Digital payments form a critical facet of the world’s economy, facilitating the flow of tens of trillions of dollars among individuals and businesses each year. However, these common payment methods are rife with frictions, including slow processing times, exorbitant fees, and the potential for interception by hackers who can pilfer the payments themselves or the personal data that accompanies them.
These challenges are only exacerbated when payments move across international borders, usually accomplished via correspondence banking. Banks are typically required to establish direct links with financial institutions (FIs) in other nations to make or receive cross-border payments. Still, not every FI has a counterpart in any given country. This means that money must often be transferred between numerous banks in different countries until it reaches its final destination. The typical cross-border payment flows through no fewer than four banks before a transaction is complete.
The following Deep Dive explores cross-border payments’ challenges, including time-consuming government inspections, lack of transparency and the potential for fraud. It also examines how cloud payments could mitigate these challenges and usher in seamless and faster payments experiences.
The Intrinsic Challenges Of Cross-border Payments
Cross-border payments between businesses are expected to reach $35 trillion by 2022 and 2024 could see up to $240 billion in person-to-person (P2P) payments. Remittances between migrant workers and their families could also account for hundreds of billions of dollars. However, the sheer number of cross-border payments belies the challenges that individuals and companies face when conducting them.
The biggest hurdle the cross-border payments industry faces is navigating the networks that govern payment flows in every correspondent bank through which funds pass. Each payment must be inspected to ensure that it does not facilitate money laundering, terrorist financing or other illicit activities. Up to 5 percent of all cross-border B2B payments are subjected to additional inquires or investigations beyond basic levels of scrutiny, causing significant payment delays and carrying hefty price tags. Handling such investigations costs banks up to 35 times more than payment processing itself.
A lack of transparency regarding these payment processes leads to additional frictions for senders and recipients. Senders could receive complaints from receivers that payments did not arrive on time, for example, but the former would be left in the dark about what caused the issue. Such payments may have been stalled in regulatory checks or could have been intercepted by hackers, resulting in broken trust and lost business between the two firms, even though neither party is at fault. Sixty-one percent of treasury professionals in a recent survey said that the time involved in finding out why payments failed had been a drain on company resources.
The worst-case scenario for a cross-border transaction is being intercepted by a hacker or other bad actor. These fraudsters can make off with hard-earned funds, but mere cash is not the only target. Some bad actors look to harvest senders’ or receivers’ private data using payments as entry points. A recent survey found that one-third of businesses were worried about cross-border payments fraud, while 26 percent expressed data security concerns.
How Cloud Systems Accelerate And Secure Cross-border Payments
New cloud-based technologies have shown much promise in securing cross-border payments and making them faster and more transparent. Dozens of FIs have embraced SWIFT, a global network that allows banks to make payments directly to participating FIs more quickly and easily. The SWIFT network processed $77 trillion in cross-border transactions in 2019, accounting for approximately 60 percent of all cross-border transactions.
Integrating the SWIFT network is often a financial and logistical challenge for banks, which must have the networking technology located at their branches. SWIFT is partnering with Microsoft and BNY Mellon to introduce this technology to the cloud, allowing banks to use the network digitally while preventing them from undertaking expensive systems retrofits.
Banks that adopt the cloud system can tap into the SWIFT network’s speed and transparency as well as take advantage of the security that cloud systems inherently provide. Studies have found that cloud networks experience 60 percent fewer security incidents than traditional data centers. For example, this improved security experience is amplified because only the sending and receiving banks are involved in the cross-border payments process when using the SWIFT network. This restricts potential fraudsters to only two secure entry points through which payments or data can be intercepted, rather than giving them numerous opportunities at different correspondent banks.
The nature of international commerce regulations means that cross-border payments will almost always be more complicated than domestic ones. The SWIFT network’s migration to the cloud means that more banks than ever can extend simple, transparent and secure payments to their customers.