The Role of APIs in Transforming Cross-Border Payments

As global trade returns to the “normal” in 2024, cross-border payments are growing in relevance. Valued at $190 trillion in 2023, cross-border payments are set to increase by 53% by 2030.

So far, “traditional” cross-border (or international) payments are time-consuming and expensive. Naveen Mallela of JP Morgan Payments observes that modern consumers expect cross-border payments to deliver “the same type of payment experience as in domestic markets.”

Along with technologies like AI and blockchain, application programming interfaces (APIs) have a critical role to play in transforming cross-border payments. Abhinav Paliwal of PayNet Systems also believes that the emergence of open banking APIs can streamline the digitalization of cross-border payments.

Open banking APIs enable a direct account-to-account payment transfer – without the involvement of banking intermediaries. Before talking about the role of APIs, let’s first look at why cross-border payments in the current state are complex and challenging:

1. High transactional costs

Traditional cross-border payments involve many intermediaries – including the following:

• Source bank (that initiates the international payment)
• Intermediary agents (that facilitate the payment transfer)
• Target bank (that receives the payment)

Each intermediary applies their payment processing fee and currency exchange rate, thus making cross-border payments complex and expensive.

• Regulatory compliance

Every country involved in international trade has its unique laws to counter financial threats such as:

• Money laundering
• Terror financing
• International trade barriers

Any efficient cross-border payment system must comply with these complex laws and regulations. A single compliance-related failure can lead to legal procedures or heavy penalties.

• Fluctuation in currency exchange rates

A fluctuating exchange rate in the involved currencies can also pose a challenge for cross-border payments. Banks and other financial entities must hedge against these currency fluctuations to minimize losses. Additionally, enterprises that receive foreign currency must allocate funds upfront to process the transaction.

Besides, buyers and sellers are both impacted if there is any change in the exchange rate between the payment initiation and settlement date.

• Legacy payment systems

Banks and financial institutions involved in cross-border payments often use their legacy tools or proprietary systems, which may be incompatible with digital payment systems. This incompatibility can lead to delayed payment settlements or other issues.

Legacy systems can also delay payments due to their lack of standardization (for instance, inconsistent data formats). Non-standard payment systems and practices across countries can also impact smooth fund transfers.

• Data security

The complex network of cross-border payment systems increases the chances of a data breach or cyberattack. Additionally, data privacy laws differ between countries (for example, GDPR is only applicable to companies operating in the U.K. or European Union).

Companies involved in international payments must navigate through this complex maze of data-related regulations. Additionally, they need stringent measures like data encryption and fraud detection tools to ensure data security during international transactions.

How APIs can transform cross-border payments

APIs can transform and streamline cross-border payments through third-party integration and real-time operations. By using APIs, financial companies can make international payments faster, cost-effective, and transparent.

Here’s how APIs are playing a direct role in cross-border payments:

1. Direct connections between diverse systems

APIs are designed to work across diverse payment systems and networks. For example, open banking APIs can enable frictionless cross-border payments using mobile apps. Without any redirections, APIs provide a familiar user interface for the comfort of its customers.

• Real-time access to currency exchange rates

By using APIs designed for global money transfers, companies now have real-time access to the prevailing currency exchange rate. This reduces the risks of exchange rate fluctuations, thus allowing them to apply the correct rate for any transaction.

• Streamlined payment routing

With integrated APIs, international payment systems can evaluate and choose the best payment route, which offers speed, affordability, and reliability. This capability overcomes the potential delays and high costs associated with traditional routing.

• Real-time payment tracking

By using APIs, international stakeholders can receive immediate updates on their payment status. This boosts transparency and reliability in the payment system. Real-time tracking also enables companies to redesign their payment strategies.

• Data security and regulatory compliance

APIs also improve data security in cross-border payments by enforcing measures such as user authentication and anti-money laundering (AML) techniques. Open banking APIs also integrate with existing KYC standards and AML infrastructure.

Conclusion

A Citi report found that 83% of banks regard APIs as the key technology in enabling cross-border payments. In the rapidly evolving payment landscape, APIs are gradually replacing traditional payment methods. Along with customer behavior, open banking initiatives are advancing the demand for digital payments across the globe.

As a solution provider for payment processors, Verinite is enabling its customers to address its common challenges with customized payment solutions.

You can leverage our technology expertise to streamline your cross-border payments. Get in touch with our team today.