If your business is required to make even a small number of international payments to contractors or employees, you are all too aware of the delays and fees involved. One of the greatest benefits Bitcoin brings to the table for businesses like yours is the elimination of these issues. Using Bitcoin for international payments, your payroll process becomes streamlined to a degree that will make you wonder how you ever did it any other way. The delays, bank transfer fees and miscellaneous charges you’ve experienced using traditional payment transmission methods will disappear forever.
Uber, the Internet rideshare company, offers a prime example of how Bitcoin can simplify the payroll process. Uber has two choices to pay their contractors. They can either incorporate and build banking relationships in every country, working with non-user-friendly interfaces and old, low quality APIs, or they can go through several slow and costly integrations of multiple platforms. Either way, the contractors are left with no choice but to accept high forex costs and slow, unreliable transfer times. According to the World Bank, the average of cost of sending funds across borders is 8 percent, and the average time for transfer completion is three to five days, with workers shouldering the bulk of these costs.
But why does it take so long for wages to be transferred and exactly how much is lost to intermediaries? Here’s a step-by-step breakdown of a simplified international contractor transaction:
1. Client initiates the international bank transfer from their bank account and pays a $45 flat fee.
2. Their bank forwards the funds next business day to a large correspondent bank with the resources to maintain international correspondent banking relationships.
3. The large correspondent bank removes $25 from the total amount.
4. The large correspondent bank sends back $7.50 to the client’s bank for initiating the transfer.
5. The large correspondent bank forwards the funds next business day to their large multinational correspondent bank with a presence in Brazil and the capital to facilitate a foreign exchange.
6. The large multinational correspondent bank exchanges the USD to BRL and takes 7.5 percent in the spread between the interbank rate and the retail exchange rate.
7. The large multinational correspondent bank forwards the funds next business day to the contractor’s local bank account.
8. The contractor receives the international bank transfer into their bank account three business days later and pays a $15 fee.
These costs and delays are a result of the current financial system’s reliance on sending funds through a system called the correspondent banking infrastructure. Banks do not actually have direct relationships with the banks receiving the funds on the other side. Instead, funds flow through a series of correspondent banks, where one bank somewhere in the middle will make the conversion from one currency to the next. While many people tend to focus on the flat fees levied on both sender and receiver, the main cost burden is accrued through the currency conversion, where the spread is often over 8 percent.
Unlike the simplified version of the correspondent banking system provided above, the real process is actually very opaque. The sender and receiver typically do not know how many banks are within the chain of correspondent banks, and there are currently no good mechanisms for tracking funds. So banks cannot provide an exact date for when funds will arrive at their destination. In fact, many wires end up getting lost in the process, often delaying international payments by one or two weeks. For the receivers, this creates the stress of not only not knowing when the funds will hit their accounts, but also not knowing where the funds are or even whether the funds will ever reach their destinations. For the sender, this typically results in increased customer support costs and less time to hold onto the working capital used to pay employees and contractors.
This is clearly not an ideal situation for any of the participants other than the intermediary banking institutions who are generating additional revenues. So what would an international payroll solution look like if it used Bitcoin and the blockchain? Here is the step-by-step breakdown of the new blockchain-based international contractor transaction above:
1. Client initiates domestic bank transfer for a vastly reduced or zero flat fee.
2. Domestic bank forwards funds to Bitcoin Payroll & Payments company’s domestic bank next business day.
3. Bitcoin Payroll & Payments company facilitates near instant international blockchain transaction.
4. Bitcoin Payroll & Payments company takes a nominal fee depending on the service.
5. Contractor receives domestic bank transfer from Bitcoin Payroll
- Payments company’s domestic bank in the receiving country, forwarded one business day later, and pays vastly reduced or zero flat fee.
This means that Bitcoin payroll and payments companies now have full control over the entire payments process. Fees and transfer times can be dramatically reduced by removing intermediaries and directly accessing all the players involved. In many circumstances, employers receive better rates than the interbank rates, saving them money, and the employees and contractors have access to their local funds next day. And unlike the current financial system, both the employers and their workers can actually track the funds, providing insight into when the funds will arrive and assurance that the funds will actually reach their destinations.
It is obvious why both individuals and corporations are looking to Bitcoin for a better payroll solution. Some people are using pure “Bitcoin payroll” systems, while others are working with systems that leverage Bitcoin as an intermediary step. There is even a service that allows employees and contractors to receive their wages through Bitcoin without requiring their employer to sign up.
Market research carried out by Bitwage, one international payroll services provider, suggests that even among the Bitcoin community, many people don’t know that they can receive a chosen percentage of their paychecks in Bitcoin even when their employer has not signed up for a Bitcoin payroll service.
It is surely only a matter of time before more employers and employees transition away from antiquated traditional payment systems to the vastly superior solution that Bitcoin provides. In the near future, the everyday pain of international payroll payments will be a thing of the past.