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For all the good work the private sector is doing to improve cross-border payments, national regulations and politics are still one of the main barriers to change. VIXIO discusses the challenge of fixing cross-border pain points with leading industry experts.
“Cross-border payments remain a tough nut to crack because they are where the irresistible force of real-time digital borderless commerce slams right up against the immovable object of government regulation,” Vinay Prabhakar, vice president of global marketing at Volante Technologies, told VIXIO.
Expensive fees and varying regulatory requirements render them not just hard for regulators to improve upon but often they hit consumers and businesses in a very negative way too.
For example, poorer communities often find themselves footing the bill for remittance fees that average 5.7 percent.
“The proper execution of a cross-border payment requires a series of complex movements to occur in a carefully choreographed way, involving multiple individuals, institutions, and governments across different continents and time zones,” said Prabhakar. “This is why traditionally it has taken days, with little transparency for either sender or receiver in the process."
In particular, one of the key issues at stake is currency conversion: “When sending a thousand dollars from New York to California, there is no currency market operating underneath to be concerned about,” noted Rodman Reef, representing the US Payments Forum.
“However, as soon as you cross a border, whether that is Canada or elsewhere, there will be a currency conversion.
“When building these systems, they don't account for where the recipient receives the currency or does the conversion."
The other issue is payments are often based on older systems, which means in many cases people still need to be at the bank to process the transaction.
Disruptive innovation
Yet Reef was positive that the industry is leading the modernisation efforts. “There is a lot of stuff happening in the industry to enact change.”
For example, last month, Wise announced an agreement with Plaid that connects clients with 6,000 apps powered by the latter's Core Exchange.
“They are leveraging best-in-class solutions now,” said Reef.
“This is maybe less of a big deal in Europe but is huge in the US as open banking here does not have the same impact as in Europe,” he pointed out. “The Plaid connection will have a significant impact upon cross-border transactions."
Today, with the power of digitisation and real-time computing power, the transaction cycle for a cross-border payment is easier to see, audit and price up competitively, agreed Ed Adshead-Grant, payments chief at Bottomline Technologies.
“There is a large influx of FX payment companies in London and similar fintech centres offering up new cross-border payment services as the barriers to entry for global payments have steadily lowered.”
For Adshead-Grant, these new organisations challenge the incumbent processes that have been in place for many years, if not decades with banks.
Wise, for example, charges rates that are 3.5 to 4 percentage points cheaper than international bank transfers, according to reports.
Meanwhile, the fintech Remitly has been found to offer more competitive and transparent exchange rates than the incumbent Western Union.
“All this leads to the new conditions of play where plans and initiatives can no longer fail if you want to stay competitive in cross-border payments,” said Adshead-Grant.
“Fintechs have been instrumental in driving innovation in the industry not only by implementing creative solutions themselves but also by pushing the incumbents to level up their offerings,” said Mohit Kansal, vice president of global payments at Flywire.
This has been a huge win for customers of both fintechs and incumbents, he argued.
“Through automation, fintechs have been able to drive costs down putting pressure on incumbents, who have responded by lowering prices themselves. More importantly, fintechs have created technology-enabled experiences for their customers that have now become the norm and incumbents are responding as well,” said Kansal.
And as well as challenging the traditional institutions, fintechs that have moved into the space are also opting for partnerships - something that Kansal says is the most interesting element.
“They have found creative ways to collaborate by leveraging each other’s strengths instead of competing to create the best experiences for customers,” he said. “I expect this trend to continue in the near future.”
National boundaries
Yet, in spite of this, Reef warned that a core issue remains compliance with national regulation, particularly as countries treat inbound and outbound payments very differently.
“There are specific regulations in some countries, so payment may not immediately be deposited and regulation may even mean that you need to go to the government to get permission, in order for that transaction to be posted to the account."
“From a government oversight perspective, a domestic payment is subject to the jurisdiction of only one country,” said Prabhakar, pointing out that cross-border payments are subject to the jurisdiction of at least two countries, and possibly more if intermediary banks in a third country are involved.
“Each party has its own sanctions, no-pay lists, anti-money laundering regulations, and other compliance requirements.”
Thus, harmonising these is not a technology problem — the technology is readily available — but a problem of politics and human priorities, Prabhakar concluded.
