"The lines of national borders on maps are artificial constructs, as unnatural to us as they are to birds flying overhead."
- Mohsin Hamid
As the pace and scope of global interaction and transaction increases, the need for quick and seamless cross-border payments becomes ever more urgent. To smooth out international payments, to grow and optimize commerce, to develop and strengthen connections across the planet, creating effective and trustworthy cross-border payments is crucial.
With the amount of international commerce that does occur, the revenue in international payments is astounding; according to McKinsey, the revenue from transaction fees and foreign exchange is up to $200 billion globally per year. While business-to-business payments are currently the largest proportion of that total, remittance and global eCommerce are two key drivers of growth.
Changes in consumer and business behavior, payment technology and the regulatory landscape will all have significant impact on the companies offering payment services and their offerings. How will cross-border payments evolve over the next few years, and what strategies should companies deploy to maximize opportunities?
Different segments, different requirements
As there are so many segments and so many cross-border transfer pairs, honing strategies for specific niches is imperative. Technologies or processes that work for one market will not work for another, so flexibility and adaptability are key to conquering multiple payment areas.
Fortunately, one trend is clear and applies across the board: the digitalization of payments is ever-increasing. Although the pace of adoption varies depending on the specific step and parties of the payment chain, once a process becomes digitized it is not going back. The ability to improve speed and transparency, provide metadata for further analysis, and otherwise automate and systemize transactions is quickly not even becoming a question. Rather, it’s about choosing what digital payment frameworks, technologies and providers to go with for now and into the future.
Traditional banks have relied on international transfers as a cash cow for many years. The need for speed was not really in their interest; as banks had market domination, they could focus on payment validity and making money on the funds sitting in their accounts before payout. Banks realize now that they need to up their game, as alternative offerings deliver faster and more seamless payments with the necessary security. There are numerous options for instant global payments, including SWIFT gpi, an update of services from the global financial messaging giant, and new blockchain systems such as Ripple.
Other fintech options abound for other players in the cross-border payment space. With the size of the market and growth at 5.6 percent per year, there’s no shortage of new payment platforms, in-house projects, digital distributors, alliances, consumer apps and other ideas looking to transform the market. According to the Accenture International Payments in a Digital World report, “the cost to provide such a payment experience using fully automated operations is expected to scale down to 1/100 of today’s cost, new providers will be able to offer fair and attractive FX rates to their customers.” That scaling in cost will lead to an explosion in new opportunities, service offerings and ways to transact across the world.
Keeping money safe
Cross-border payments have always been, and will always be, highly regulated and security conscious. Each country that is part of the transaction chain will have its legal and regulatory requirements and on top of that, each institution has its own security and compliance protocols.
For any player in the industry, compliance is fundamental to success. There’s the risk of fines for non-compliance. There’s the blowback of reputational damage to deal with, in case of compliance failures or security lapses. Then there’s the cost to deal with proper compliance; according to Chris McCann, General Partner at Proof of Capital:
“What most startups don’t realize is the cost of transferring money is not the most expensive part, but rather compliance costs. It is inherently difficult to ensure money is being sent compliantly in multiple jurisdictions 24/7, which is why 20-40 percent of the remittance cost is due to compliance alone.”
The nature of compliance, which one would think is similarly applied to all participants, depends on the nature of the organizations. While Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures generally apply to all payment companies, the exact rules and specific regulator will vary depending on the type of business. For example, banks answer to the banking authority, while forex companies fall under money service businesses. Understanding the exact requirements for specific jurisdictions that the organization operates in, prior to any activity, is fundamental.
Tech adaptability, full compliance
With technologies and market circumstances in a state of upheaval, implementing adaptable systems will minimize the cost, complexity and organizational resistance to quickly seizing new opportunities. Considering that compliance is a significant contributor to the cost and intricacies of cross-border payments, RegTech solutions are especially important to the industry.
Whatever the payment technologies, whatever international borders are involved, AML and KYC are going to be necessary. Solving the question of how you will fulfill your KYC requirements now, no matter what geographic markets or systems you use, will help future-proof your cross-border payment system and remove significant barriers to international expansion.