Dissecting the Impact of New Players on Cross-Border Payment Solutions
The global payments landscape has undergone a massive upheaval in the past decade with the emergence of fintech challengers and alternative payment rails. This tectonic shift has disrupted the traditionally slow, opaque, and expensive international remittance solutions offered by legacy providers like big banks and payment networks.
In this comprehensive article, we will analyze the deep-rooted problems plaguing the cross-border payments ecosystem and how the entry of agile startups and new technologies is transforming the status quo.
We will also assess the response from incumbent players to counter innovation and discuss the challenges still faced by new entrants in scaling disruption. Finally, we will explore what the future holds for cross-border payments as collaboration and competition between legacy and emerging players intensifies.
The Deep-Rooted Problems with Traditional Cross-Border Payments
For decades, cross-border payment flows have been dominated by large multinational banks, money transfer operators, and messaging networks like SWIFT. While these players have facilitated trillions of dollars in global money movement, the traditional cross-border payment procedures suffer from several persistent pain points:
Exorbitant Costs
Banks and money transfer operators charge prohibitively high fees and opaque foreign exchange markups for facilitating international wire transfers, especially in the retail segment. For consumer-initiated remittance and small business payments, these fees can range from 5% to as high as 10% of transaction volume, which is a massive deduction. The opaque fee structures across banks and remittance corridors also lead to customers drastically overpaying for transfers.
Sluggish Speed
The typical lifecycle of a traditional cross-border wire transfer involves multiple intermediaries, nostro-vostro accounts for settlement, and manual reconciliation. This results in an archaic procedural delay of 3 to 5 days for money to move across borders and reflects in outmoded experiences for both personal as well as business payments.
Limited Access
Stringent eligibility requirements due to KYC and AML regulations often exclude migrants, underserved communities, and SMEs in developing countries from accessing cross-border payment facilities from banks. Lack of access to traditional remittance and settlement systems hinders financial inclusion and prevents integration with global trade and commerce.
Low Transparency
There is very little transparency or standardization in the fee structures, foreign exchange rates, and settlement times associated with legacy cross-border payment processes. Customers are often confused about how much they will receive on the other end due to opaque deductions. Real-time payment tracking is also typically unavailable.
How New Players are Revolutionizing Cross-Border Payments?
Multiple fintech challengers and alternative network protocols have emerged in the past decade that directly address the entrenched pain points with legacy cross-border systems and provide radical improvements:
Significantly Lower Costs
New-age digital remittances providers like Wise, Remitly, Revolut, and WorldRemit use technology to optimize back-end operations, compliance, and FX handling. This reduces operating costs and enables offering outward transfers at as low as 1-3% of transaction volume, compared to 5-7% fees charged by banks. Cryptocurrency networks also facilitate cross-border transfers at near-zero fees given their peer-to-peer architecture.
Near Real-Time Speed
Several next-gen networks enable near real-time settlement of cross-border transfers. SWIFT’s gpi instant payments network offers enhanced speed and end-to-end tracking. Digital assets like Ripple eliminate nostro-vostro accounts and manual reconciliation between banks, enabling instant settlement. Meanwhile, Visa Direct leverages Visa’s global credit card rails to facilitate payouts in 30 minutes.
Increasing Financial Inclusion
New-age payment platforms provide user-friendly digital interfaces that can onboard migrants and SMEs at scale. Mobile money services also grant unbanked access to integrated global financial services including cross-border remittance. Fintech and telco collaborations further boost accessibility to fast and low-cost remittances for underserved groups.
Radical Transparency
Disrupters like Wise and Remitly have set a new standard in transparency by eliminating hidden charges and providing upfront visibility into exact network fees, FX rates, and settlement times. Their apps and websites also allow easy cost comparison across corridors. Senders can track transfers in real time until the recipient gets paid.
Improved Governance
New networks follow clear operating rules and standards that optimize speed, transparency, and costs. Ripple’s RippleNet global network, for instance, follows consistent fee, FX, and risk management protocols across all partner banks and systems. This improves governance.
Impact on Incumbents
Faced with declining share and revenues, legacy providers have been forced to rethink their traditional business models and upgrade their capabilities to stay competitive:
Lower Outward Fees
Large money transfer operators like Western Union and banks have reduced fees on some major remittance corridors by as much as 50% given rising competition. Banks have also lowered their FX conversion margins to rationalize costs for clients.
Increased Speed
Banks have upgraded their nostro-vostro accounts and compliance systems to enable real-time settlement and tracking of transfers. Major networks like SWIFT have launched instant payments capabilities. Remittance firms are partnering with digital platforms to accelerate disbursal.
Improved Inclusion
Incumbents are expanding partnerships with postal networks, telcos, and mobile operators to extend their reach to underserved migrant communities lacking banking access. Digital remittance services are also being launched by banks.
Boosting Transparency
Players like SWIFT, Visa, and Western Union have introduced transfer tracking systems that provide visibility into fees, FX rates, and deductions. Visa Direct offers guaranteed FX rates boosting transparency for recipients.
Restructuring Governance
Some incumbent networks and operators have streamlined regulations, compliance, and data standards across their systems to reduce disputes and costs. Blockchain-based systems are being evaluated to further improve governance.
Challenges Faced by the New Players
While disrupting the status quo, the new age cross-border payment providers also face critical challenges in scaling their solutions and capturing significant market share from incumbents:
Building Global Scale
Enabling cheap, fast transfers across all regions requires immense network scale and liquidity management. Fintechs need to scale operations and tie up with thousands of banking/intermediary partners globally – an arduous task.
Navigating Regulatory Uncertainty
They have to navigate regulatory variations across different jurisdictions pertaining to licensing, data flows, identities, and reporting. Unclear crypto regulations also pose adoption risks. Compliance overheads remain high.
Mitigating Cyber Risks
Digital transactions are vulnerable to hacking, theft, and system outages. Disrupters with lean teams have limited cybersecurity infrastructure compared to large banks, posing reliability challenges.
Overcoming Consumer Inertia
Migrating consumers habituated to familiar bank wire transfers to new platforms involves initial hesitation and learning costs. Stiff competition against marketing-heavy incumbents also exists.
Battling Fraud
Digital networks are exposed to sophisticated identity theft and money laundering risks. Robust verification protocols are expensive to implement for small teams. High chargeback costs also persist.
The Outlook for Cross-Border Payments
The cross-border payments ecosystem is undergoing a seismic shift with the entry of agile fintechs deploying next-gen technologies to transform historically slow and opaque money movement. While incumbents still retain key advantages including trust, vast scale, and liquidity management expertise, they are being forced to innovate and collaborate with disruptors.
Looking ahead, more win-win partnerships between legacy institutions and emerging providers can benefit consumers worldwide by merging inclusive reach, trust, and continuous innovation. But new-age players still have critical challenges to overcome around scaling globally, managing risks, battling inertia and fraud.
Legacy systems also need comprehensive upgrades to remain relevant. Ultimately, the ideal future cross-border payments landscape would feature the best of both old and new worlds – combining extensive accessibility, rapid movement, security, and low costs.