Continuous Evolution in Cross-Border Payments

With businesses spanning globally, more intercontinental trading and increasing consumer demand, we’ve all been hearing more about cross-border payments. A lot has changed in a short space of time, and what are the risks and solutions in a world of growing international corridors?

What are cross-border payments?

Cross-border payments are transactions where the end recipient and the sender are in separate countries. Cross-border payments can be made in numerous ways, including bank transfers, card payments, alternative payment methods and mobile payments. The diversity in payment methods is a positive, as well as the fact that they cover retail payments and wholesale – increasing accessibility. EY predicted that global cross-border payments are expected to reach US$156 trillion in 2022, with B2B transactions rising the most.

The need to improve cross-border payments is essential, but many civilians are left questioning why it’s so important. Economic growth is fed by international movement of goods and services, and so the mobility of goods and services is fundamental to economic stability. In fact, the value of cross-border payments is expected to grow by 2027 to a value of $250 trillion!

The payment corridors which have developed over the years have reached a point of pressure with numerous manufacturers expanding across borders, international trading, global investments and international remittances. End users are applying more pressures to banks and financial institutions to deliver a safe cross-border payment service to fulfil the role that legacy systems are unable to in a time-efficient manner.

Main types of cross-border payments:

We currently have two main types of cross-border payments:

1. Wholesale: Cross-border payments named as ‘wholesale’ are generally between financial institutions to support customer activity or their own cross-border activities, which includes lending, borrowing, foreign exchange, debt, commodities, and securities. Wholesale cross-border payments are also used for large no-financial companies, including governments, for large imports and exports of goods, services, and trading.
2. Retail: The most widely recognised cross-border payment method is defined as ‘retail’. This includes a transaction between individuals and businesses. For example, remittances, purchase and even money sent back to home countries from migrants.

What are the longstanding issues?

Numerous domestic issues of cost, speed, accessibility, and transparency. In essence the most prevalent issue is the overall difficulty completing a transaction seamlessly, with payments taking several days and costing up to 10 times more than a domestic payment. Some of the main issues noted include:

• Complex compliance checks: Transactions can often be checked several times before progressing, causing time delays in efforts to avoid illegitimate financial movement. But harder still, there is a lack of consistency in regulations applied to screening of cross-border funds because of the different rules and processes in different countries. Banks have different resources assigned to conducting checks in a secure manner, but when you combine each involved parties’ resources, there are several intermediaries in a chain which hinders time efficiency and simplified automation.
• Time differences and hours of operation: Combining time differences with limited operating hours creates a tight time window in which company business hours align internationally. This results in delays with cross-border payments and causes problems for banks who need to anticipate fluctuating costs from the FX rates.
• Long chains: Not the fun kind of sparkly jewellery, but rather the numerous relationships banks hold to make cross-border payments a possibility. With the receiving banks, third parties, repeated checks and processes in place, the transactional chain becomes longer.
• Inconsistently high costs: Quick settlements? Not likely! Fiat institutions using legacy platforms have limited capabilities. Additionally, where banks are required to provide funding in advance in the relevant currency, banks are at risk of losing money in fluctuating FX rates and risk of fraudulent activity.
• Legacy technology: Unfortunately for many legacy platforms, they lack the advancements of fintechs such as real-time monitoring, blockchain technology, have a lower processing capacity. With so much of the legwork being completed by manpower, the processes are lengthened because of time constraints and capped labour available.
• Limited data: Financial institutions make payments by delivering messages to update the accounts of both the sender and recipient. In these messages, there is data to confirm the identity of both parties and that the payment is of legitimate interest. The standards and regulations in which data is formatted varies in different systems and jurisdictions, which can often mean that scripts require a translation when used in cross-border payments.

What new issues are arising

The first issue is the obvious need for financial institutions to remain ahead of competition in the payments landscape by delivery cost-effective, secure, and faster cross-border solutions. At a rapid rate we see digital banks, payment service providers, fintechs and non-traditional players enter the field bringing revolutionary solutions to create a simplified flow in cross-border payment corridors.

Cybersecurity has become a prevalent issue in many industries, but when handling cash – the risk is that much higher. In the most recent years alone, we have seen an increase in cybersecurity attacks, which are driven by lack of regulations, rapidly expanding technologies, and more interconnections globally. Hacking skills and techniques has improved, whilst legacy methods and platforms for cross-border payments remains slow to change. In several jurisdictions there are currently no regulations or standards which focus on compliance and security for payments which happen across borders, creating room for criminal activity in the payment corridors. Managing cybersecurity concerns amid the fragmented processes and policies has resulted in business owners becoming unsure of unintended consequences and even the potential for new cyber threats to develop.

One of the largest concerns is in the algorithms that are used to automate approvals, advisories, detect fraud and apply regulation compliance. Whilst these are non-negotiable elements to a cross-border payment, there is question around the integrity of the algorithms and ethical questioning behind the concept of automated approvals. Attackers are creating false applications, manipulating financial data and pose a threat to exposing personal data.

How is it changing?

G20 and FSB

In 2020, the G20 made a commitment to prioritising the cross-border payments process after observing increasing threats to national and international financial systems. In this they dedicated work to identifying challenges and blocks associated with cross-border payments and developing solution to address them. The G20 has asked the Financial Stability Board (FSB) along with other bodies such as the Committee on Payments and Market Infrastructures (CPPMI) to work together to develop a roadmap that would enhance the global cross-border payment process.

The FSB are collaborating on an international level to manage operational risk, and work on practises that can be applied internationally to ease blockages in payment corridors. Some of the recommendations that are being exercised include:

• Bringing a common language between cyber and financial stability communities
• Unifying and intertwining international regulations

Collaborating with multiple stakeholders at a local government and international level to understand cyber risk threats.

Fintechs

How will fintech impact the cross-border market?

Fintech innovations are emerging regularly, if not daily, to facilitate the adoption of safer, cheaper, and more convenient cross-border payments. Digital technologies, such as blockchain technologies, will mitigate risks of confidential information that is passed through the cross-border corridors. Many non-bank institutions, such as fintechs, possess licences and infrastructures which allow them to mitigate an intermediary player in the payment corridor. In the long run this brings great reduction in fees and waiting times to be shortened.

Fintechs are also tackling the issues around ‘transparency’ which hinder a seamless cross-border payment process. The lack of transparency stems in the messaging sent from bank A to bank B during a transfer, and fintechs have been developing technologies which remove this issue. Distributed ledger technologies, for example, are supporting back-end processes in cross-border payments to offer real-time tracking of payments and potentially same-day settlements for banks whose recipient is in their network.

We are now also seeing fintechs exploring solutions that increase adherence to regulations and minimise risks of fraud. Much like the blockchain technologies that we have already touched on, we also are seeing machine-learning, automated compliance, algorithm-based reviews and meticulous know-your-customer (KYC) systems.

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