How Blockchain Payments Bring Economic Relief to Emerging Economies
Here’s how blockchain payments can bring financial freedom to people in emerging economies.
Due to high transaction costs and long waiting periods, international payments can become a real challenge for people in emerging economies. Alla Zhendik, CEO of TEMPO Payments, discusses how blockchain technology can be the key to solving these issues and positively impact the development of emerging markets.
Fintech companies have been whirling up emerging markets for some time now. For instance, in Latin America, innovations have given unbanked people long-awaited access to financial services. And as mobile adoption has snowballed in recent years in Africa and the Asia Pacific, new payment solutions have emerged to serve those traditionally excluded.
The results of this fintech revolution are certainly noteworthy: Increasing online transactions, an uptake in e-commerce activity, and rising interest from stakeholders in international trade – all of which spur economic growth.
Nevertheless, opening the doors to new opportunities has become a double-edged sword due to cross-border finance. Payment systems are still significantly underdeveloped in most emerging markets and, therefore, costly and slow. Now, modern payment systems that are based on blockchain are introducing a new era of growth.
Let’s take a look at how blockchain technology can positively impact the development of emerging economies.
How Blockchain Transforms Cross-border Transactions
In recent years, specialized money transfer operators have emerged to provide near-instantaneous transfers and reduce the cost of sending money. However, it takes an average of $13 to send $200 to another country.
The Bank for International Settlement explains that payments must be converted to the currency on both sides of the transaction (also known as “cash-in, cash-out”). This process often requires manual processing (including verification of the customer’s identity) and having a physical business location. Smaller enterprises and individuals that send lower cash volumes globally face even higher fees and waiting times than larger retail customers.
By eliminating intermediaries, blockchain users benefit from better transaction speeds, cost-effective transactions, and higher security. Instead of exchanging currencies, blockchain payment providers allow customers in country A to buy tokens, which will then be sent to the recipient in country B within seconds. The recipient can then exchange these into their desired currency. As this payment type is usually based on stablecoins, the country’s currency will determine the price.
Blockchain users benefit from better transaction speeds, cost-effective transactions, and higher security by eliminating intermediaries. The technology is built about transparency and visibility – once a transaction is made, it cannot be altered or deleted. This helps reduce errors and potential fraud, as anyone can check the information and hold it against the law.
At the same time, distributed ledger technology reduces the likelihood of errors. Especially when transferring money between different countries, clerical mistakes or incorrect account numbers can hinder the speed and settlement of transactions. The technology will instantly identify something like a spelling mistake – not allowing the payment to go through. The payments provider can then communicate with their client and correct the destination address.
Blockchain payments are especially relevant in areas seeing growing participation in the digital economy but no corresponding growth in access to e-commerce-based payment mechanisms. However, users will need the internet and a cell phone or computer to manage their digital transactions. The good news is that most countries in East Asia, the Pacific, and Latin America have high cell phone penetration – and if needed, customers can go to a provider’s office.
Current Problem with Blockchain Technology
Even though blockchain is a fast-growing industry – its market size is projected to reach $163.83 billion in 2029, according to Fortune Business Insights – it is not all sunshine and rainbows.
Take the blockchain trilemma, for instance. It means that decentralized networks cannot have it all – they can provide two of these three benefits: decentralization, security, and scalability.
To illustrate, Bitcoin is decentralized and secure, meaning it is safe and no single person or group is in charge – instead, all users collectively retain control. Yet, Bitcoin is not scalable, which causes transaction latency. It takes 10 minutes of the average Bitcoin transaction’s confirmation time and can handle a maximum of seven transactions per second (keep in mind that VISA can carry out 1,667 in one second). This, expectedly, results in high transaction costs.
Another prime example would be Ethereum. Although it is the world’s second-largest cryptocurrency, transactions on the platform might be more pricey than the others, and depending on network congestion, a transaction can take from 15 seconds to a few days. The good news is that programmers and developers have taken action to upgrade the network under its ETH 2.0. This development plan will allow the platform to handle more than 100,00 transactions while reducing the costs and delays significantly as well as be more sustainable.
Focusing on interoperability is also another way of making blockchain cross-border payments more efficient. In a nutshell, interoperable payment and currency blockchain systems like Stellar can find the most optimal solution when converting money. It is because interoperability allows different blockchains to listen to each other and transfer digital assets and data. This better collaboration reduces the cost and increases the number of transactions per second.
Cross-border Trade Brings New Opportunities
First, introducing digital cash and corresponding technologies will incentivize service providers and entire nations to invest in digital infrastructures. The nations’ current interest in adopting their own digital currency – Central Bank Digital Currencies (CBDCs) – shows a growing tendency towards cashless societies and equal access to financial services.
Increasing cross-border economic activity will allow people in emerging markets to generate more significant revenue, boosting the economy. Enabled to participate in international supply chains, they can easily acquire goods, services, and technology abroad to diversify their product portfolio and sell them overseas.
Lastly, cheaper remittances also help reduce the strain between migrants and the families who support them abroad. As The Conversation suggests, more than 270 million migrants living and working abroad send remittances to their home countries during a typical year. And usually, migrant families are those most in need of saving every penny they can.
Is the blockchain itself innovative enough to overturn the entire financial system? It is. Its transforming power starts with bringing more and more financial freedom to people in emerging markets – an economic relief long overdue.
How do you think blockchain can transform cross-border transactions? Share your thoughts with us on Facebook, Twitter, and LinkedIn.
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