Article 4 min

Overcoming the Complexities of Cross-Border Payments

Overcoming the Complexities of Cross-border Payments

October 5, 2022  

The accelerating pace and scope of global transactions are fueling an even stronger push for quick and secure cross-border payments.

McKinsey & Company in 2021 estimated global payments revenue had hit an annual growth rate of 6% to 7% and would reach about $2.5 trillion by 2025. Key drivers include business-to-business paymentsremittance and global eCommerce.

As payment services companies survey the shifting landscape of changing consumer behavior, emerging technology and new regulations, a top priority will be determining what strategies can help maximize opportunities in the market.

Understanding international payments segments

Technologies and processes that work in one cross-border payment market don’t necessarily work in all of them. Flexibility and adaptability are key to succeeding in multiple payment areas.

Despite the market differences, one trend has become universal: Digitization of payments continues to increase. The pace of adoption varies, but once a process becomes digitized, it rarely goes back.

Improving speed and transparency, providing metadata for further analysis and automating transactions are becoming the norm. The market variables now revolve around digital payment frameworks, technologies and providers.

Evolving cross-border payments are also affecting traditional financial institutions, which for years led the market. That’s changing as challengers offer real-time, secure payment options such as SWIFT gpi, an update of services from the global financial messaging giant, and new blockchain systems such as Ripple.

There’s no shortage of new payment platforms, in-house projects, digital distributors, alliances and consumer apps that could transform the market. New technologies and automated processes hold the potential to enhance the payment experience, lower costs and create new ways to transact across the world.

But technology is just one element of cross-border success. In 2020, the G20 asked the Financial Stability Board to develop a road map to enhance cross-border payments. While payment technologies are rapidly improving, compliance and other back-end costs can hamper delivering fast, inexpensive, transparent and inclusive cross-border transactions. The road map suggests “the most significant enhancements are likely to be achieved if they are all implemented in a coordinated manner.”

Organizations that coordinate the complexities of different markets, payment options and regulations can benefit from higher authorization rates, lower fees and better payment experiences.

Ensuring payments compliance

Cross-border payments have always been highly regulated. Each country in the transaction chain has legal and regulatory requirements, and each financial institution has security and compliance protocols.

Compliance is fundamental to success. Beyond fines for noncompliance, there’s the risk of reputational damage.

But compliance can be costly.

“What most startups don’t realize is the cost of transferring money is not the most expensive part, but rather compliance costs,” Chris McCann, general partner at Proof of Capital and Race Capital LP, wrote in 2019. “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.”

Compliance depends on the organization. While Anti-Money Laundering (AML) and Know Your Customer (KYC) procedures apply to all payment companies, the exact rules and regulations vary depending on the business type. For example, banks answer to the banking authority, while foreign exchange companies fall under money service businesses.

Understanding the exact requirements, prior to any activity, is fundamental.

Adaptable technology provides a path to compliance

Compliance requirements constantly shift depending on the market, so adaptable regulation technology can help organizations quickly seize new opportunities.

AML and KYC verification will be part of the process no matter what technology is in play or where the payment is going. Preparing for those requirements in every market can enhance cross-border payment systems and remove barriers to international expansion.