Cross-border payments still heavily rely on slow and opaque networks such as correspondent banking and SWIFT, which cannot move funds from one country to another in real time. To work around this issue, financial institutions must keep nearly the same amount of capital beforehand in the receiving country, which is called prefunding. 

This has resulted in $4 trillion being locked in pre-funded accounts today, a massive but hidden cost on financial institutions and the overall global payments industry. Moreover, access to liquidity remains a major problem, forcing these players to struggle to find more money as they try to survive and thrive in competition.

Arf, the global settlement banking platform, and the Stellar Development Foundation have teamed up to solve the liquidity constraints faced by payment and remittance companies in cross-border payments.

Use case: A new way of accessing liquidity

Challenge

A licensed remittance company has been struggling with competition in the industry, mainly led by global contenders with much larger amounts of capital. The firm’s clients, money transfer locations, were losing money due to the increasing number of customers asking for next-day settlements. The locations, lacking the resources to prefund the banking rails themselves within this time frame, had to sign agent agreements with the firm’s competitors. This resulted in a decrease in their revenue by 80 percent compared to a model where they settled themselves. 

Meanwhile, remittance flows from Europe to Africa have been dramatically increasing, making it difficult to meet the demand. The remittance firm needed a breakthrough project that would bring a competitive edge without more capital requirements. As they were seeking an agent of change, they met with many different solution providers, but none of them seemed competent enough to offer a single solution to meet all their needs. In the quest for liquidity, they applied to banks for credit, only to find out the very long repayment terms and even more capital requirements in return. After a few weeks of busy research, the team was introduced to Arf through trusted business partners, and finally breathed a sigh of relief.

Solution

Arf offered an all-in-one solution to all the challenges they faced by providing an unsecured, short-term, and USDC-based working capital credit line, enabling the firm to make cross-border payments without collateral or prefunding.

Arf’s solution, known as the Arf Credit Line, is built on the Stellar network and powered by Circle's USDC, and provides access to unsecured and short-term (1 to 5 days) working capital for qualified licensed financial institutions worldwide. With Arf Credit Line, financial institutions can make same-day settlements with their partners in desired countries without requiring pre-funding or any additional collateral. Arf Credit Line eliminates the capital-intensive business model for sending parties and counterparty risk for receiving parties in cross-border payments. Moreover, because all of these transactions happen on-chain with USDC, money transfers can be transparently tracked without any intermediary.

Seeing the superior advantages, the firm decided to team up with Arf to meet the increasing demand for payments in the Europe-Africa corridor. The onboarding process was completed within two weeks, and the firm started to use the line of credit in November 2022.

How it works

Let’s say the firm’s European customers, who are money transfer locations, want to send a certain amount of money to Africa. To do that, they send funds to the firm’s local bank account. Arf provides the line of credit with an agreed-upon credit limit, and funds the transaction amount to the firm’s local partners. In other words, Arf prefunds the bank account of the receiving partners in Africa for the desired daily transactions on the firm’s behalf. 

The transaction is settled in USDC, and the firm’s partners can do the same-day local payout with local fiat money. After the settlement, the firm funds its Global Treasury Account provided by Arf in USD through the desired method, such as Wire, SWIFT, or SEPA. Arf instantly tokenizes the deposit to USDC, which is always redeemable 1:1 for U.S. dollars.

The firm repays the matured credit within the agreed-upon terms of 1 to 5 days from its Global Treasury Account. Right after the repayment, Arf reopens the credit limit so the firm can re-access the line of credit. This way, the flow of liquidity continues.

Results

• More than 800 money transfer locations in Europe started making same-day settlements with their partners, with significantly lower costs than their global competitors.
  
  
• The firm’s cross-border volume in the Europe-Africa corridor increased by 27% in only two months.
  
  
• The 6-month growth objectives were achieved within just two months of the partnership.
  
  
• Loans and repayments are now fully transparent and visible with on-chain USDC transactions.
  
  
• The firm eliminated any prefunding or collateral requirements, as well as counter-party risks, enabling it to use this unlocked capital for further expansion.

As a result, the firm gained a competitive advantage over its competitors and eliminated counter-party risk without locking up any more capital. Moreover, it can use the same treasury account to make settlements in other corridors across the globe, 24/7 and in real-time, reducing the burden of cross-border financial operations as its coverage expands.

The partnership became an unprecedented use case showing that Web3 technologies can be utilized in a fully compliant manner to access liquidity and achieve same-day settlements. As a licensed global settlement banking platform, Arf delivers the future of cross-border payments by bridging Web3 and TradFi, enabling wider access to better financial services.

Click here to download the case study and join the waitlist for Arf Credit Line.

About Arf

Arf is a regulated global settlement banking platform, eliminating the capital-intensive business model of the cross-border payments industry by offering digital asset-based working capital and settlement services with fiat on- and off-ramp capabilities to licensed financial institutions. Arf is a member of the VQF Financial Services Standards Association and is officially recognized by FINMA pursuant to the Anti-Money Laundering Act.  Learn more at  https://arf.one/