A thriving industry has emerged over the past five years with the goal of making payments more seamless. Most of its successes have occurred in domestic markets such as the UK and the US, where neobanks, mobile payment apps and buy-now-pay-later services have proliferated.
The cross-border payments market is much larger – the Bank of England expects it to be worth more than $250tn (£212tn) by 2027 – but it remains far less efficient, mainly because of the disjointed nature of the global financial system.
As Sir Jon Cunliffe, deputy governor at the Bank, explained in the FT in 2020, it can take as long as 10 days to transfer money to some jurisdictions. He noted that the fee for each transfer could be up to 10% of the sum being moved, while payments from the UK to certain territories might have to go through four currencies and five banks.
“Cross-border payment systems still use message formats developed 100 years ago for the telex machine,” Cunliffe added. “For decades, they have been the forgotten corner of the global financial plumbing.”
This has caused immense socioeconomic harm around the world. If businesses can’t move money across borders easily, it impedes global trade and development, especially in emerging economies. Millions of people face high costs when sending money to relatives and friends abroad, while the unbanked and those living in the most unstable and impoverished territories often cannot access payment services at all.
Smoothing cross-border cash flows
It’s widely acknowledged that the system urgently needs improving. The good news is that modernisation work is under way. New players in the payments sector are trying to smooth cross-border cash flows, eliminate unexplained fees and make processes more transparent. The big incumbents that have hitherto dominated this market are taking note and upping their games.
Perhaps most crucially, the G20 group of leading economies has agreed an ambitious action plan to tackle the compliance hurdles and the lack of coordination between the industry and its regulators that have made it so hard to solve the problem. The big question is whether this will make a real difference by 2027, as its architects hope.
If you want to move money across borders, there are several ways to do it, depending on the use case. These include traditional banks; money-transfer services such as Western Union and PayPal; newer fintech players such as WorldRemit and Wise; and payments specialists and forex brokers including Corpay and Monex.
While there are many players serving a range of customers with differing needs in this fragmented market, most payments at the back end require an account-to-account transaction through a bank. This is where a large part of the problem lies. If the payment provider has a direct tie with a financial institution in the receiving country, the transaction can proceed relatively quickly with little fuss. If there’s no such relationship, it will rely on intermediaries, with the funds travelling through a network of so-called correspondent banks. This slows things down, with each party applying its own compliance controls and fees.
Daniel Webber is the founder and CEO of FXC Intelligence, a provider of data on the payments market. He observes that there are “200 countries that can send money to each other. When you add it up, that makes about 40,000 individual payment corridors, each one of which is a unique case. Nearly every country has its own rules covering things such as money-laundering and the financing of terrorism that financial institutions must comply with. Then you have all the different use cases for payments, challenges specific to certain industries and the fact that financial institutions may have different operating hours across different time zones and/or use outdated tech. All of these factors create friction.”
The clearing and settlement time for most global payments is typically at least two days, according to research by the Aite-Novarica Group. Many users complain about the lack of transparency concerning where a payment is until it has settled and also about the loss of data during the process. Moreover, transaction values may vary by the time they settle, owing to hidden charges incurred along the way.
Webber points out that some payment corridors – for instance, between the UK and the US – are much more efficient than others, as these tend to be the most widely used. “Where things get tougher is when you’re moving money to a country where the banking system is less developed,” he says.
The innovators improving transfers
Although there’s clearly much room for improvement, there has been some progress in recent years. Most large banks rely on a cross-border messaging system known as the Society for Worldwide Interbank Financial Telecommunications (Swift) to make payments. Since 2017, that organisation has been implementing an initiative called the Swift Global Payments Innovation (GPI) to improve the speed and transparency of international transactions.
According to the Bank of England, nearly half of Swift GPI payments are credited to end beneficiaries within 30 minutes and almost all within 24 hours. Clients can also pinpoint where a payment is in the process, instead of having to wait in blind faith for it to arrive. By last year, about three-quarters of Swift’s 11,000 member institutions were using the service.
Meanwhile, some innovative new players have been finding ways to improve transfers, with a few eliminating the need for correspondent banks altogether. Apps such as WorldRemit or Remitly enable consumers to shift small sums across borders directly to debit cards or digital wallets with ease. Wise – one of Europe’s largest fintech players, with a valuation exceeding £5bn – has built its own banking network across the world, meaning that its commercial and consumer clients don’t need to use intermediaries. Its goal is to make transfers both faster and cheaper.
