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Cross-border payments are the backbone of international trade, global remittances, and financial connectivity. Yet, traditional systems often face challenges like high transaction fees, delays, and inefficiencies caused by intermediary banks and multiple currency conversions.
The introduction of liquidity pools is transforming this landscape, offering cost reductions and ensuring instant payments. Here’s how this innovative approach is reshaping the future of cross-border transactions.
Understanding Liquidity Pools in Cross-Border Payments
At their core, liquidity pools are pre-funded reserves of currencies maintained in strategic locations or across networks to facilitate real-time transactions. These pools ensure that the required funds are readily available for payouts, bypassing the traditional need to move money across borders for every transaction.
Unlike legacy systems that rely heavily on intermediary banks, liquidity pools allow payments to be processed seamlessly by providing immediate access to local currency in the recipient’s region. They have emerged as a critical solution for addressing the inefficiencies inherent in correspondent banking models.
The Dual Promise: Cost Reduction and Instant Payments
1. Cutting Costs Through Efficiency
Liquidity pools help reduce costs in several ways:
2. Enabling Instant Payments
Technological Enablers of Liquidity Pools
Blockchain and Distributed Ledger Technology (DLT)
Blockchain-based systems, such as RippleNet’s On-Demand Liquidity (ODL), use cryptocurrencies as bridge assets to eliminate the need for pre-funded accounts in certain corridors. This ensures faster settlements while reducing dependency on traditional banking channels.
AI-Driven Liquidity Management
Artificial intelligence and predictive analytics play a vital role in managing liquidity pools. They dynamically allocate resources, ensuring that the right currencies are available in the right amounts, avoiding overfunding or shortages.
API Integration
APIs allow financial institutions and payment providers to connect seamlessly to liquidity pools, enabling real-time transactions and better scalability.
Benefits Beyond Cost Reduction
1. Greater Transparency
Liquidity pools improve visibility into transaction costs and processing times. Businesses and consumers alike benefit from predictable pricing and reduced hidden fees.
2. Improved Cash Flow Management
With instant access to funds, businesses can manage their cash flow more effectively, reducing the need for working capital tied up in transit.
3. Increased Financial Inclusion
Liquidity pools enable cost-effective and efficient payments in underserved regions, supporting financial inclusion by connecting individuals and businesses to the global economy.
Who Can Leverage Liquidity Pools More Efficiently?
MTOs
Banks
Overcoming Challenges
While liquidity pools offer significant advantages, they are not without challenges.
Future Outlook: The Path to Universal Adoption
The adoption of liquidity pools is expected to grow as more financial institutions and fintech companies recognise their potential. As blockchain and AI technologies mature, liquidity pools will become more efficient, reducing costs further and enabling real-time global payments.
To maximise their impact, stakeholders across the financial ecosystem must collaborate:
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Victor Irechukwu Head, Engineering at OnePipe Services Limited
29 November
Nkahiseng Ralepeli VP of Product: Digital Assets at Absa Bank, CIB.
Valeriya Kushchuk Digital Marketing Manager at Narvi Payments
28 November
Alex Kreger Founder & CEO at UXDA
27 November
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