by Grace Deng, Lin Congjian, Lei Shuang and Luke

Notes: In this article, we primarily focus on the improvements that cryptocurrencies are bringing to cross-border payments. Domestic payment systems are becoming increasingly mature, with Real-Time Payments (RTP) systems like the USA’s FedNOW and India’s UPI, as well as closed-loop fintech payment companies such as PayPal and Alipay, enabling instant settlements and 24/7 availability.

Payment Use Cases and their revolutions

B2B Payment

Traditional Banking Rails 🐢

• Peer-to-peer bank payments are settled through interbank clearing systems like ACH. A key requirement is a strong partnership between the sending and receiving banks.
• When there is no direct link between banks, especially in cross-border payments, intermediary banks are needed.
  • This introduces an extra step: After the initiating bank sends the funds, they pass through an intermediary financial institution before reaching the receiving bank. While this adds time and cost, it ensures the transaction can still proceed even without a direct connection.
  • For less common currency conversions, multiple intermediary banks might be required, and the SWIFT system is used for information transfer. This is the traditional correspondent bank network (CBN) for cross-border payments.
    • SWIFT handles over 50% of global cross-border payments, connecting over 11,000 financial institutions across 200+ countries, making it the most widely used financial messaging network.

• Pain Points of Traditional SWIFT System:
  • Multiple Intermediary Banks:
    • Accumulating Fees: Each intermediary bank charges a fee.
    • Time Delays: Transactions can take 1-5 business days as they pass through each intermediary.
  • Lack of Transparency in Fund Flow:
    • Both sender and receiver have limited visibility into how funds move through intermediary banks.
  • High Costs:
    • The combined fees from intermediary banks, SWIFT network fees, and foreign exchange conversion make it costly, especially for small-value cross-border payments.

Fintech improvement 🚀

• Payment Network Aggregators and Proprietary Payment Networks — Bypassing SWIFT and Reducing Intermediary Banks

• Payment Network Aggregators (e.g., Wise, Payoneer):

  • Aggregators operate networks that rely on third-party connections to reach markets where they don't have direct ties. This approach helps them scale quickly and covers many markets by aggregating various partners' networks.
  • However, these indirect connections come with ongoing fees, increased risk from each partner, and limited transparency of fund flows. While they provide quick access to multiple markets, this can compromise on transparency, costs, and security.
  • Flow: Payer's Bank → Fintech Company (Aggregator) → Partner Bank/Network → Payee's Bank/Wallet

• Proprietary Payment Networks (e.g., Thunes, Airwallex, Visa Direct):

  • Proprietary networks like Thunes build direct connections with each network participant, bypassing third-party intermediaries. This allows for easier fund transfers with full visibility over the flow.
  • These networks have greater control over transaction costs and risks, ensuring higher transparency, security, and lower costs for users.
  • Flow: Payer's Bank → Proprietary Network → Payee's Bank/Wallet

• Pain Points of Fintech Solutions (e.g., Thunes):

  • Net Settlement Dependency: Fintech solutions like Thunes often bundle multiple transactions for batch reconciliation instead of settling each individually. However, they still rely on SWIFT for final settlement between bank accounts in different countries, which introduces key challenges:
    • Prefunding Costs: They need to maintain prefunded accounts across multiple countries to speed up processes. Without prefunding, they are constrained by the inefficiencies of traditional banking systems.
    • Currency Volatility: Holding various currencies exposes them to exchange rate risks.
    • Higher Costs for Users: These operational costs are passed on to customers, making services less cost-effective.

• crypto improvments

  

  • Immediate Settlement: Blockchain enables near-instant settlement, eliminating the need for prefunded accounts and reducing exposure to currency volatility. This significantly accelerates B2B payments and reduces costs.

    • flow：Local currencies on-ramp--stablecoins---offramp to destination currency

    

  • Enhancing Legacy Systems: Existing payment companies can integrate stablecoins and blockchain to improve or replace outdated payment infrastructure.

    Thunes x Circle: Thunes partnered with Circle to use USDC for settlements, reducing capital costs, mitigating volatility, and enabling near-instant global transactions.

    SCB x Lightnet: SCB collaborated with Lightnet to launch stablecoin-based cross-border payments, improving efficiency and lowering costs.

Crypto opportunities 🚀🚀🚀

Existing fintech payment companies are gradually experimenting with blockchain technology. However, significant opportunities remain in crypto space due to the complexities associated with crypto-specific regulations and the challenges of routing payments across multiple blockchains and stablecoins. Additionally, these larger companies often move more slowly in adopting and implementing new technologies, leaving room for more agile startups and innovators to capitalize on the evolving crypto payment landscape.

• Regulated stablecoins and stablecoin issuers
  • In the typical stablecoin sandwich for b2b payment (fiat-stablecoin-fiat), the stablecoin in between is the key. They are usually well-established highly regulated issued by regulated stablecoin issuers to ensure:
    • Regulatory Compliance: This is important for both parties in the transaction to remain within legal frameworks, especially for large-scale institutional or B2B payments.
    • Stability and Transparency: The middle stablecoin is generally chosen for its price stability, which is pegged to a fiat currency (e.g., USD), ensuring minimal volatility during the transaction. Highly regulated stablecoins like USDC are also often subject to regular audits, which enhances their transparency and trustworthiness in the B2B space.
    • Liquidity and Availability: The stablecoin used needs to have high liquidity and widespread acceptance across exchanges and platforms. A stablecoin that is more commonly used or integrated with key financial systems allows for more seamless transactions across different countries and payment networks.
  • Typical regulated stablecoins are USDC and USDP; typical regulated stablecoin issuers are Paxos, circle, straitx, GMO
  • This sector has strong network effects. USDC benefits from its extensive licensing across the globe, solid banking partnerships providing substantial liquidity, and a broad partner network that includes major players like MoneyGram, Visa, Mastercard, Circle, and FIS. These collaborations enhance market confidence. Similarly, Paxos holds licenses in multiple regions and has a trusted track record with billions in redemption volume. It has partnered with industry giants such as Robinhood, PayPal, and eToro, bolstering its market presence and credibility. Paxos is also exploring various stablecoin models, including single-entity, holder-incentivized, and distributed network stablecoins.
• B2B crypto payment with proprietary networks
  • For B2B crypto payment providers with proprietary networks, a robust license and strong banking relationships are essential, especially when working with Web2 companies. These licenses allow providers to handle high-volume stablecoin-powered B2B payments and offer on/offramp services for crypto users who are unbanked or underbanked. Below are examples of such providers:
    • RD Group holds a Hong Kong Stored Value Facility (SVF) license, of which only 16 exist. Notably, RD Group is the only company among these 16 licensed entities that offers B2B payment services. Additionally, RD Group is one of only three stablecoin players operating within the Hong Kong stablecoin sandbox, which positions them as a leader in the region. Their strong relationship with DBS Bank is another advantage, as they both operate within the same regulatory framework, ensuring smoother integration with traditional finance.
    • Bridge.xyz holds multiple regulatory licenses, including registration as a Money Services Business (MSB) in the U.S. and money transfer licenses across 48 states, each requiring separate approval. Additionally, Bridge is authorized by Poland’s Financial Supervisory Authority (KNF) and is listed in the country's virtual currency activities registry.
  • Based on their existing licenses and regional advantages, both Bridge.xyz and RD Group can collaborate with compliant players in other regions to extend their services. For example, Bridge.xyz has partnered with Trubit, a regulated crypto payment provider in Latin America to facilitate cross-border payment between Latam and US using crypto rails.