The world with no borders is a far-fetched fantasy, global economy seems to find a way through them more effectively than ever. Goods, services, and capital transactions from one territory to another highlight the importance of a reliable cheap payment system that would be operating across multiple directories.
The traditional ways of conducting these transactions do not always correspond to modern requirements. High costs, long processing times, lack of regulations, and transparency are the biggest issues in the field. Innovations in international payments are coming, and we’re going to explore the ways fintech will improve the international payments landscape.
In this blog post, we’re going to study the effects blockchain, digital currencies, data analytics, and other technologies have on payment systems. Let’s see if fintech brings us to a more connected, and more comfortable world.
The traditional Ways Cross-Border Payments Exicted
The foundation of cross-border payments has long been built on a complex, layered architecture of banks, intermediaries, and regulatory bodies. This traditional system, while providing the essential service of facilitating international trade and remittances, comes with its own set of inherent challenges. High transaction fees, slow processing times, and a lack of transparency and predictability have characterized the cross-border payment landscape for decades.
Cross-border payments are based on the architecture of traditional banks, and their intermediaries, and are regulated by the bodies on both (or rather multiple) sides of the border.
Statista projects the total value of cross-border payments to reach $290.2 trillion by 2030 from $190.1 billion it had back in 2023.
Cross-border payments involve various financial institutions across countries of involved parties. Each country has its own rules and regulations. The network that enables a transaction journey from a payer in one country to the recipient in another is called correspondent banking. So this network, as one could guess is far from being perfect.
It is quite complex and oftentimes includes currency conversion, compliance subtleties, and the process of reconciliation. OECD states that cross-border payments may cost up to 15% in transaction value (depending on the complexity of the transaction and the banking systems involved.)
Cost is one of the key challenges in the traditional ways of cross-border payments. Usually, the process involves several intermediary agents, each taking a fee. It may also include different money-absorbing operations, such as currency exchange and processing.
One of the main challenges in this landscape is the cost. The involvement of multiple intermediaries, each taking a fee, along with the expenses associated with currency exchange and processing, can significantly inflate the cost of transactions.
For businesses that exist thanks to international trade, the costs often impact profit margins the hard way and bring a significant blow to their bottom line.
World Bank reported that the global average cost of sending $200 eliminated 6.4$ of the amount, while the Sustainable Development Goal target is at 3%.
While the cost issues remain significant, they’re not alone. Another challenge here is the time that’s taken to process the transactions. The payments across borders sometimes take several days to complete.
This is caused by different time zones, different banking systems, and regulatory requirements. For individuals, this could be a cause of anxiety, and for businesses, it can cause trouble with cash flow.
Currently, just 8% of cross-border payments are instant, while the remaining ones can be delayed for as many as up to ten days.
Alongside with high cost and long time, the lack of transparency is an issue that comes hand-by-hand with cross-border payments. Limited visibility and lack of any control of the situation often lead to uncertainties, especially with the delays arising here and there.
Is SWIFT the Standard of the Industry?
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is one of the leading standards of a network for cross-border payments. It has been an example in the industry when it comes to communication and transactions securities. However, as it operates with all the constraints the traditional banking system holds, all three issues from the precious block (cost, speed, lack of transparency), unfortunately stay with SWIFT.
The system however is huge and includes 11,000 banks in over 200 countries and territories. The load is quite big, and there are millions of transactions happening daily.
SWIFT is the best system landscape of cross-border payments, and it’s obvious there is room for improvement.
Let’s explore how fintech can help.
How Fintech changes the Game
Over the past decade, a new wave of fintech companies has emerged to address the limitations of traditional cross-border payment systems. Some are enhancing existing platforms, while others are leveraging technologies like blockchain to create an entirely new payment infrastructure.
Digital wallets and mobile payment platforms have created fresh opportunities for expanding financial inclusion. According to the World Bank, remittance costs could be reduced by an average of 3% globally. Speed also improves if you’re using the products of the leaders of the market, such as Airwallex, Nium, Wise, or Revolut.
Here is the quote from the listings describing the website of AirWallex:
“Local payments network offers you a faster, more cost-effective, and transparent alternative to legacy banking.”
As we can see, it tackles all three of the major traditional cross-border payment templates are tackled. No wonder 85% of financial institutions considered collaboration with fintech companies as key to their business strategy rather than competing with fintechs.
Fortune Business Insiders estimated that the global fintech market was valued at USD 294.74 billion in 2023.
