• Nick Botha, Global Payments Lead at AutoRek


• 18.11.2024 12:00 pm
#CrossBorderPayments #FrictionlessPayments

As international trade and e-commerce continues to expand, cross-border payments has grown substantially. According to the latest report from EY, global cross-border payments are growing at around 9% annually, and is expected to reach US$290tn by 2030. As the digital economy continues to expand, the demand for more efficient, secure, and inclusive payment systems becomes crucial. The shift from traditional T+2 and T+1 settlement periods to real-time payments has already reshaped domestic transactions, setting the stage for a similar revolution in cross-border payments.

Whilst there is plenty of opportunity for cross-border payments, sending and receiving payments across borders can be a complex and challenging process, due to rising data volumes, fragmented systems, and different regulations across multiple territories. So, how can businesses best prepare for the evolving cross-border payments environment?

Breaking down the barriers for cross-border payments

It’s no secret that achieving real-time cross-border payments involves complexities beyond technology alone. Regulatory challenges are a significant hurdle as multiple financial institutions across different countries have distinct rules around payments, fraud detection, and compliance. For example, the stringent regulations of the UK’s Financial Conduct Authority (FCA) contrasts with the relatively flexible approach of the US Federal Reserve. This diversity in regulations can lead to inefficiencies, increased costs, and compliance burdens for entities involved in international payment methods. Harmonising these regulations will be crucial for creating a seamless global payment network.

In addition, cross-border payments often take several days to process through traditional banking systems due to time zones, inefficient processes and the involvement of multiple intermediaries, including correspondent banks, and local financial institutions. Each intermediary adds time and cost to the transaction, and the entire process can take between two to five days. For businesses, these delays can disrupt cash flow, complicate supply chain management, and create issues with paying vendors and employees promptly. Worryingly, the delay can prove hugely problematic for SME’s who often operate with tighter cash reserves and need more immediate access to funds.

Furthermore, businesses engaged in cross-border transactions must also navigate the complexities of fluctuating exchange rates. Currency exchange rates can change dramatically, influencing the cost and value of transactions which could lead to financial losses if a payment is delayed or if a favourable exchange rate changes before the transaction is processed.

Unlocking potential by reducing complexity

To overcome cross-border challenges, G20 leaders endorsed a roadmap for enhancing cross-border payments globally in 2020. This initiative set out to address the four key challenges related to cost, speed, access, and transparency, paving the way for a more efficient and inclusive financial ecosystem. For example, the G20 aims for 75% of cross-border payments to be credited with the beneficiary within an hour by 2027. The past couple of years have undoubtfully brought major milestones with respect to this roadmap. Most notably, The Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been a central figure in traditional cross-border payments, providing a standardised network for financial institutions to send and receive information about transactions.

The challenges faced by businesses in cross-border payments has unlocked new opportunities for financial institutions to develop innovative solutions. Fintechs are leveraging advanced technology, including blockchain, artificial intelligence (AI), and digital currencies, to make cross-border payments faster, cheaper, and more transparent. Blockchain and cryptocurrencies are often cited as potential game changers in cross-border payments due to their ability to eliminate the need for intermediaries, whilst enabling instant and transparent transactions. For example, Ripple, one of the leading blockchain-based payment networks, uses its RippleNet platform to facilitate payments between countries, providing faster and more cost-effective payments.

Cross-border payments traditionally have been more complex than domestic transactions due to multiple intermediaries but it’s important to note that ongoing international collaboration will be crucial to ensuring that cross-border payments remain seamless, secure, and inclusive. This opportunity can be maximised through automatic reconciliation. By automating the processing of high volumes of date from cross-border payments, businesses can remove the distractions of mismatched information, fraud concerns and accounting hold-ups. It also manages inbound payments, outbound payments, and inter-currency transfers through a centralised framework. This enables businesses to gain complete visibility of the data.

Opportunities on the horizon for cross-border payments

The pace of change within the payments and wider fintech industry is showing no signs of slowing down with customer expectations for faster, cheaper and more transparent payments driving change across the sector. It is certainly an exciting time for the industry, but financial institutions cannot afford to rest on their laurels. Further growth can be found on the horizon for those who are equipped with the right knowledge to be able to pursue cross-border payments.