The rapidly changing technology landscape has made it difficult for banks and other financial institutions to move money across borders quickly, securely and efficiently. Archaic systems do not seem to have a place anymore, and financial institutions are given no choice but to evolve.
Nonetheless, with the advent of new and innovative payment solutions, cross-border payments’ future looks promising. According to Juniper Research, B2B cross-border payments are expected to exceed USD 42.7 trillion by 2026. This growth is being driven by several factors that we will explore today.
Trends Reshaping Cross-Border Payments
1. Emerging Cross-Border FinTech Solutions
Cross-border fintechs have emerged as viable alternatives to traditional banks and other financial institutions. They can offer lower fees and faster transaction times by leveraging the latest technology. In addition, many of these fintechs offer API integration, which allows businesses to seamlessly connect their cross-border payment solutions with their existing accounting and ERP systems.
They also focus on specialised fintech-based solutions designed to automate their processes, such as mass-payment solutions and multi-currency accounts, without the need to be physically present in different countries. These are the kinds of solutions that traditional banks are often unable to provide.
The Bank of England has estimated that cross-border flows will grow significantly in the coming years, from USD 150 trillion in 2017 to an estimated USD 250 billion by 2027. This growth is being driven by a number of factors, including the increasing globalisation of trade, the rise of digital commerce and the growing popularity of mobile payments. With this increase in cross-border activity, there is a growing need for efficient and cost-effective cross-border payment solutions. This is where fintechs are able to offer a competitive advantage over traditional financial institutions.
2. The Proliferation of CBDCs
Central banks worldwide are researching and experimenting with central bank digital currencies (CBDCs). The Bank of England is one of the many institutions that are looking into this new technology. They have stated that a CBDC could provide “a more efficient and resilient payments system” and help reduce business costs.
CBDCs have the potential to revolutionise cross-border payments, as they would allow businesses to make international payments using a digital currency that is backed by a central bank. This would simplify the process, improve the speed and eliminate the need for intermediaries. In addition, CBDCs could help to reduce the risk of fraud and counterfeiting associated with traditional cross-border payments, as they would be issued using blockchain technology. This would provide a secure and immutable record of all transactions.
3. Real-Time Cross-Border Payments
One of the biggest challenges with cross-border payments is the time it takes for the money to reach the recipient. This is due to the fact that banks operate on different schedules and time zones, which can cause delays. In addition, banks often have to rely on intermediaries to process these payments, which can add even more time.
This is why real-time cross-border payments are becoming more popular. These payments are processed and settled immediately, which means that the money will reach the recipient almost instantaneously. This is made possible by using technology such as blockchain and smart contracts.
Currently, there are several initiatives underway to launch real-time cross-border payment systems, including SWIFT GPI and Visa Direct.
What Does The Future Hold?
The trends discussed here are all pointing to cross-border payments becoming faster, more secure, cost-efficient and more efficient from a customer standpoint. This is good news for businesses and consumers alike.
There are, however, some challenges that need to be addressed. Firstly, the closed-loop nature of some of the new cross-border fintech solutions may limit their market power. Bech and Hancock note that, in contrast to stablecoins, cross-border fintech solutions rely much more on existing providers and infrastructures (banks and payment systems). This means they are less deep than stablecoins in terms of the closed loop they bring.
Secondly, the legal and regulatory environment for cross-border payments is complex. This is due to the fact that there are multiple jurisdictions involved. Regulations are constantly changing, and this can make it challenging for businesses to keep up to date.
Finally, data security is a key concern for businesses when making cross-border payments. This is due to the fact that sensitive data, such as financial information, is often involved.
Despite these challenges, the overall trend is positive, and it seems likely that cross-border payments will continue to become faster, easier and more efficient.
About the author: As Co-Founder at Capitalixe, Lissele Pratt helps companies in high-risk industries obtain the latest financial technology and banking solutions.
With 7+ years of experience in the financial services industry and her global perspective, the entrepreneurial-minded Lissele is a recognised expert in foreign exchange, payments and financial technology. Her entrepreneurial spirit took her from crafting her first business at the age of 16 to building a seven-figure consultancy within the space of three years.
Lissele’s hard work and determination landed her a spot on the Forbes 30 under 30 finance list in 2021. You can also find her insights in popular publications like Business Leader, Fintech Futures, Fintech Times, Valiant CEO, Finextra and Thrive Global.