Do Cross-Border Payments Really Need Stablecoins?

Not much faster than Wise, but it opens another door.

Written by: Jonah
Compiled by: Saoirse, Foresight News

Everyone says stablecoins are better suited for cross-border payments. Is this really the case?

If the recipient of your transfer wants stablecoins, then stablecoins are indeed an excellent solution for cross-border payments. You can transfer funds around the clock, with almost zero costs, and settle instantly.

But the trickier question, which this article focuses on, is the cross-currency scenario: what happens when you input US dollars on one end and output foreign currency (like Mexican pesos) on the other. Most opinion leaders in the crypto industry would claim that stablecoins fundamentally reduce the speed and cost of transfers in this scenario. However, those optimistic about stablecoins deliberately avoid a fact: fintech companies have already achieved low-cost, high-efficiency similar services without needing stablecoins. So what problem do stablecoins actually solve?

This article will outline how the traditional correspondent banking system operates while analyzing the innovations made by modern fintech companies like Wise to clarify the actual value of stablecoins.

Correspondent Banking Operations

Suppose Alice, who is in the United States, wants to send some pesos to her friend Bob in Mexico. Neither bank has a branch in the other's country, so they cannot complete the payment directly. The two banks need to rely on a larger bank, known as a correspondent bank, to establish a connection. Alice's bank holds US dollars in a correspondent bank called GlobalBank; GlobalBank, in turn, holds pesos at BancoMX in Mexico.

After Alice initiates the transfer, her bank deducts the funds from her account and instructs GlobalBank. GlobalBank withdraws $100 from Alice's bank, exchanges it at its own exchange rate, earns a spread, and then notifies BancoMX to credit Bob's account while charging its own fees. The entire process relies on the SWIFT system for information coordination, which also charges message fees.

This underlying transfer mechanism is costly and slow, rooted in the fact that each intermediary profits from the process. In ordinary consumer remittance scenarios, the overall cost of the correspondent banking system is about 15%, including transaction fees and the embedded foreign exchange spread in the exchange rate. Additionally, a transfer usually takes 1-5 business days to complete, as each intermediary needs time to complete its operational processes.

Modern Fintech Solutions

In 2011, two friends in London had complementary funding needs: one earned in euros but needed pounds for local living expenses; the other earned in pounds but had to repay a euro mortgage in Estonia. So they bypassed banks and made payments locally: pounds were deposited into a London account, euros into an Estonian account, with no cross-border flow of funds.

This system later evolved into Wise. The two founders believed that this model of hedging and offsetting fund flows could be scaled, and it indeed worked. Many other fintech companies adopted the same idea.

Let's revisit the example of Alice sending money to Bob, this time using a service similar to Wise. Alice transfers US dollars into this fintech company's US account; the company uses its own pesos held in Mexico to directly pay Bob. The funds never cross borders. The perceived cross-border transfer for Alice is essentially this financial institution receiving and disbursing funds simultaneously. As a result, the user experience is nearly instantaneous, while the fintech company must bear the asset-liability risks of holding large amounts of foreign currency.

To avoid touching the traditional banking system, fintech companies will offset transactions. For example, if other users send pesos out of the country, the fintech company can internally hedge and offset the two funds. Only when a currency's liquidity pool is severely imbalanced will they seek help from the traditional banking system. At the core, fintech companies piece together partnerships with banks and various licensing resources; areas not covered by their own business are handled by local partners.

Under normal operations, this model far exceeds the traditional system. Wise only charges a small, transparent fee, using real market mid-exchange rates without hidden spreads, with an overall rate of just 0.52% (this figure mixes some same-currency transfers and does not separately disclose foreign exchange rates). According to the World Bank, the average cost of digital remittance services is about 3.5%, making Wise one of the lower-cost options.

The Stablecoin Sandwich Model

Since fintech companies like Wise already provide a faster and cheaper cross-border solution than traditional systems, what unique benefits do stablecoins bring?

Let's recreate the same remittance scenario using stablecoins. Alice exchanges $100 for 100 USDC; USDC is sent to Bob in Mexico via the blockchain network, taking seconds and costing less than a cent in fees. Bob then converts USDC to fiat currency and transfers it to his local bank account to receive pesos. This process is referred to in the industry as the stablecoin sandwich.

From Alice and Bob's perspective, this experience is not necessarily better than Wise. In terms of costs, stablecoins do not have a clear advantage. The cost of transferring USDC on-chain is nearly zero, and deposit fees are also approaching zero. However, there is still friction in the withdrawal phase, as the foreign exchange spread when converting dollars to local pesos can incur significant expenses ¹.

The True Value of Stablecoins: Fully Open Market Competition

Building a global network like Wise is extremely difficult, and only a few companies worldwide have achieved it. Stablecoins have significantly lowered this barrier. You no longer need to build a complete global business network to conduct cross-border payment services; you only need reliable deposit channels on the remittance end and reliable withdrawal channels on the receiving end.

It can be said that stablecoins have decoupled fintech businesses, transforming previously closed proprietary networks into open markets. No longer does a single service provider earn all the spreads along the remittance channel; local withdrawal service providers can compete with one another for exchange business, which will lower overall costs in the long run.

The cost-saving effects are most evident in niche remittance channels. Without the need to build a global network, regional service providers can focus on a specific area without the need to cover the entire world. @yellowcard_app is a typical example, as this company focuses on multiple markets in Africa (a company within the BCAP investment portfolio).

Decoupling business leads to market fragmentation, and fragmentation fosters competition, ultimately allowing consumers to enjoy lower transfer costs.

Some may argue: this situation won't last long, as there are already many stablecoin service providers integrating various links, and leading companies will revert to vertical integration. The market may once again concentrate, and the advantages brought by stablecoins will disappear.

However, the open underlying transfer tracks are inherently open and difficult to monopolize. If a certain intermediary extracts excessive profits through spreads, local withdrawal service providers can seize business with lower prices, and anyone can participate in the competition.

As the comprehensive fee rates for cross-border payments continue to be compressed, the excess profits previously captured by intermediaries will flow to ordinary consumers and businesses, ultimately resulting in lower costs for fund transfers.

Appendix
¹ It is difficult to find credible data on the actual total costs of the stablecoin sandwich model online. Almost everyone only cites the near-zero cost of the stablecoin on-chain transfer, and very few consider the costs of deposits and withdrawals to provide a complete end-to-end expense. This itself is quite telling: either those quoting these figures are promoting something and deliberately avoiding the complete costs, or they do not understand where the true costs of transfers come from. This is also a significant reason for writing this article.
According to oral information from executives in the leading cross-border payment industry: in mainstream remittance channels like the US-Mexico route, stablecoins can at most match the competition with fintech; but in niche channels like the US to Africa, stablecoins may have certain advantages.

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