Binance has released an update entitled, Blockchain in the Modern Payments Landscape: Synergy and Transformation.
Binance Research has shared that key takeaways as follows:
This Binance Research report looks at “the state of modern payments, its main pain points, and how blockchain payments can address them, bringing value into the ecosystem.”
Despite being one of the largest and fastest-growing global sectors, the payments industry operates on “outdated infrastructure that was established more than 50 years ago.”
Transactions still depend on several intermediaries, “such as card networks, issuers, and payment processors, which introduce significant inefficiencies, costs, and delays.”
Blockchain technology presents “an innovative solution by offering a decentralized, globally-enabled payment infrastructure built from the ground up.”
Blockchain applications, such as Binance Pay, “are already demonstrating the power of this new technology by offering faster, cheaper, and more transparent cross-border transactions.”
Modern payment systems continue to “be plagued by inefficiencies.”
While cash payments allow for direct peer-to-peer transactions without intermediaries, digital payment systems often “involve multiple third-party actors, including banks, card networks, and payment processors, all of which add layers of complexity, costs, and privacy concerns.”
Blockchain technology offers a transformative opportunity “to eliminate these inefficiencies. By enabling peer-to-peer digital transactions without the need for intermediaries, blockchain can replicate the simplicity of cash payments in the digital world.”
When Bitcoin was introduced in 2009 by the pseudonymous Satoshi Nakamoto, it aimed to provide financial freedom and transparency “through a decentralized digital currency.”
This marked the birth of blockchain technology, which has since “evolved with the introduction of stablecoins and layer-1 and layer-2 scaling solutions that further enhance transaction speeds and reduce costs.”
The current global payments infrastructure like the Society for Worldwide Interbank Financial Telecommunications (SWIFT) network, “developed during the 1970s, is outdated and fragmented.”
The systems are heavily dependent “on intermediaries such as banks and card networks to process transactions, which introduces inefficiencies.”
These inefficiencies are most apparent in cross-border transactions, “where funds often pass through multiple correspondent banks, adding delays and increasing costs.”
For example, cross-border bank transfers “can take up to five business days to settle and can incur fees of up to 6.35% of the transaction amount, according to the World Bank.”
Despite these inefficiencies, the demand for cross-border payments “continues to grow.”
The market for B2B cross-border payments was “valued at $39 trillion in 2023 and is projected to grow to $53 trillion by 2030.”
Even within domestic transactions, the payments industry “continues to grow, with global payment flows reaching approximately $150 trillion in 2022, a 13% increase from the previous year.”
The rise of payment-focused fintechs like Stripe and PayPal has “made payments more accessible and convenient for consumers, but these platforms remain tied to the legacy infrastructure, leading to high transaction fees and slow settlement times.”
In the traditional payments landscape, there are two main types of payment systems: open-loop and closed-loop.
Open-Loop Systems:
Open-loop systems, such as those powered “by Visa and Mastercard, enable payments to flow from one bank to another through card networks.”
These systems allow consumers to “use a single card to pay for goods and services globally.”
However, in an open-loop transaction, “up to six intermediaries, including point-of-sale (POS) systems, payment aggregators, acquirers, issuers, card networks, and e-wallets, sit between the merchant and the consumer.”
Each of these intermediaries takes a fee from every transaction, “driving up costs for merchants and consumers.”
In contrast, blockchains can function as global, decentralized payment networks, eliminating the need “for intermediaries and offering a new form of open-loop system untethered from the slow and costly traditional banking infrastructure.”
Closed-Loop Systems
Closed-loop payment systems, such “as those offered by PayPal or Starbucks, operate within a controlled environment.”
Consumers can only transact with merchants “within the closed network.”
While closed-loop systems can reduce fees for merchants and deepen customer loyalty, they remain fragmented and often require integration “with traditional banking systems for transferring funds in and out of the closed loop.”
Blockchain technology offers an alternative by “allowing fintech companies to bypass traditional banking systems entirely, reducing fees for merchants and enabling global transfers within decentralized closed loops.”
Binance Pay exemplifies this model, “providing a seamless, customizable experience for both consumers and merchants.”
Cross-border transactions, particularly remittances, “are one of the most expensive and inefficient aspects of the traditional payments system.”
Worker remittances, where migrants send home “part of their earnings, often involve multiple correspondent banks and intermediaries.”
This process not only incurs high fees but “can also take several days to complete.”
In 2023, global remittance flows “reached $857 billion, with “significant portions of this value going to developing countries like India, Mexico, and the Philippines.”
According to The World Bank as of Q1 2024, the average “cost of sending money globally is 6.35%, leading to a total of $54 billion in annual fees.”
Many layers of additional fees at “every step of the transaction when intermediary banks are involved, unfavorable currency exchange rates when more than one currency is involved, lengthy anti-money laundering (AML) and know your customer (KYC) checks, all add up on the cost and length of time for traditional remittances.”
Adding fuel to the fire, “up to 1.4 billion adults globally remain unbanked.”
The traditional payments system is currently “unable to reach a significant portion of the global population.”
