They all say stablecoins are suitable for cross-border payments; is it really faster and cheaper than Wise?
Author: Jonah Compiled by: Saoirse, Foresight News Original title: Do cross-border payments really need stablecoins? Everyone says stablecoins are better suited for cross-border payments. Is that really true? If the recipient of your transfer wants stablecoins themselves, then stablecoins are indeed an excellent cross-border solution. You can transfer money around the clock at almost zero cost and instant settlement. But the more difficult question, which is also the focus of this article, is the cross-currency scenario: what happens when one end inputs US dollars and the other end exports foreign currency (such as Mexican pesos). Most crypto industry opinion leaders will claim that stablecoins can fundamentally reduce the speed and cost of transfers in this scenario. However, people who are optimistic about stablecoins deliberately avoid the fact that fintech companies have already achieved low-cost, high-efficiency businesses of the same kind, and there is no need for stablecoins at all. So what problem do stablecoins solve? This article will sort out how the traditional agency banking system works, and also analyze the innovations made by modern fintech companies such as Wise to clarify the actual value of stablecoins. The proxy banking business assumes Alice, who is in the US, wants to send a peso to her friend Bob in Mexico. Both banks do not have branches in each other's countries, so payments cannot be completed directly. The two banks need to use a larger bank, or correspondent bank, to establish a connection. Alice's depositary bank holds funds in US dollars at this correspondent bank called GlobalBank; GlobalBank also holds pesos at BancomX Bank in Mexico. After Alice initiated the transfer, her bank withheld the funds in her account and issued instructions to GlobalBank. GlobalBank transfers $100 from the dollars stored by Alice Bank, completes the exchange according to its own exchange rate, earns the exchange rate spread, then tells BancomX to credit Bob's account and deduct its own processing fee. The entire process relies on the SWIFT system to coordinate information, and SWIFT itself also charges for messages. This underlying transfer mechanism is expensive and slow. The root cause is that all layers of intermediaries are profiting from it. In an ordinary consumer remittance scenario, the comprehensive cost of the agent banking system is about 15%, including transaction fees and foreign exchange spreads embedded in the exchange rate. In addition to this, a transfer usually takes 1 to 5 business days to complete, and each intermediary takes time to complete its own operation process. Modern fintech solutions In 2011, two friends in London had complementary financial needs: one person earned in euros but needed pounds to live in the local area; the other received a salary in pounds and had to repay a mortgage in euros to Estonia. As a result, they bypassed banks and paid each other locally: the British pound was deposited into the London account, the euro was deposited into the Estonian account, and the two funds did not flow across the border. This system later evolved into Wise. The two founders believe that this model of hedging and offsetting capital flows can be implemented on a large scale, and this model has indeed worked. Many other fintech companies have taken the same approach. Let's take another example of Alice sending money to Bob, this time using a service similar to Wise. Alice transferred dollars to the fintech company's US account; the company used its own peso funds stored in Mexico to complete the payment directly to Bob. The funds did not cross the border from beginning to end. Alice's perception of a cross-border transfer is essentially a financial institution that receives and withdraws money at the same time. Because of this, the user experience was almost instantaneous, and the fintech company needed to bear the asset liability risks associated with holding large amounts of foreign currency. In order not to touch the traditional banking system as much as possible, fintech companies will distort transactions. For example, if other users remit pesos overseas in reverse, fintech companies can internally hedge off the two capital flows. Once a currency's capital pool is seriously unbalanced, it is only necessary to seek help from the traditional banking system. At the bottom, fintech companies cobble together partner banks and various license resources, and local partners handle regions that cannot be covered by their own business. Under the premise of normal operation, this model is far superior to the traditional system. Wise only charges a small, publicly disclosed processing fee, using the actual mid-market exchange rate, no hidden exchange rate spread, and the comprehensive rate is only 0.52% (this value is mixed with some transfers in the same currency, and the foreign exchange rate is not disclosed separately). According to World Bank data, the average ratio of digital remittance services...
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