Banks, payment companies, fintech and crypto companies are vying for the ultimate goal in cross-border payments: to make the movement of money easy.
The sheer number of companies building solutions reflects the fragmented nature of payments. It involves every market, every jurisdiction. It serves every type of user, from migrant worker remittances to e-commerce platforms, from small business owners to multinational corporations.
“There are two major types of cross-border payments,” said Richard Mezaros, vice president, North America, for cross-border payments at Visa Direct.
Many variables
One is consumer money movement, where people move money between their own accounts or to others’. The other is businesses moving money to other businesses, or disbursing money to individuals such as employees or customers.
“The differences between the two should not be underestimated,” Mezaros said, as each segment has its own user needs, regulatory environments, and customer expectations.
This fragmentation is a big reason why moving money remains complicated and often costly. Another way of thinking about cross-border payments, then, is simplicity.
The player that reduces the number of counterparties, touchpoints, and risks is the one that delivers the most value.
This is where a global payments-technology company such as Visa has an advantage: it can cover all market segments at scale, which reduces costs, friction points, and complexity.
Wanted: better solutions
Nonetheless services such as Visa Direct, which allow banks, fintech and companies to connect with one another through a single point of access, have a massive job ahead.
Consider that fewer than 3 percent of small businesses worldwide find their current cross-border payment solutions to be satisfactory, according to Visa. These users expect sending and receiving funds to be simple, fast, and safe.
Yet most users are still looking for a better outcome. A Visa survey of employees finds 63 percent would switch employers for fast payouts, and 60 percent of consumers would switch financial institutions if they could get instant fund transfers.
Those are big numbers, reflecting the fact that today it often takes more than a week for cross-border disbursements to finalize in many emerging markets, and that sellers on global marketplaces face day-to-day crises when payments don’t arrive on time.
The complex reality
These delays are often due to multiple participants involved in a given transaction. This is especially true of correspondent banking, the traditional way to send money across borders. Throw in the complexities of different time zones and an industry habit of batch processing instead of handling money close to real time.
There are also compliance factors. Certain customers require additional screening before their money can move. That’s a good thing, designed to prevent money laundering and detect fraud. But when additional participants are needed, regulations mean duplicative know-your-customer procedures that don’t add value.
And don’t forget FX transactions. Foreign exchange rates are always changing, and more participants can mean more currencies. The slow pace and lack of transparency can allow some intermediaries to take higher fees or charge rates unfavorable to the user. Such chicanery can gum up a customer’s liquidity, exposing them to unnecessary market risks.
That might be an extreme situation. But such costs are quite ordinary. “Fluctuating FX rates mean the sender may not know the FX rate that will be applied,” said Piers Marais, global head of product for embedded cross-border solutions at Visa. “It’s like making a purchase without knowing the price.”
The path to prosperity
These problems, though real and persistent, are creating new opportunities for various service providers to bring innovative solutions. Visa estimates that if banks, fintechs, and other participants adopt digital networks for cross-border payments, they could increase global money movement by $2 trillion.
That’s a huge revenue opportunity for the industry. But the greatest rewards will go to those players that are able to cut through the messiness of a fragmented business, and bring a smoother experience to customers, akin to the simple, point-to-point, transparent, real-time transactions that are routine domestically.
Visa Direct has partnered with DigFin to bring you more insight into key trends in cross-border payments. Download their report. It has fascinating details about market sizing, a closer look at the bottlenecks, and Visa Direct’s strategy for overcoming endless fragmentation.
It also goes into how technology is the big enabler for speed, access, transparency, and bringing down costs, particularly as the type of accounts proliferates with the digital economy.
Finally, the paper looks at partnerships with fintechs such as Remitly, Revolut, and TabaPay. For anyone in the payments space, no matter what underlying technology you’re using, whether you’re a fintech or a bank, this is a must-read. And maybe a step towards your next partnership.
