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Why Cross-Border Payments Are Still a Pain Point for Businesses and Consumers

May 15, 2023

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Simplifying payments in a modern, globalized world

It’s high time that global payments become as convenient as domestic payments to enhance the accessibility of international e-commerce through multilateral cross-border payment platforms.

In the global payments ecosystem, FinTech and banks proactively cooperate to realize their mutually beneficial potential. On the one hand, traditional payment providers will slowly fall behind without digital integration. On the other hand, FinTech companies looking to gain credibility in a saturated market can win over more clients with the backing of a bank. Cross-border payments are growing at about 5% annually (CAGR) and are expected to reach a total volume of $156 trillion by 2022, but not without problems.

Despite tremendous progress in the payments industry, there are still limitations faced by small businesses, such as sole proprietorships. They often do not have adequate means to settle international transactions with a scarcity of working capital to make ends meet. The high currency exchange costs restrict many SMBs from capturing their target customers geographically.

The problem stems from a lack of efficient global payment rails that bypass the need for intermediaries, aka banking correspondents. Credit cards offer an improved customer experience over net banking, but not all are universally accepted. There are digital wallets (whose market will likely reach $16.2 trillion by 2031) that come to the rescue of retail cross-border remittances, but it’s still just a hack due to limited interoperability and various regulatory requirements, namely KYC, AML, and data localization. For operational efficiency and ease of reconciliation, the payment technology stack needs to be end-to-end streamlined, making it transparent, fast, safe, and accessible.

Ecommerce Has Globalized Retail Businesses

Let us look at some hypothetical examples to understand the issues in the market regarding cross-border payments and be better positioned to solve them.

A SMB in Mexico wants to expand its electrical appliance business in the US. The customers pay the transportation cost of the goods, as the base price is lower irrespective of the increased logistics. But the business’s feasibility is impacted when more charges are added to the transaction, like correspondence and clearance. Moreover, production can also be severely affected by delays in settlement, which might cause the manufacturer to take a higher advance. This requirement might again impact order conversions.

Take another example of an entrepreneur trying to bootstrap in the US. The nature of their business is such that they do not require full-time or onsite staff. Since the demand for labor is high in developed economies such as the US, the entrepreneur looks for freelance talent in developing countries to get the most for their money without burning a hole in their pocket. They cannot compromise on the quality of work when kickstarting a business. Despite lower contractual expectations of independent contractors (ICs) in other countries, the entrepreneur still has to pay huge sums in exchange rates to pay off the ICs unless they’re exceptionally good at running their books and investing idle capital for returns to cover those costs. Moreover, the entrepreneur might have to plan to pay five days before the payment date, as it often takes that much time for cross-border payments to be cleared, especially if they are interbank. It affects them adversely and might even impact the quality of their work.

Having discussed some cases of international commerce and how important it is to simplify global payments, let’s have a look at the pain points in detail:

Pain Points of Cross-Border Payments

  • Higher costs
    International payments are typically costlier than domestic payments due to additional intermediary fees, exchange costs, regulatory compliance, and additional payment gateway integration requirements. Cryptocurrencies and other alternate payment methods are gaining popularity but they are also restrained by the country’s laws and acceptance by the party in question. The conversion rates charged are also often higher in these gateways due to intermediary tokens and the associated volatility. These can be regulated by introducing scalable central bank digital currencies, which are currently being pursued by many countries.
  • Lack of standardization, transparency, and access
    SWIFT messages, the international norm for cross-border settlements, are one-way communications. The lack of two-way communication leads to delayed processing, which makes the process costly for the customers owing to the time value of money. It is also tedious for banks to reconcile payments with incorrect information. This is one of the reasons why over $11 billion were funneled by investors into FinTech by the first half of 2022, as reported by BCG.
  • Inadequate interoperability and application programming interfaces
    Due to a lack of interoperable international payment rails, the need for correspondent banks is not being bypassed. Although there’s not much risk in the book-entry transfers in the correspondent banking model, the more intermediaries there are in the process, the longer it takes for settlements. It tends to discourage SMBs from operating smoothly across borders, especially when they want to conduct business in a country that does not have a bilateral agreement with their country offering direct convertibility of their currencies.

Increasing Efficiency in International Settlements

APIs are crucial for a faster and more secure experience in the web-enthused world. Approximately two-thirds (65%) of the BIS surveyed PSPs have acknowledged their use, and another 20% have shown an inclination towards it. As prescribed by ISO 20022, automated verification and validation techniques offer a range of advantages over manual ones. These include saving time and resources, improving accuracy and consistency, increasing coverage and depth, enhancing traceability and documentation, and facilitating collaboration and communication. Additionally, AI and ML-based algorithms are increasingly being developed and deployed to detect fraud on a real-time basis and create a robust payment system that protects the interests of its users. With the power of APIs, these models can flag anomalous behaviors and even inspect them preliminarily to call for manual intervention only where needed.

Using blockchain-aided payment rails is an excellent solution to increase speed and reduce the cost of international payments. Other reasons for incorporating blockchain networks in the international payment settlement process are to ensure security and avoid breaches of contracts by way of non-performance. These cases call for an additional security element in the cross-border settlement, which blocks the amount in escrow, as with smart contracts.

Having an internationally enforceable set of rules for payment settlements will ensure effective communication and bring the benefits of simplification to the currently lengthy process.

Partnering With Technology to Improve Bottom Lines

International payments can be complicated when a business manages them by itself, so getting a reliable and dedicated payment partner on board is worth it to ensure you’re keeping your payment acceptance rates high and your overheads low.

Through strategic data-driven advice and features such as fraud prevention tools and local and global payment options, you can overcome obstacles impeding your road to mastering borderless payments and conquering your desired markets.

If you don’t know where to start, contact us right away so we can facilitate your journey to a seamless global commerce experience.

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