Whether sending funds for the folks back home or international business contracts, the positive trend in cross-border commerce can be attributed to the evolution in methods of international remittances and payments. All merchants are involved in cross-border payment transfers, including B2B, P2B, B2P, and P2P.
The conventional modes of international money transfers have been rendered unattractive because of transaction fees, excessive regulations, and documentation requirements. However, thanks to the evolution in financial technology, fintech players are improving the speed and cost of delivery, which were left unaddressed by legacy modes.
The total transaction value in the global cross-border payment segment is projected to reach $156 trillion by 2022, with a CGAR of 5% between 2018 and 2022. Advanced technologies, network innovations, increasing trade with emerging markets, and digital payment accessibility are important trends influencing the cross-border payment landscape revolution.
Let’s look at the current status of cross-border payments and how they will change over the next few years.
What are Cross-border Payments and why do they Matter?
Cross-border payments are money transfers between the payer and recipient in different countries. Individuals and organizations can make international payment transfers in any currency, but mostly they are started in the local currency of the payee’s country.
Cross-border payments make up a significant part of the global financial system because of various reasons, including these:
- Central banks and other financial institutions use wholesale payments for their customers’ cross-border activities like forex trading and trading of equity, debt, commodities, security, derivatives, etc.
- Governments and non-financial enterprises also make large international transactions for their international payroll, import and export of goods and services, international travel, and more.
- Retail cross-border payments are used by migrants sending money back to their countries via international remittances.
- International retail payments also include P2B use cases where an individual purchases goods and services from businesses abroad.
Various Cross-border Payment Methods
There is no single method that payment institutions use for cross-border payments. Several cross-border payment infrastructures use different financial messaging systems and intermediaries. Various intermediaries can be central banks, correspondent banks, or fintech APIs that share standard regulatory bodies to protect funds against money laundering. Examples of financial messaging systems are SWIFT, Ripple, SPFS, and Cross-Border Interbank Payment System (CIPS). Following is a list of various cross-border remittance methods:
- International wire transfers
- International clearing houses
- Prepaid debit cards
- Paper checks
- Global payment gateways
- Fintech payment processing platforms
Key Players in the Current Cross-border Payment Landscape
MobiFin International Remittance Solution
MobiFin international remittance solution enables financial service providers to roll out cross-border payment transactions through the cost-effective and cashless model. Its easy integration with global remittance providers, like Money-Gram, Western Union, and RIA, simplifies cross-border payments for its users. The solution meets all the regulatory requirements by allowing full transparency with dynamic field management per different country standards. Its additional features, like hedging, margin management, product management, and fixed/dynamic exchange rates, make it the most affordable, reliable, and secure transaction process.
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Correspondent Banks and SWIFT: Near Instant Payments
Society of Worldwide Interbank Financial Telecommunication launched SWIFT GPI (Global Payments Innovation) in 2017, which links over 11000 banks in over 200 countries. It uses cloud-based tools to improve the existing processing and messaging infrastructure and make cross-border payments faster and less expensive.
Many banks, clearing houses, and securities dealers use it, but it doesn’t facilitate instant payments, given it relies on a correspondent-banking network. More intermediary banks required for the payment delivery will imply more costs and delays at each stage.
Money Transfer Services
Money transfer services mainly provide P2P cross-border money transfers using a strategic tie-up between overseas principals and a vast network of payment locations. They offer cash-to-cash, online, debit card, and credit card payment transfers.
Their transaction fees depend on source funds, i.e., online and debit card transfers are cheaper than cash-to-cash and credit card transfers. However, they often come with limitations regarding the number of transactions, total annual amount, and trade.
Forex Cards
Forex card is an exclusive offering by banks and financial institutions for travelers as an alternative to credit/debit cards. While it is the easiest way to store and spend money abroad, customers can also make online payments to multiple countries with a single card.
It allows users to avoid fluctuations in cross-currency charges. They can do so by locking in the rates while loading the amount like a prepaid card.
Digital Wallets
Digital wallets or e-wallets have witnessed a boost in their usage for cross-border payments in the recent past. Several e-wallets have expanded their cross-border capabilities by partnering with payment providers.
For example, EziPay users across MENA (the Middle East and North Africa) can add their Mastercard virtual card to their e-wallet and make online money transfers to merchants globally.
The Increasing Role of Fintechs in International Remittances
The arrival of fintech players has been a major turning point for cross-border transactions. Fintech APIs and innovative business models have made cross-border remittances digital, fully compliant, affordable, fast, and transparent. Such real-time international transactions are enabled by Nostro accounts in the payee’s resident country that are pre-funded with foreign currency. When the fintech company receives a request from the payer, it moves an equivalent amount in foreign currency from its Nostro account to the payee’s account. Fintech APIs ensure compliance with the guidelines of both countries. Some of its examples are:
- RippleNet is a remittance network of over 200 banks using Distributed Ledger Technology (DLT) to secure and process cross-border payments instantly.
- Flywire’s fintech payment platform streamlines international payments for various global industries, including travel, healthcare, and education.
- Remitly simplifies international money transfers through its thousands of bank and cash-pickup partners across the globe.
What the Future of Cross-border Payments Looks Like?
The Emergence of Fintech and Faster Payment Rails
Fintech companies are leveraging technology to introduce faster and low-cost international payment solutions with enhanced customer experience, flexible payment options, and extensive global reach. They are doing it in two ways:
- They will establish faster cross-border payment rails that won’t run on traditional bank networks. Instead, they will enable faster routes by integrating instant payment systems from countries that use proxy identifiers like mobile numbers.
- They will develop technology solutions that allow easy connection with legacy bank rails. In this method, fintech companies will maintain balances in local currency across a network of accounts in several countries. It will enable optimization of exchange rates and transfer fees.
Distributed Ledger Technology (DLT) in Cross-border Remittance
Many payment service providers are experimenting with Blockchain or distributed ledger technology in the international remittance landscape. DLT makes fast, secure, transparent cross-border payments possible.
The DLT model uses bidirectional messaging and settlement modules that validate transactions using a decentralized database before transferring the funds. This model is being acclaimed by clients who regularly transfer smaller amounts of money.
Crypto and Open-Source Payment Solutions
Cryptocurrencies provide open-source, global currency exchange and remittance networks that are gaining dominance in the cross-border payment landscape. These open-source solutions allow parties to perform transactions cheaply in real time.
All transactions on such networks are settled in a matter of seconds. The only problem with these solutions is the compliance implications for banks. Banks are wary of cryptocurrencies as they are too volatile and can be an easy target for money laundering activities.
CBDCs (Central Bank Digital Currencies)
CBDCs hold the potential to ease cross-border payments by solving the intermediary problem. It will require interlinking of CBDC systems, which can be done in either of the following three ways:
- Establishing compatibility between separate CBDCs through adherence to common international standards
- Interlinking through the common technical interface or a common clearing mechanism
- By integrating all CBDCs into a single multilateral payment platform
Despite its potential benefits, achieving such interoperability can be grueling because of different regulatory frameworks across jurisdictions.
Get Along with the Evolving Landscape of Cross-border Payments
The legacy modes for international money transfers are losing touch with today’s reality of the digital age. The latest technology in the financial world, such as instant payments, DLT, and network innovations, are shifting the regulatory and sanctions frameworks. Soon, these emerging trends will change the competitive dynamics of the cross-border payment landscape. Organizations involved in cross-border payments must consider the latest methods that offer instant payments at competitive exchange rates to remain competitive.
Panamax leverages the latest technologies to deliver best-in-class digital financial solutions that unlock new business opportunities for banks, financial institutions, service providers, and more.
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