Demystifying Cross-Border Payments: Common Challenges and Solutions

According to the Bank of England, the global volume of cross-border payments is projected to surpass nearly 250 trillion in 2027. As the global economy becomes more interconnected, it is crucial to demystify the intricacies of cross-border payments and address the common challenges that arise. 

Traditional methods of conducting cross-border transactions often have limitations, such as high costs, time-consuming processes, and lack of transparency. To overcome these obstacles, innovative solutions have emerged to revolutionize the landscape of international payments. 

This article aims to shed light on the importance of understanding cross-border payments, explore the challenges faced, and present viable solutions that can enhance efficiency and security in cross-border transactions.

 

Evolution of International Payments

The evolution of international payments has witnessed remarkable advancements in communication networks and correspondent banking relationships. B2B cross-border payments are projected to surpass $42.7 trillion by 2026, as reported by Juniper Research. These developments highlight the growing significance of efficient and secure financial transactions across borders. 

One notable milestone was the introduction of the Telex network, which revolutionized international money transfers by enabling reliable and swift communication among financial institutions. 

Correspondent banking relationships have also played a vital role, facilitating seamless fund transfers between banks in different countries and fostering trust and collaboration. 

Some examples of this evolution include the secure messaging and transaction processing capabilities of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network and the convenience of global payment platforms like PayPal for cross-border transactions.

 

The SWIFT and Correspondent Banking Model

According to data from Stripe, the SWIFT network is currently utilized by over 11,000 banking institutions spread across more than 200 countries. These institutions rely on SWIFT and the Correspondent Banking Model to facilitate cross-border transaction communication. However, despite its widespread adoption, the model encounters various challenges and limitations that affect its overall effectiveness and efficiency. 

SWIFT as the Default Network for Cross-Border Transaction Communication

According to Stripe, in 2021, member institutions transmitted an average of 42 million SWIFT messages daily. This statistic highlights the widespread use and reliance on the SWIFT network by financial institutions for cross-border transaction communication.

The SWIFT network provides a standardized platform for financial institutions worldwide to exchange payment instructions and other relevant information. It ensures the reliable transmission of messages across different banks and countries, facilitating international transactions. 

However, with the emergence of new technologies and the need for faster and more efficient cross-border payments, there is a growing demand for alternative solutions that can address the limitations and challenges of the SWIFT network, which has otherwise been the most extensive global network for correspondent banks up until now.

 

Challenges and Limitations of the Correspondent Banking Model

The correspondent banking model, which relies on multiple intermediaries, presents various challenges and limitations that hinder its effectiveness.

·       Increased Transaction Time and Costs with Multiple Intermediaries

The involvement of multiple intermediaries in the correspondent banking model leads to longer transaction times and increased costs. Each intermediary adds complexity and processing time to the transaction, resulting in delays and additional expenses.

·       Lack of Transparency and Dependability

Transparency and dependability are key concerns in the correspondent banking model. The lack of visibility and traceability throughout the transaction process can create uncertainties and hinder trust between parties.

·       High Costs Associated with SWIFT

The correspondent banking model involves various costs, including SWIFT messaging fees, transaction fees, and even foreign exchange spreads. These costs can be substantial, contributing to the overall expense of cross-border transactions.

·       Limited Interoperability and Coverage

Surprisingly, there has been a significant decrease in active correspondent banking relationships worldwide, with a 20% decline observed between 2011 and 2018. Additionally, the number of active corridors enabling direct payment links has dropped by 10%. 

Interoperability, the ability to exchange information seamlessly between different financial institutions, is limited in the correspondent banking model. This lack of interoperability restricts the efficiency and effectiveness of cross-border transactions.

·       Limited Accessibility in Markets with Low Bank Account Penetration

In markets with low bank account penetration, the correspondent banking model faces limited accessibility. This hampers the ability of individuals and businesses in these markets to engage in cross-border transactions, creating barriers to economic growth and financial inclusion.

 

How To Overcome the Challenges Faced in Cross-Border Payment?

According to a study conducted by Visa GME, a significant 87% of global merchant executives recognize cross-border payments as their primary growth opportunity. They acknowledge that cross-border business accounts for almost one-third of their total revenue. These statistics emphasize the importance of overcoming challenges in cross-border payments to fully tap into the growth potential and revenue opportunities offered by international commerce.

To overcome the challenges faced in cross-border payments, consider implementing the following strategies:

·       Embrace Digital Solutions

Adopt digital payment platforms and technologies that offer faster and more efficient cross-border transactions, reducing the need for manual processes and paperwork.

·       Explore Alternative Payment Methods

Investigate alternative payment methods such as mobile wallets, digital currencies, or peer-to-peer platforms, which can offer lower costs, faster settlement times, and increased transparency.

·       Enhance Transparency and Traceability 

Implement blockchain technology or distributed ledger systems to provide a transparent and immutable record of transactions, enhancing trust and accountability in cross-border payments.

·       Foster Partnerships and Collaborations 

Establish strong correspondent banking relationships and collaborate with trusted financial institutions, payment service providers, and regulatory bodies to streamline processes and improve interoperability.

·       Improve Customer Experience

Focus on providing seamless and user-friendly payment experiences, ensuring that customers have access to convenient and reliable cross-border payment options.

By adopting these strategies, businesses and financial institutions can overcome the challenges associated with cross-border payments and enhance efficiency, transparency, and customer satisfaction in the process.

 

The Future of Cross-Border Payments

As emerging technologies transform cross-border transactions, innovation holds the key to advanced solutions that can enhance the efficiency and security of financial transactions. Some of the latest solutions that are making their mark in the cross-border payments landscape include the following:

·       Blockchain Technology

Blockchain technologies have seen increased attention in recent years, with experts exploring their potential for revolutionizing cross-border payments. Blockchain, a distributed ledger technology, provides an immutable, decentralized platform to validate and store data in real-time. It offers consumers fast, efficient, and cost-effective international payment solutions with improved transparency and security features. 

·       Central Bank Digital Currencies (CBDCs)

CBDCs are digital fiat currencies that are issued by central banks. They can streamline cross-border transactions, reducing settlement times and costs and promoting financial inclusion while maintaining regulatory oversight.

·       Instant Payments and Real-Time Gross Settlement (RTGS) Systems

The need for faster and more convenient cross-border transactions drives the demand for instant payments. RTGS systems allow immediate settlement on a transaction-by-transaction basis, enhancing efficiency and customer experience.

·       Open Banking and API Integration

Open Banking and APIs enable secure access to financial data, empowering third-party providers to access account information, initiate payments, and offer innovative solutions. This fosters competition, innovation, and interoperability in cross-border payments.

 

The Bottom Line

Cross-border transactions continue to be an important component of the global economy. Understanding and overcoming the challenges of cross-border payments is crucial. 

At Verinite, we help financial institutions successfully address the common challenges associated with cross-border payments. From advisory and migration to the implementation of innovative new services, we enable transformative change in the retail payments experience. 

Explore our diverse range of digital payment solutions and unlock the potential of seamless and efficient cross-border transactions. For more information, connect with us here.