Small and medium-sized businesses often find themselves at a disadvantage, because they have to rely on the same antiquated cross-border payment methods as large companies. Larger companies can use their financial leverage to negotiate favorable fees and lower foreign exchange (FX) rates, while smaller players do not have such privilege, despite the fact that they constitute almost 25% of the cross-border market at $6 trillion a year.
From a transaction fee standpoint, an outbound wire transfer fee on average costs a business $35 per transaction, irrespective of the underlying amount being transferred, this is somewhat affordable for processing a transaction worth $100,000 (fee is only 4 bps) , but the same is not true for processing the same cross-border transaction worth only $1,000 (fee increases to 350 bps). The base fees that businesses pay can vary considerably, ranging from $30 for an inbound wire transfer to as high as $50 for an outbound wire transfer. Unfortunately, the total fees paid is composed of the base fees plus the foreign exchange rates of 3-8% on the spread of the currency pairs, which is the crux of the problem. Bitcoin is an excellent example of how modern technology can be used to facilitate a frictionless cross-border money transfer, and help small businesses reach markets that would otherwise be unattainable.
Finally, with Bitcoin technology as the foundation, all businesses would have access to the entire $24 trillion per year global trade market, and more importantly, a significant portion of the existing $50 billion currently incurred in fees per year would be eliminated. A business’s geographical location and proximity to traditional banking institutions would no longer be considered competitive advantages in the payment space. Moreover, a new digitally transformed environment powered by a global cryptocurrency will offer greater convenience, lower expenses, and a powerful reduction in processing time relative to traditional wire transfers.
What is Bitcoin and Blockchain?
Bitcoin is the first decentralized digital currency in the world. Its roots date back to 1998, when it was first described by an early advocate of digital currency known as Wei Dai. The original software that is still used to this day was published in 2008 by Satoshi Nakamoto. At its core, Bitcoin is a digital ledger that contains names and balances. This ledger is maintained by all participants in the network to ensure transparency and security. When someone decides to transfer Bitcoin to someone else, an electronic signature is added, verified by all other members on the network, and, finally, permanently stored in the network. The information that is published to the network is non-repudiable and irrefutable. This is known as the ‘proof of existence’. A single unit of Bitcoin is essentially infinitely divisible (up to the 8th decimal point!) and easily transferrable across peers. Imagine tipping someone 5,000 miles away 10 cents for a great YouTube video!
Bitcoin as a digital currency is just the tip of the iceberg, the underlying technology, known as the Blockchain, is where true opportunities exist. The power of the Blockchain comes from its characteristics as the most versatile shared digital ledger ever combined with its decentralized nature. With neither a central authority nor a governing body, it is the world’s most secure database of transactions. These transactions are secured by complex mathematical principles which guarantee that each and every transaction is verified by thousands of individual computing nodes, which makes it immune to tampering, fraudulent activity, and predator control. As such, the Blockchain represents a single shared source of truth that can be relied upon by anyone in the world. A single transaction on the Bitcoin Blockchain can represent a myriad of digital assets, such as electoral vote, a barrel of oil, a digital signature, a promissory note, or just about anything else that requires neutral verification and transparency. In fact, the number of transactions processed on the Bitcoin Blockchain has steadily increased from 2009 onward at an exponential rate, which has created some concerns on the scalability of the platform; below is a line chart showing the number of transactions per day from January 2009 to January 2016.
How Can This Technology Be Used by Small and Medium-Sized Businesses to Save Money on International Cross-Border Transactions?
Just by understanding the underlying principles behind Bitcoin, it becomes clear how this technology could be used to expand the reach of small and medium-sized businesses from local markets to a single global one. Modern customers are used to ordering merchandise from every corner of the world, but they still have to face many barriers to purchase. These barriers are, however, removed the moment you decide to implement Bitcoin as a form of payment for your business. Suddenly, online payments can be processed cheaper, faster, and in a more seamless manner compared to traditional payment systems.
It is entirely free for businesses to receive Bitcoins, while individuals need to pay a minuscule transaction fee to send outbound payments.. Individuals have the ability to expedite the transaction being approved by the network by paying a few more cents. Most transactions are processed within 20-30 minutes, only cost a few cents irrespective of the amount being transferred, and cannot be reversed (no double spending!) Therefore, businesses would pay the same amount for making a bulk order with their supplier as they would for a small refund to a customer.
This makes Bitcoin 40% cheaper than traditional wire transfers and 70% cheaper than PayPal (and similar alternatives). Additionally, the speed to transfer units of Bitcoin is exponentially faster than the legacy systems. To put everything in perspective, an international cross-border payment using the traditional banking system takes up to 5 days to be processed, while a traditional cross-border payment using Bitcoin takes as little as 10 minutes to be processed. While FX providers can, in some cases, offer relatively competitive rates, their services are usually inaccessible to small and medium-sized businesses. Furthermore, they cannot accommodate receivers, which makes them unfit for cross-border business activities. Because they act solely as an intermediary bank between the business and the bank, they prolong the transfer process and add an additional layer of complexity, while still being completely dependent on the bank itself.
Bitcoin offers businesses robust protection against fraud and dishonest customers. Traditional payment solutions put the burden of trust on the merchant. This fact can make it completely unviable for a company to do business with certain countries that are known for a high percentage of fraudulent transactions. Honest customers from these countries are then penalized and deprived of their rightful chance to participate in the global marketplace. Bitcoin elegantly solves this issue, while still providing users with security. Its multi-signature feature requires consent from multiple parties before the payment is actually authorized. This is in principle akin to an escrow provider, who acts as an overseer of two parties that do not know or trust each other.
Bitcoin offers anonymity for buyers and protection of their identity. It might not be immediately obvious, but many businesses lose a substantial amount of money simply because their customers are afraid that their identity and personal information is going to be revealed. Maybe they do not trust that the business is able to securely store personal data of their customers, or perhaps they worry potential embarrassment that could arise from ordering certain products or services. With Bitcoin, the only information that is publically available is the wallet number.
As you can see, Bitcoin can be a very cost-effective payment method for smaller and medium-sized businesses, who are looking to expand their reach and offer their services to customers from all over the world. Companies who already do business on the global market are guaranteed to save money on fees – not to mention the much faster processing.
The only real barrier that stands that stands in the way of its widespread use is the willingness to accept this new, disruptive technology. But history tells us that innovation cannot be stopped. Just like when VoIP solutions were first introduced, it took some time before they have become widely embraced and utilize. Today, we could hardly imagine living in a world where it would be impossible to instantly talk to everyone else in the world for the cost of the Internet connection itself.
The Blockchain comes with the same promise of a bright future without any unnecessary borders. It will finally enable small and medium-sized businesses to cut down on their wire transfer fees, process payments with much greater speed, and ensure complete transparency and safety on both ends. We are on the verge of a great social-economical change and have everything we need to use it to our benefit.