How Fintech is Transforming Cross-Border Payments

Globalisation and technology have revolutionised international trade. Billions of tons of products now move seamlessly from one side of the earth to another. Just-in-time delivery has become critical to non-stop production. Services cross continents with just the click of a mouse. Speed, efficiency, and security are the linchpins that keep this train of commerce moving. However, until recently, the weakness in the chain was payments. Even as the world of business raced forwards, systems for cross-border payments remained glued to the past.

Creaking methodology and weak technology have left the legacy banking network struggling to process trillions of dollars worth of international payments quickly, securely and affordably. Archaic practices, different time zones, a thicket of intermediaries, and differing rules and regulations are slowing down payments and applying a brake to trade. In a globalised market this isn’t viable, and in answer to the problem a new cadre of fintech operators has arrived to bring about change. Equipped with powerful technology and free of the many encumbrances that slow down the banks, these agile competitors are rapidly transforming the world of cross-border transactions. Read on to find out more.

What Are Cross-Border Payments?

Cross-border payments are financial transactions where the sender and the recipient are based in separate countries. They cover both wholesale and retail payments, including remittances, and the transactions can be between individuals, companies, or banking institutions who are looking to transfer funds across territories.

Types of cross-border payments

Once upon a time, sending funds abroad meant physically carrying cash from one place to the other. This was slow and sometimes dangerous. Fortunately, today businesses and consumers can make a cross-border transaction without leaving home or the office. The most popular payment processes include:

Bank transfer

Bank transfers, also called electronic transfers, or wire transfers, are bank-to-bank money transfers that send funds from the sender’s bank (usually in their local currency) and deposit it in the recipient’s bank in another country. Typically, the funds are converted from the sender’s currency to the recipient’s local currency at the point of arrival. Where the sender bank and recipient bank do not have a direct relationship, an intermediary – a ‘correspondent bank’ – must act as ‘middleman’ to handle the payment between the parties.

Credit cards

Credit cards are a common international payment option for many businesses and consumers. From the sender’s (buyer’s) perspective, they simply enter their card details and wait for the transaction to be verified. However, as with any payment process, there is a lot more going on behind the scenes. Cross-border payments typically require the conversion of two different currencies, and this involves more work for the credit card networks and acquiring banks. The additional workload generates fees that are passed down the payment chain to reach the sender and/or the recipient.

E-wallets

Accessed via smartphones, e-wallets are apps like Google Pay, PayPal, Apple Pay and Ali-Pay. They store the sender’s card details, (credit card or debit card linked to a bank account), which are then debited to send funds to an international recipient. Technically, e-wallets are an extension of the credit card network system discussed above, however, their storage and convenient access features make them a useful tool for fast transfer initiations.

Cross-Border Payments Challenges

Sending funds from one country to another may be far easier now than it once was, but that doesn’t mean cross-border payments are all plain sailing. A number of persistent challenges hamper the international payments network. They include:

Legacy technology

Much of the technology supporting cross-border payments remains on legacy platforms built when paper-based payment processes were first changed to electronic systems. These platforms have limitations that can create delays in settlement. The continuing requirement to interface with legacy technology can also act as a barrier for emerging business models and technologies to enter the market.

Complex compliance checks

To ensure they are not at risk of exposing themselves to illicit finance, banks may use different sources for conducting their compliance and due diligence checks. This can lead to payments being delayed as they are checked multiple times at different touchpoints, or even being incorrectly flagged.

Differing data formats

Cross-border payments are made by messages being sent between financial institutions to update the accounts of the sender and recipient. These payment messages contain information to confirm the identity of parties to the transaction and confirm the legitimacy of the payment. Data standards and formats vary across jurisdictions, systems and message networks, which makes it difficult to set up automated processes, causes delays in processing and increases technology, staffing, and transaction costs.

High funding costs

To enable quick settlement, banks must provide funding in advance, often across multiple currencies. This means the banks must put aside capital to cover each transaction. Uncertainty about when incoming funds will be received to offset the cover often leads to overfunding of positions, which increases costs.

Ways that Fintech is Changing the Payments Landscape

The new generation of fintech payment providers are transforming the way consumers and businesses send funds around the world. Innovation and technology are making cross-border payments faster, cheaper, more secure and compliant. Key cross-border payments trends include:

APIs provide real-time rates

APIs (Application Programming Interfaces) are software that make banking functions accessible to third-party companies. APIs integrate seamlessly into existing treasury infrastructure giving treasurers direct, real-time visibility into FX rates. This allows them to effectively manage their currency exposure, mitigate risk across their global accounts and accelerate reconciliation.

Real-Time Cross-Border Payments Settle Transactions Instantly

Even though advances in fintech have meant significant improvements in the efficiency of cross-border payments, at present, all international payments must still interface with legacy banking systems, which limits capability. Instead, real-time cross-border payments use technology such as blockchain and smart contracts to process payment systems and settle transactions immediately. This means the money reaches the recipient almost instantaneously. However, although more than 60 countries have a local real-time payments scheme in operation or at the planning stage, the lack of compatibility between schemes means that these payment solutions are not yet available for international payments. Currently, there are several initiatives underway to develop and launch real-time cross-border payment systems that overcome the compatibility issue. The initiatives include SWIFT GPI and Visa Direct.

Enhanced transparency

API connectivity provides greater visibility and transparency with every payment. Compliance is easier. Checks are reduced. The sender can see their FX rates before sending payment. If an issue arises during a transaction, beneficiaries can track the payment and receive updates in real-time. Beneficiaries and senders can also better manage their cash positions wherever they operate a bank account, which leads to improved predictability.

Virtual accounts increase global reach

Many businesses engaged in international trade have direct deposit accounts (DDA) in countries where their suppliers are located. This can create complex reporting, idle cash balances and unnecessary cross-currency risk exposure.

Virtual Account Management Systems provide clients with a centralised account structure. Businesses no longer need multiple local accounts in the same markets. They can obtain better payment sequencing and manage detailed business-to-business (B2B) transactions reporting under one umbrella, manage payment flows, and easily transfer and/or concentrate their offshore funds. This enables businesses to maximise their liquidity, reduce their risk exposure and operate in the currencies that make the most sense for their business.

Exponential Potential

Although there is still much to do, fintech innovation has dramatically changed the world of cross-border payments. What once took days, at high cost and with little to no transparency is now fast, cost-effective, and visible. As fintech brings the systems of cross-border transactions into an era of instant real-time payment, so trade will become exponentially easier, fairer, and more beneficial to all.

Clear Treasury for Innovation, Clarity, Speed and Security

Clear Treasury’s mission is to take the complexity out of making international payments. To learn more about our services and to find out how we transparently assist businesses engaged in cross-border trade, please get in touch today.