Written by: Jonah
Compiled by: Saoirse, Foresight News
Everyone says stablecoins are better for cross-border payments. Is that really true?
If the recipient of your transfer wants stablecoins themselves, then stablecoins are indeed an excellent cross-border solution. You can transfer funds 24/7, with almost zero cost, and achieve instant settlement.
However, the trickier question, and the focus of this article, is the cross-currency scenario: what happens when one end inputs US dollars and the other end outputs a foreign currency (for example, Mexican pesos). Most opinion leaders in the crypto industry claim that stablecoins can fundamentally reduce transfer speed and cost in this scenario. But proponents of stablecoins deliberately avoid one fact: fintech companies have already achieved low-cost, high-efficiency operations of the same type, without needing stablecoins at all. So what problem do stablecoins actually solve?
This article will outline how the traditional correspondent banking system works, while analyzing the innovations modern fintech companies like Wise have made to this model, in order to clarify the actual value of stablecoins.
Correspondent Banking
Suppose Alice in the US wants to send some pesos to her friend Bob in Mexico. Their respective banks do not have branches in each other's countries, so they cannot complete the payment directly. The two banks need to connect through a larger bank, the correspondent bank. Alice's bank holds US dollar funds at this correspondent bank named GlobalBank; and GlobalBank holds pesos at BancoMX bank in Mexico.
After Alice initiates the transfer, her bank debits her account and sends an instruction to GlobalBank. GlobalBank debits $100 from the US dollars Alice's bank holds, completes the conversion at its own exchange rate, earning a spread, then notifies BancoMX to credit Bob's account, while charging its own handling fee. The entire process relies on the SWIFT system for message coordination, and SWIFT itself also charges message fees.
This underlying transfer mechanism is costly and slow, rooted in the fact that numerous middlemen profit along the way. In ordinary consumer remittance scenarios, the total cost of the correspondent banking system is about 15%, including transaction fees and the foreign exchange spread embedded in the exchange rate. Additionally, a transfer typically takes 1-5 business days to complete, as each intermediary institution needs time to execute its own operational processes.
Modern Fintech Solutions
In 2011, two friends in London had complementary funding needs: one earned income in euros but needed pounds for local living expenses; the other received a salary in pounds but needed to repay a euro mortgage in Estonia. So they bypassed the banks and made payments to each other locally: pounds were deposited into a London account, and euros into an Estonian account, with no cross-border flow of funds throughout.
This system later evolved into Wise. The two founders believed this model of offsetting and hedging fund flows could be scaled, and indeed it succeeded. Many other fintech companies have adopted the same approach.
Let's revisit the example of Alice sending money to Bob, this time using a service like Wise. Alice transfers dollars to the fintech company's US account; this company uses its own peso funds held in Mexico to directly send money to Bob. The funds never cross borders. What Alice perceives as a cross-border transfer is essentially the financial institution collecting on one end and paying out on the other. Because of this, the user experience is almost instant, though the fintech company bears the balance sheet risk of holding large amounts of foreign currency.
To minimize touching the traditional banking system, fintech companies net transactions. For example, other users might be sending pesos out of the country in the opposite direction, allowing the fintech company to internally hedge and offset the two flows. Only when the balance of funds in a particular currency becomes severely imbalanced would they resort to the traditional banking system. Underneath, fintech companies piece together partnerships with various banks and licenses; for regions their own business doesn't cover, local partners handle the transactions.
When functioning properly, this model is far superior to the traditional system. Wise charges only a small, transparent fee, uses the real mid-market exchange rate with no hidden spread, resulting in an overall fee of just 0.52% (this figure mixes some same-currency transfers and does not disclose the foreign exchange fee separately). According to World Bank data, the average cost of digital remittance services is about 3.5%, with Wise being on the lower end.
The Stablecoin Sandwich Model
Since fintech companies like Wise already provide a cross-border solution that is faster and cheaper than the traditional system, what different value do stablecoins bring?
Let's recreate the same remittance scenario using stablecoins. Alice converts $100 into 100 USDC; the USDC is sent to Bob in Mexico via a blockchain network, taking seconds and costing less than a cent in fees. Bob then converts the USDC into fiat currency, depositing it into his local bank account to receive pesos. The industry calls this process the stablecoin sandwich.
From Alice and Bob's perspective, this experience isn't necessarily better than Wise. In terms of cost, stablecoins also don't have a clear advantage. The cost of transferring USDC on-chain is almost zero, and on-ramp fees are also approaching zero. However, friction still exists at the off-ramp stage, where the foreign exchange spread incurred when converting dollars to local pesos can still represent a significant expense1.
The Real Value Unlocked by Stablecoins: Fully Open Market Competition
Building a global network like Wise's is extremely difficult, with only a handful of companies worldwide achieving it. Stablecoins dramatically lower this barrier. You no longer need to build a complete global business network to operate a cross-border payments business; you only need reliable on-ramp channels at the sending end and reliable off-ramp channels at the receiving end.
One could say stablecoins decouple fintech operations, turning previously closed, proprietary networks into an open market. Instead of a single service provider capturing the entire spread of a remittance corridor, off-ramp service providers in various locations can compete for the conversion business, which in the long run will drive down overall costs.
The cost-saving effect is most pronounced in niche, less-traveled remittance corridors. Without the need to build a global network, regional service providers can specialize in a specific area without requiring worldwide coverage. @yellowcard_app is a prime example, a company focused on multiple African markets (a company within the BCAP portfolio).
Business decoupling leads to market fragmentation, and fragmentation fosters competition, ultimately giving consumers lower transfer costs.
Some may argue: this situation won't last. Many stablecoin service providers are already integrating various stages, and leading companies will once again move towards vertical integration. The market might re-concentrate, and the advantages brought by stablecoins would then disappear.
However, an open underlying transfer rail is inherently open and difficult to monopolize. If a middleman extracts excessive profits through spreads, local off-ramp service providers can compete by offering lower prices—anyone can join the competition.
As the overall fee for cross-border payments is continuously compressed, the excess profits previously captured by middlemen will flow to ordinary consumers and businesses, ultimately manifesting as lower-cost capital flows.
Appendix
1 It's difficult to find credible data online on the actual total cost of the stablecoin sandwich model. Almost everyone only cites the middle part of the sandwich—the near-zero cost of on-chain stablecoin transfer—and rarely includes the on-ramp and off-ramp costs to give the complete end-to-end expense. This fact is telling in itself: either those citing these data are promoting it and deliberately avoiding the full cost, or they haven't understood where the true cost of transfer lies. This is also a key reason for writing this article.
According to oral accounts from senior executives in the cross-border payments industry: on major remittance corridors like US-Mexico, stablecoins can at best match fintech competitors; but on niche corridors like US to Africa, stablecoins have a certain advantage.
