There is no denying that the global fin-tech landscape has matured and grown quite rapidly over the past three decades, thanks mainly to the inception of different digital payment mediums. However, with issues pertaining to transaction delays, high transfer fees, etc., at an all-time high, newer, more efficient, secure, and accessible payment systems must be made available to the masses.
To put things into perspective, a report by consulting giant McKinsey suggests that the payments market drew a revenue of $1.9 trillion in 2020. Moreover, digital transactions are estimated to keep growing at an annual rate of 20% in the near-to-mid term, therefore signifying the need for financial entities — traditional and otherwise — to keep up with the fast-evolving needs of the global economy.
In this regard, the United States Federal Reserve recently announced the launch of its real-time payment network ‘FedNow,’ which, as the name suggests, is a platform that makes clients’ funds available for withdrawal as soon as money is deposited into an account and/or available for instant payment for goods and service— at least on paper, that is.
Decentralization — The key to revamping the payments market
Even though the FedNow project is a significant move forward for the faster remittance market — since it allows for transactions within seconds — it still suffers from several operational bottlenecks and peripheral inefficiencies. Rollout of the service is slow, only a handful of banks upgraded their infrastructure to date to be able to participate; the service is sole US- specific and many financial institutions likely to take years to be able to join. Moreover, many users have reported facing delays accessing their deposited funds on the platform, sometimes facing up to five working days for their funds to reflect in their accounts.
These delays often result in excessive overdraft fees, costing unsuspecting users a decent sum of money. To this point, a recent Bloomberg story notes that bank overdraft fees cost American consumers in excess of $8 billion per annum. Lastly, even after being touted as a real-time payments system, FedNow’s lack of immediate availability of funds because of poor interoperability has left the door for newer, more decentralized options to make their presence felt in the market.
Cross-border payments – the holy grail of modern finance
In today’s interconnected world a global and cross-jurisdictional compliant payments infrastructure remains the goal. Large card networks, financial gateways, and global banks are all involved in the race to simplify and speed up global financial transactions and settlements, so are crypto and fintech startups. Several well-established crypto firms and their clients (Circle, Ripple, Stellar and Coinbase among them) already rely on cross-border transacting in stablecoins tied to fiat currencies, thus minimizing or even eliminating fees and maximizing payment processing efficiencies.
With over 60 countries worldwide in the process of rolling out instant payment systems, real time transaction processing rails are becoming mature and the undeniable convenience of getting paid fast is no longer a wish, rather an expectation, for businesses, teams and consumers alike.
While FedNow primarily focuses on clearing/settlement of retail transactions within the US, new players take it further aiming to alleviate many of the challenges above for domestic and cross border payments. For example, the Zebec ecosystem released the Nautilus Chain, which provides clients with real-time continuous settlements, capable of supporting real-time payroll and by-the-second payment applications and services. This allows businesses to pay employees and partners in real-time in a tax-compliant way.
“We are optimistic in our projections, but grounded in data: in the first 8 months Nautilus has facilitated over 50 million transactions, 400,000 wallets and deployed 3,000 smart contracts. We plan to surpass other payment blockchain networks in interoperability, transaction speed and security, ” said Sam Thapaliya Zebec’s founder.
FedNow is also centralized, which means it is potentially susceptible to attacks and scalability issues. On the other hand, blockchain-powered operational frameworks offer additional level of security and transparency, as well as a drastic reduction in fees.
Predatory loans and the urgent need for immediate access to earned pay
In addition to the issue of poor real-time transaction settlements, another problem pervading the payment market has for years been that of ‘predatory loans.’ In brief, these loans tied to paycheck are part of a lending practice where an individual/entity imposes extremely skewed repayment terms on a borrower.
In fact, the devious nature of these loans has caused many people to be evicted from their homes, caused individuals to be faced with real estate foreclosures, and in some dire cases, total bankruptcy. If that wasn’t enough, studies have shown that they are a big factor in broadening the wealth gap that currently exists worldwide.
Despite all this, numbers show that the practice of predatory lending has continued to grow over the past decade, with there even being a 50% increase in these offerings between 2019 and 2020.In this regard, the idea of payment streaming to enable real-time compensation allows users to bypass the need for predatory payday loans by allowing employees to access earned wages instantaneously
Looking ahead
As more and more people, employers and financial institutions continue to seek out innovative financial tools to facilitate their local/international monetary transactions, it will be interesting to see the dawn of this new financial paradigm. With the rise and adoption of tools like FedNow, add others (Ripple, Stellar, Zebec, etc.) the payments market is getting a major makeover and it is anyone’s best guess as to what the future now holds! Thus, it is fascinating to watch how the future of this space pans out from here on end.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.