The fintech disruption provides new ways for committing global payments, efficient, inclusive, and innovative. The future of cross-border transactions looks bright, especially as we’ve never even discussed blockchain-based fintechs.
Cross-Border Payment Market Leaders
Fintech Magazine lists these three companies as the most well-funded operating in the cross-border.
FIS
Top-funded cross-border payments fintech by total funding, FIS (Fidelity National Information Services) has secured $2.5bn over two funding rounds.
Cross-border payments aren’t all they do. FIS is a comprehensive provider of financial technology solutions, and they offer a wide range of services, including banking, payments, wealth management, and risk management.
FIS helps businesses and financial institutions navigate international payments by supporting various currencies, adhering to global compliance standards, and offering diverse payment methods.
Checkout.com
Checkout.com holds second place with a total of $1.8bn raised across 12 funding rounds.
The company specializes in online payments. They enable various payment options, including credit cards, digital wallets, and local payment methods
With its Series D investment of $1bn in 2022, Checkout.com is expanding its services and products, positioning itself as a leader in the evolving global payments space.
Wise
Completing the top 3 cross-border payment fintechs by total funding is Wise, which has received a total investment of $1.7bn.
Formerly known as TransferWise, the company offers fast, affordable, and transparent cross-border money transfer services with a focus on fair exchange rates and low fees.
The fintech challenges legacy banking systems by providing cost-effective alternatives for businesses and individuals to send money overseas. Continued investment in the company has allowed it to further innovate and drive financial inclusivity, making international money transfers accessible to all.
Blockchain and Cryptocurrency: the Frontier of Payment Solutions
The digital transformation of cross-border payments is the biggest narrative in across-boarder payments.
At the core of blockchain technology lies a decentralized ledger, which records transactions across a network of computers. This decentralized structure prevents any single entity from controlling the network, boosting security and resilience against fraud and cyber-attacks.
Blockchain transactions can be settled in seconds to minutes, contrasting traditional methods. No intermediaries are needed for the technology, and that dramatically reduces transaction costs.
Blockchain improves cash flow for businesses engaged in international trade.
Cryptocurrencies, or digital currencies secured by cryptography and based on blockchain technology, have become powerful tools for facilitating cross-border payments.
As cryptocurrencies aren’t included in the conventional financial system, they offer a level of financial inclusion that is second to none. The main downside of using digital currencies is their volatility in comparison with a stable asset as government-run assets as traditional fiscal money.
Blockchain-based fintech, like BVNK, or Circle uses third-party blockchains and tokens for cross-border payments.
Innovative Technologies Improving Cross-Border Payments
CBDCs (Central Bank Digital Currencies)
CBDCs are poised to have a significant impact on cross-border payments. Governments and central banks across the globe are exploring or piloting CBDCs. The currencies streamline international payments by offering a direct, government-backed digital alternative to traditional currencies.
This reduces the reliance on intermediary banks and helps speed up transactions, lower costs, and enhance transparency. CBDCs, if implemented more widely, solve liquidity issues and eliminate currency conversion fees in cross-border trade.
Blockchain and Distributed Ledger Technology (DLT)
The aforementioned blockchain and DLT are set to continue transforming cross-border payments by offering secure, transparent, and immutable transaction records.
In particular, the rise of blockchain-based payment networks will facilitate faster settlement times and reduce the need for intermediaries. Innovations in interoperable blockchain systems could allow different blockchain networks to communicate, creating a unified ecosystem for cross-border payments. Additionally, decentralized finance\ protocols will become more integrated, providing alternative liquidity sources and enabling near-instant settlement.
Generative Artificial Intelligence
AI and machine learning are predicted to be crucial in optimizing cross-border payments. Generative AI enhances fraud detection, predicts payment delays, and automates compliance processes, reducing the time and resources required to manage international payments.
AI won’t directly improve the speed or cost-efficiency of cross-border transfers, but AI-powered risk assessment and fraud prevention tools will ensure transactions are more secure and compliant with global regulations. Predictive analytics can anticipate and address potential currency fluctuations in real-time.
Conclusion
The evolution of cross-border payments, driven by fintech innovations, creates multiple opportunities for businesses operating in the domain. The emergence of blockchain and cryptocurrencies significantly improves the costs, speed, and transparency of international financial operations compared to traditional methods.
For businesses engaged in international trade, embracing these fintech innovations is crucial to staying competitive. At Elinext, we specialize in developing fintech software solutions for the market leaders.
Whether you’re looking to integrate blockchain technology, build a new Wise, or enhance your payment infrastructure, contact us to discuss how we can help each other build top solutions.
