Blockchain technology and the distributed ledger offer a promising alternative to move cross border payments faster and cheaper.
Payments deliver atomically meaning all movements of funds from senders and receivers settle simultaneously or not at all. Cross border payments can involve several parties so the promise of the blockchain’s speed and lower cost is appealing, in theory!
However, it is early days and there really isn’t much of a network of blockchain enabled financial institutions around the world. Every party to a payment must be enabled on the blockchain in order for it to function as envisioned. The SWIFT network, by comparison, already has thousands of banks all over the world and SWIFT is implementing its own blockchain pilots to move to real-time settlement.
Payments also are already moving faster – independent of the blockchain. ACH payments, for amounts up to $25,000, recently moved to same-day settlement and payments in Mexican peso, Canadian dollars, and US dollars typically flow on the same-day basis throughout the NAFTA zone. Even Euro and British pounds can deliver same day, from the US to Europe, within defined cut off times. Blockchain can further accelerate payments moving from the US to Europe and Asia.
While blockchain technology has the potential to lower payment costs, be mindful that the hidden and higher cost of transacting cross border is embedded in the foreign exchange rates. Hedging this currency risk with forward contracts and market orders to set buy/sell rates are effective ways to protect profits. Timing foreign currency transactions in volatile currency markets can significantly lower cross border payment costs so it is important to keep up on foreign currency developments to take advantage of favorable market moves.
So as blockchain technology evolves over the next few years keep up to date on developments but in the meantime focus on the tools and tactics now that can mitigate foreign exchange risk in your cross border payments and positively impact your profits today.