Can USDC be the solution to prefunding’s problem in cross-border payments?
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Like in the article “What is prefunding in Remittance process?” FinFan discussed the disadvantages of using prefunding for cross-border remittance.
In these disadvantages of using prefunding, we have emphasized that prefunding will make remittance businesses lose liquidity and ignore opportunity costs for other things such as investment in technology or some other necessary costs of the business.
So, can the appearance of USDC help support the extremely painful liquidity problem of remittance transfer businesses? And if the business cannot meet the prefunding volume, can other fintech companies support their capital flow through some other funding services? Let’s find out with FinFan.
Can USDC be the solution to the problem of prefunding in cross-border payments?
The cross-border payment industry reached $156 trillion and has continued to grow in 2023 and later with an estimated growth rate of 5%/year.
*As of late January 2023, the total capitalization of stablecoins reached $138 billion2, executing $7.4 trillion worth of transactions.
One of the leading stablecoins, USD Coin (USDC) is a regulated, fully reserved dollar digital currency with price parity to the U.S. dollar. Launched in 2018 by Circle, USDC has become one of the key drivers of growth in cross-border payments, with a circulation of $50 billion and $6.1 trillion transacted to date.*
A coin with a market share of more than 5% in the cross-border remittance market has also proven its outstanding ability to expand its market share due to the capitalization of cryptocurrencies, especially stablecoins much lower than fiat currency.
So, is USDC an effective solution to solve the problem of loss of liquidity and other opportunity costs of businesses? To answer this question, let's first take a look at what the core causes of this coin’s creation are.
- First of all, USDC is a cryptocurrency created by blockchain technology
Like other stablecoins, USDC is a currency created by blockchain technology, a technology that is said to provide security for coins.
Furthermore, the highlight of this technology is that it can perform transactions in a decentralized and P2P manner, meaning transactions can be transferred from one person to another directly. without going through an intermediary.
This will increase the transparency of the transaction and reduce the transaction time to no more than 1 working day (sometimes just a few seconds) for the recipient to receive the amount from the sender.
- Second, USDC is staked with USD value
That means this currency has a value of 1:1 compared to the most powerful currency in the world, USD. This helps users trust and use these stablecoins in transactions more. Otherwise, the story will be repeated like 2 Pizzas worth up to 300 million USD in California if considering the level of deflation of Bitcoin from 2010 to the present.
At the same time, created by two giants in the market, Circle and Stellar, the stability of USDC's exchange rate fluctuations is considered to be higher than that of another giant that came before it, USDT (used in exchange other cryptocurrencies rather than transact with each other).
- The presence of USDC eliminates the supposedly outdated money bank transfer system SWIFT
*At the time it went live in 1977, SWIFT was a revolutionary system, replacing the hitherto standard of teleprinter networks known as Telex. Yet in today’s increasingly fast-paced world, SWIFT has proven to be woefully slow in making cross-border remittances—not to mention the exorbitant fees and potential losses due to FX exposure.
While the SWIFT system and correspondent banking networks have continued to falter when it comes to ensuring efficiency and reliability in transaction settlement, USDC provides an innovative and compliant means for low-cost, real-time, and borderless payments. In partnership with the Stellar Development Foundation, Circle enables more than a billion worth of USDC remittance volume for millions of customers worldwide.*
With the above 3 characteristics, USDC is one of the effective ways of payment as well as cross-border money transfer and may solve the problem of illiquidity for other expenses of businesses.
What is the solution for the business that can’t meet the prefund volume?
Know that USDC upfront funding is a better way to solve a business' cash flow problems when they need another cash flow for essential business issues like new technology updates, staffing, etc.
However, converting from fiat currency to USDC still has many technological difficulties as well as an extremely high risk of losing money. Furthermore, businesses do not always have enough USDC to be able to pay for extremely large daily prefunds.
Therefore, companies providing money transfer services usually prefer the postfunding model over prefunding. However, in some nations like Vietnam, there are regulations that only apply the prefunding model in such money transfer services.
Understanding the above problem, FinFan has a solution to support businesses with working capital through the Credit Line service for prefunding. This service can also be applied to fiat currency.