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Transacting in the traditional financial system exposes users to various solutions and challenges that can inhibit growth. Banks and financial institutions are still developing and enhancing an ecosystem where everyone can trade locally and internationally. Through this system, freelance workers can work remotely and earn a sustainable income. However, carrying out this process raises a bigger concern about the payment levies applied by financial institutions. The payment fees represent a certain amount of funds users need to pay for undertaking a transaction. Insights from the GoBankingRates Survey suggest that average Americans attract a $7 monthly transaction charge through banks. From the data, it is clear that the payment industry is somewhat strenuous to the transacting parties. Such conditions are pulling freelancers into the blockchain network with a common goal of leveraging cheaper transaction fees.
Why Financial Institutions Charge Heavy Fees
Hefty processing fees usually arise due to several reasons. Financial institutions have to charge their customers to complete a transaction successfully like any other service. The entire process involves parties such as credit card networks, banks, and payment processors. Credit card companies like Visa and Mastercard may charge freelancers for using their payment solutions. Another cost that users attract is the interchange fee which allows card issuers to charge banks once a payment is made. Processing providers also apply different fees to facilitate frictionless global payments. Freelancers can therefore encounter high payment levies due for the following reasons:
1. The Risks Involved
The digital age is gradually expanding the payment system. However, online-based transactions expose parties to cyber-related crimes such as hacks and scams. As such, financial institutions charge users to obtain advanced resources to counter these illegal activities.
2. Account Maintenance
Holding funds in a bank account can also attract monthly service fees. The amount is directly withdrawn from a user's account balance monthly. These fees could make it difficult to earn interest or maintain the account above zero in the long run.
Revenue
Payment levies provide financial institutions with the opportunity to earn revenue. Banks use these proceeds to expand their services and equip the payment system with better solutions.
The Decentralized Ledger
In the crypto sphere, blockchains function as digital ledgers that hold information on every transaction. The ledger is available to multiple users worldwide, making it a decentralized solution with communal oversight. In essence, blocks accommodate transaction data and are later merged with previous blocks to form blockchains. This technology made its first appearance in the market through Bitcoin, the leading digital currency in the industry. Freelancers are gradually taking up blockchain due to its efficiency in carrying out transactions. Some of the approaches that freelancers can leverage in a blockchain to avoid costly payment fees include:
Stablecoins
Stablecoins represent digital currencies that are pegged to other reserve assets. Virtual currency exists in various forms, including algorithmic stablecoins, crypto-backed coins, fiat, and commodity-backed coins. Through their underlying assets, stablecoins are able to counter the effects of crypto volatility in the market. Freelance workers can take advantage of stablecoins to limit expensive transactions in a blockchain. The asset eliminates the need for intermediaries such as banks to process a worker's transaction. On top of that, users attract lower trading fees when they use stablecoins in their transactions. Among the leading stablecoin assets available in the market today include USDT, UST, USDC, and DAI.
Taking Advantage of Cheaper Digital Currencies
Bitcoin and Ethereum are the most valuable digital assets in the industry today. The currencies provide users with a financial instrument that can act as a store of value or a payment medium. Nonetheless, as their popularity grows, the assets' blockchain network becomes congested with numerous transactions. Freelancers can therefore opt to make use of other virtual currencies that implement an almost zero transaction charge. Nano is a good example of a digital currency that does not charge users any transaction fee. While it may have a lower ranking than Bitcoin or Ethereum, Nano can provide a feeless ecosystem that validates transactions faster. Stellar is yet another cryptocurrency that freelancers can use in their transactions. The digital currency can handle multiple transactions per second while applying an affordable fee of 0.00001 Lumens. Hence, freelancers can transact with less than a dollar on Lumen's network based on its current prices.
Using Affordable Exchange Rates
Crypto exchanges pose as digital platforms where participants can buy or sell virtual currencies. The exchanges mainly apply blockchain technology in their systems to promote a decentralized record-keeping ecosystem. Exchange platforms use different types of charges which are usually categorized as maker or taker fees. A market maker is a transaction fee that works when users contribute liquidity to the market. Taker fees apply to traders who immediately buy or sell the limited orders available. Thus, takers reduce the amount of liquidity in the market. Binance, for instance, allows makers and takers to pay an average fee of 0.05% and 0.075%, respectively. Kraken also implements a lower trading charge where takers may incur a 0.26% fee while makers attract 0.16%. Therefore, cheaper exchange rates make the trading process affordable to freelance workers.
Leveraging Advanced Blockchains
As mentioned earlier, congestion in the blockchain network ultimately slows down the transaction validation process. A sluggish transaction procedure could hike payment levies since validators will put in more effort. As such, freelancers need to be on the lookout for blockchains that employ advanced mechanisms to ease the congestion. Sharding is a one-way blockchain ensures that the network runs effectively without any issues. The method addresses scalability problems affecting blockchains by dividing the network into shards. Splitting the workload makes it convenient for blockchains to handle more transactions at an optimum price.
Final Word
Blockchain technology provides the financial industry with a fast and affordable trading system. The network comprises users who actively verify and record transactions. Furthermore, it works as an effective avenue to bypass hefty payment fees implemented by the traditional financial sector. Payment processors, banks, and other financial institutions incorporate unnecessary fees to render their services. Nonetheless, the adoption of blockchain hopes to combat this challenge and extend an affordable solution to transfer funds across the globe.