifer has completed her interaction with AnchorGreece.
  • Once the transaction endpoint returns pending_user_transfer_start, the wallet confirms by sharing a screenshot summary of withdrawal.
  • Then, the wallet transfers the specified amount of EUR tokens to AnchorGreece’s Stellar address.
  • Consequently, AnchorGreece transfers an equal amount of EUR from their bank account to Jennifer’s bank account via TED.

However, this scenario helps understand the clear workflow of a stellar platform in cross-border payments. From this example, it is also clear that stellar is valuable as it offers a global exchange network to host thousands of exchanges between currencies and tokens per second.

With the transformative impact on cross-border payments, the financial ecosystems need to implement such stellar-based blockchain solutions to reshape and augment the payment infrastructure. Simultaneously, there is a need for the economic ecosystem to adopt blockchain technology due to substantial deliberation over cross-border payments’ security, risks, and stability. Adopting the stellar-based approach is the right way to reap the maximum benefits of blockchain by making international payments to an entirely new level with secure, real-time and low-cost transfers.

Get closer to your blockchain development goals and take the next step on your journey to implement stellar blockchain solutions exclusively with our Stellar blockchain experts for elevating your business potential to the next level.

Author’s Bio

Akash Takyar
Akash Takyar
CEO LeewayHertz
Akash Takyar is the founder and CEO at LeewayHertz. With the experience of building over 100+ platforms for startups and enterprise allows Akash to rapidly architect and design solutions that are scalable and beautiful.
Akash's ability to build enterprise-grade technology solutions has attracted over 30 Fortune 500 companies, including Siemens, 3M, P&G and Hershey’s. Akash is an early adopter of new technology, a passionate technology enthusiast, and an investor in AI and IoT startups.
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