Cross-border payments are expected to surge over the next few years as the economy becomes increasingly global and interconnected. These transactions reached $144 billion in value in 2014 and could hit $240 billion by 2024.
The latest Smarter Payments Tracker looks at the infrastructure developments that are making cross-border payment systems faster, more seamless and interoperable.
Financial institutions are facing increased pressure to make cross-border payments fast and seamless as consumers grow used to instant P2P payments and such products in other sectors.
A Call for Transparency
Recent American Express research found that greater transparency is one of the top priorities for firms that regularly make international payments. Forty-seven percent of treasurers said they want visibility into the cost and deductions from a transaction, and 64 percent want real-time tracking capabilities to help reduce the rate of reconciliation errors.
As the global economy becomes increasingly interconnected, smaller businesses and consumers will also need access to systems that enable easy cross-border payments.
Khun Sarintorn, VP of international remittance business solutions for Thailand-based Kasikornbank (KBank), explained how the bank’s collaborations with FinTechs are helping to make overseas transfers more transparent and efficient.
“The pain point was that the customer never knew when the money [would arrive], when the beneficiary [would] get the money or the fees,” she said. “We asked, ‘How can we achieve full payment so the beneficiary can get the money in full … and the senders know how much they’re going to be charged and [everyone] knows exactly when it gets there?’”
Cross-border payments have gained prominence for a few related reasons. Remittances to developing nations continue to grow, which has spurred many global markets to pursue efforts to enable more efficient cross-border payments.
Remittances on the Rise
World Bank data shows that remittances to low- and middle-income nations reached a record high last year, with migrants sending $529 billion to their home countries. That figure is expected to reach $550 billion this year, with global remittances to all markets reaching $689 billion in 2018.
The global average cost of sending money cross-border remains high, at around 7 percent in the first quarter of 2019. Banks were the most expensive remittance channels, charging an average fee of 11 percent in that same timeframe.
This might not affect large, multinational corporations that can negotiate rates and transaction fees for high volumes, but small businesses and individuals sending and receiving money don’t have similar resources.
Several countries are tackling more efficient cross-border payments on their own.
In 2017, the European Payments Council launched the pan-European Single Euro Payments Area (SEPA) Instant Credit Transfer System, and Southeast Asian countries Indonesia, Malaysia, Singapore, Thailand and Vietnam agreed to establish a real-time cross-border payments network.
Many are choosing to implement ISO 20022 as a common messaging standard to achieve greater interoperability between payment systems, with the system seeing more than 80 implementations in over 40 markets, including with TCH’s RTP system in the U.S. and Australia’s NPP.
SWIFT, a global member-owned cooperative and provider of secure financial messaging services, got involved in January 2016 when it launched its global payments innovation (gpi) initiative to increase the speed, transparency and tracking of cross-border payments. More than 110 banks from Europe, Asia Pacific, Africa and the Americas are part of the SWIFT gpi, which has been in a pilot stage.
Last month, SWIFT released its first set of guidelines for financial institutions using the ISO 20022 payments messaging standard to complete cross-border transactions.
Challenges Aren’t Universal
Despite ISO 20022’s potential, there are barriers to it becoming the universal standard. Private-sector firms may be hesitant to adopt such a system, because they have limited budgets and there are potentially more compelling technologies in which they would like to invest.
Corporations are unlikely to adopt ISO 20022 until they experience the downsides of holding out.
Despite all of the technological innovation in the financial industry, businesses in the American Express study expressed interest in tackling issues with cross-border payments before investing in new technology. They were also skeptical of partnering with FinTech companies. Just 8 percent of corporations are using alternative providers to make cross-border payments, and 55 percent have no plans to do so.
That resistance doesn’t reflect the needs of smaller, regional banks. Cross-border payments of the future will not likely be based on legacy systems and traditional correspondent banking, though.
Sarintorn said KBank stands out by embracing FinTechs’ assistance and
innovations. These partnerships have also opened up new opportunities for financial institutions that can’t afford to take it slow.
“Previously, we had to start with big things, plan for a long time and then do them one by one,” she said. “FinTechs look at customers’ needs right away, find the pain points … and work to fulfill that need right away.”