Guest author Ali Erhat Nalbant, Arf Co-founder and CEO, loves to develop tech products with impact. Ex-software developer, ex-Deloitte with 10 years of B2B SaaS product development, B2B marketing & sales experience with over 25 international clients in EMEA. 10 years of entrepreneurship experience. Arf is his 3rd fintech company.
Remittance flows are one of the strong determinants of the overall economic health of low and middle-income countries, as they make up a significant part of financial inflows. Today, 800 million people are dependent on remittances to sustain their livelihood globally1. Their vital importance is undebatable.
However, remittance companies are bound to use today’s correspondent banking model, where one ‘correspondent’ bank holds deposits owned by other ‘respondent’ banks and provides payment and other services to those respondents. Although this model has been an essential component of the international payments industry, it often doesn’t comport with today’s fast-paced nature of cross-border payments, global trade, and e-commerce.
In correspondent banking, the only way to achieve real-time transactions as needed is that the traditional payment industry players prefund their treasuries locally with their partners.
In the current financial system, prefunding operates as a ‘patch’ to overcome the shortcomings of correspondent banking networks, achieving settlement speed varying from 1 to 7 days. However, this solution adds even more problems to the system as it entails high capital requirements, FX exposure, and increased financial and treasury operations, due to cross-border payments’ dependency on networks such as SWIFT. Especially when there are long settlement cycles, prefunded capital acts as a barrier to growth in volume and to establishing new corridors.
Arf has created a cutting-edge solution to unlock the benefits of blockchain and stablecoins for the licensed money service businesses (MSBs) of the cross-border payment industry
Together with Circle, Arf offers freedom from the high capital requirements of prefunding and an opportunity to conveniently build cross-border payment corridors to licensed MSBs and international money transfer operators around the world. By leveraging USD Coin (USDC), one of the the fastest growing, regulated dollar digital currencies, and allowing real-time stablecoin settlements across multiple channels—including real-time transfers to bank accounts, e-wallets, and cash pickup points—Arf enables MSBs to build API-based cross-border financial operations and treasury management.
Arf provides "global treasury accounts” using stablecoins along with its real-time cross-border settlement network to minimize the need for prefunding in each corridor partner’s bank account. Using these, an MSB can send and receive payments from other MSBs in the network and hold its treasury denominated in USDC.
Arf also recently launched Arf Credit to provide API-based, transactional, short-term working capital credit line to MSBs, allowing them to reduce prefunding requirements in their network, in some cases down to zero percent.
Another benefit of using Arf Network is significantly lowering FX exposure and real-time settlements by providing API-based, real-time, and local FX rates. Based on Arf’s internal analysis, an estimated 1/3 of managed prefunding in local currencies is lost annually due to currency fluctuations, lack of real-time FX services, or regulations that prohibit holding prefunding in foreign currencies, mostly depending on the country.
For this to work, Arf customers can manage the legal and compliance aspects, pricing, and FX via the Arf API and dashboard. In this way, MSBs as part of Arf Network from all around the world continue to do business as usual in fiat while settling between one another in USDC.
The key difference between Arf and other fiat or crypto-based networks:
A single API to connect and a single agreement to sign for all corridors
First and last miles can be conducted in fiat so end-users and businesses do not have to know and understand any stablecoin or blockchain concepts
Value (money) is settled nearly-instantly along with the payment and compliance information
Arf works only with fiat-pegged stablecoins like USDC, which is fully backed by cash and short-dated U.S. government obligations.
As of March 2022, Arf is live in more than 60 countries including the US, UK, Singapore, and China, with more than 150 MSBs in the pipeline.
How Arf built a real-time payment corridor between Europe and the Philippines
The remittances sent by overseas Filipino workers to the Philippines have been increasing for many years2. As of 2020, remittance flows reportedly made up almost 10% of the Philippines' GDP, indicating the need for an enhanced experience for both sides of money transfers.
A digital money transfer business based in France saw the remittance opportunity in the country. Together with them, Arf successfully launched a payment corridor between Europe and the Philippines.
Example Use Case
A babysitter living in Europe downloads the remittance app and loads money from her bank account. Next, she makes an order to send the money to her family in the Philippines. She sees the FX quote EUR:PHP for sending the money on the app, provided by Arf’s local licensed Philippines partner. Then she approves it, and the payment happens in real time.
In the background of this transaction, the app sends the required amount of euros to the ‘global treasury account’ provided by Arf. This amount is transferred to the Arf Network Member in the Philippines through Arf’s stablecoin infrastructure.
The member nearly-instantly pays out the money in Philippine pesos by using its own payout channels such as bank accounts, e-wallets, and cash pickup points. End users and businesses never have to understand or deal with any stablecoins, as the payout always happens in local fiat.
The transaction, including the USDC amount, FX, and KYC information flows, are seamlessly orchestrated by Arf’s technology. It only takes a few minutes for the transaction to settle in the beneficiary’s local account.
The remittance company uses the global treasury account provided by Arf to hold and manage its treasury in USDC. It can now use the same account to make settlements in other corridors across the globe, 24/7 and in real time via Arf API. This way, its cross-border financial operations and capital requirements are effectively reduced.
With the elevated need for real-time cross-border payments across the world, traditional finance needs the benefits of blockchain technology and stablecoins more than ever
Up until now, global finance hasn’t reached its full potential in part because the financial players could not compliantly utilize blockchain technology and stablecoins. These are critical technological instruments to be utilized for moving forward, but traditional finance needs to figure out how to use them compliantly.
For the first time in the world, we are witnessing concrete steps towards an elevated version of finance with fiat-pegged stablecoins like USDC, which is fully backed by cash and short-dated U.S. government obligations.
Traditional finance, more than ever, requires blockchain technology, digital assets issued by licensed institutions, and compliance frameworks to meet the growing demand for cross-border payments. It is exciting and promising to see regulators across the globe are taking solid actions towards this shift.
Arf built a global payment network enabling instant fiat-to-fiat cross-border payments by leveraging regulated stablecoins for licensed money service businesses (MSBs), especially e-wallets, neobanks, FX providers, digital remittance companies, and payment companies. Arf enables MSBs to build API-based cross-border financial operations and treasury management. https://arf.one/
1 "Remittances matter: 8 facts you don’t know about the money migrants send back home", 04/20/22, United Nations
2 "Total value of cash remittances sent by overseas Filipino workers (OFW) to the Philippines from 2011 to 2020", 04/20/22, Statista