Nick Botha, Global Payments Lead at AutoRek
As international trade and e-commerce continues to grow, cross-border payments have seen significant expansion across the globe. A recent EY report indicates that global cross-border payments are growing at around 9% every year, with projections suggesting they could reach US $290tn by 2030. With the digital economy on the rise, there is an essential need for payment systems that are more efficient, secure, and inclusive. The transition from traditional T+2 and T+1 settlement periods to real-time payments has already transformed domestic transactions, paving the way for a similar revolution in the realm of cross-border payments.
Despite the opportunities in cross-border payments, sending and receiving funds internationally can be complicated and challenging due to rising data volumes, fragmented systems, and varying regulations across different regions. So, how can businesses effectively prepare for the changing landscape of cross-border payments?
Removing the barriers for cross-border payments
It’s no secret that achieving real-time cross-border payments involves complexities beyond technology alone. Regulatory challenges are a significant hurdle as multiple financial institutions across different countries have distinct rules around payments, fraud detection, and compliance. For example, the stringent regulations of the UK’s Financial Conduct Authority (FCA) contrast with the relatively flexible approach of the US Federal Reserve. This diversity in regulations can lead to inefficiencies, increased costs, and compliance burdens for entities involved in international payment methods. Harmonising these regulations will be crucial for creating a seamless global payment network.
In addition, cross-border payments often take several days to process through traditional banking systems due to time zones, inefficient processes and the involvement of multiple intermediaries, including correspondent banks, and local financial institutions. Each intermediary adds time and cost to the transaction, and the entire process can take between two to five days. For businesses, these delays can disrupt cash flow, complicate supply chain management, and create issues with paying vendors and employees promptly. Worryingly, the delay can prove hugely problematic for SMEs who often operate with tighter cash reserves and need more immediate access to funds.
Furthermore, businesses engaged in cross-border transactions must also navigate the complexities of fluctuating exchange rates. Currency exchange rates can change dramatically, influencing the cost and value of transactions which could lead to financial losses if a payment is delayed or if a favourable exchange rate changes before the transaction is processed.
How to reduce the complexity surrounding cross-border payments
To overcome cross-border challenges, G20 leaders endorsed a roadmap for enhancing cross-border payments globally in 2020. This initiative set out to address the four key challenges related to cost, speed, access, and transparency, paving the way for a more efficient and inclusive financial ecosystem. For example, the G20 aims for 75% of cross-border payments to be credited with the beneficiary within an hour by 2027. The past couple of years have undoubtfully brought major milestones with respect to this roadmap. Most notably, The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been a central figure in traditional cross-border payments, providing a standardised network for financial institutions to send and receive information about transactions.
The challenges faced by businesses in cross-border payments has unlocked new opportunities for financial institutions to develop innovative solutions. Fintechs are leveraging advanced technology, including blockchain, artificial intelligence (AI), and digital currencies, to make cross-border payments faster, cheaper, and more transparent. Blockchain and cryptocurrencies are often cited as potential game changers in cross-border payments due to their ability to eliminate the need for intermediaries, whilst enabling instant and transparent transactions. For example, Ripple, one of the leading blockchain-based payment networks, uses its RippleNet platform to facilitate payments between countries, providing faster and more cost-effective payments.
Cross-border payments traditionally have been more complex than domestic transactions due to multiple intermediaries but it’s important to note that ongoing international collaboration will be crucial to ensuring that cross-border payments remain seamless, secure, and inclusive. This opportunity can be maximised through automatic reconciliation. By automating the processing of high volumes of data from cross-border payments, businesses can remove the distractions of mismatched information, fraud concerns and accounting hold-ups. It also manages inbound payments, outbound payments, and inter-currency transfers through a centralised framework. This enables businesses to gain complete visibility of the data.
The future of cross-border payments
The speed of change in the payments and broader fintech sector continues to accelerate, fuelled by customer demands for quicker, more affordable, and more transparent payment solutions. This is undoubtedly an exhilarating time for the industry; however, financial institutions must not become complacent. There are still opportunities for growth ahead for those who are equipped with the right insights to explore cross-border payments.