Wise’s senior corporate affairs and policy manager, Magali Van Bulck, explains: “If you’re sending pounds to euros, you pay sterling into our UK bank account and we pay out to your recipient from our euro account. As much as possible, money does not cross borders. We charge a single upfront fee, while the exchange rate you get is the one you see on Google, with no hidden charges.”
Some payments firms are using so-called use aggregator models, grouping payments together to reduce costs, as most cross-border fees are incurred as a fixed sum per transaction. Others are dabbling with blockchains. Proponents say that these decentralised digital ledgers could make payments more secure and easier to track than would be possible with the centralised ledgers used by big banks.
One provider that’s been using blockchains is Ripple. The San Francisco firm, which names Bank of America and Santander among clients, claims that cross-border payments on its platform can be made in seconds.
Webber believes that blockchains could help with one of the biggest problems affecting international payments: the fact that banks in many countries don’t operate 24 hours a day (unlike blockchains), meaning that payments may take longer to reconcile and get passed on. They could also address the costly problem of having to pre-fund multiple accounts as collateral to make an international payment, he adds.
That said, it is still early days for blockchain – a technology that is not trusted in some quarters. For instance, the US Securities and Exchange Commission is suing Ripple over its issuance of XRP – a cryptocurrency it uses to make cross-border transactions. The regulator claims that the firm has broken the law by selling unregistered securities. Ripple strenuously denies this and intends to defend itself in court.
Many experts believe that the recent innovations in international payments bode well for the future. They are spurring traditional institutions either to be more creative themselves or to partner with the new crop of fintech firms.
Despite such advances, most agree that concerted regulatory action is also needed to address the wider issues blighting the market, which is why the G20 stepped in. In 2020, it published its Roadmap for Enhancing Cross-Border Payments. This action plan is being overseen by two international bodies with the task of increasing cooperation: the Financial Stability Board and the Committee on Payments and Market Infrastructures (part of the Bank of International Settlements).
The plan, which has the backing of central banks, aims to boost public and private sector cooperation on international payments; improve regulatory coordination across borders; enhance existing payment infrastructure; improve data-sharing and explore the potential role of new payment technologies and arrangements. It also sets out a series of ambitious goals to cut fees, reduce delays and increase transparency by 2027.
The role of central banks
Progress is being made in these areas. For instance, the central banks of Australia and India are working to give non-bank service providers access to their domestic payment systems. This means that such providers will be able to deliver their services without having to use a costly intermediary. Only 30% of domestic payment systems allow such access, according to the Bank of International Settlements.
Meanwhile, the US Federal Reserve has extended the operating hours of its Fedwire service (a real-time gross settlement system used by Fed banks) and the European Central Bank is set to extend its operating hours in November. This reflects the need to widen the rather limited time window in which banks worldwide are open at the same time.
Nonetheless, the G20 plan will take a huge amount of cooperation among governments, central banks, financial institutions and fintech firms if it’s to deliver all the desired benefits.
“The success of our work will depend on the commitment of public authorities and the private sector working together,” says the Financial Stability Board’s secretary-general, Dietrich Domanski. “It also will require investment in systems, processes and technologies to make material improvements in underlying systems and arrangements, as well as the development of new systems.”
Erika Bauman, director of commercial banking and payments practice at Aite-Novarica Group, doubts that it will accomplish all its aims on schedule.
“The goals of the roadmap may be meetable, but is that likely? As with any industry standardisation attempts, there will be bastardisation and differences among global regions that make the process arduous,” she says. “Global cooperation is no easy task. If we look at ISO 20022 standardisation in payment messaging as an example, it’s obvious that progress is quite slow.”
Webber likes the G20’s wide-ranging approach but agrees that meaningful change will take time. “I think we’ll see steady progress with slightly uneven results. Some markets will progress faster than others,” he predicts.
Whether the 2027 goals can be met remains to be seen. Either way, the status quo presents a huge opportunity for the payments industry.
Webber, whose company tracks industry developments, reports that the market is growing quickly but also starting to consolidate. It is always likely to be quite fragmented, with many solutions required to tackle the sector’s many challenges, he says, adding: “There will be no silver bullet.”
Baumann observes that payment providers are innovating faster than ever – and that any bank that fails to adapt could be left behind.
“For smaller financial institutions especially, it can be hard to rationalise investing in services that aren’t used as widely as something such as online banking,” she says. “But the reality is that many customers are leaving to utilise banks that have invested in better solutions, including cross-border payment systems.”
Key aims of the G20 Roadmap for Enhancing Cross-Border Payments
The G20 hopes that, by 2027:
- The average cost of sending a retail payment globally will be no more than 1%, with no payment corridor charging more than 3%.
- Three-quarters of wholesale, retail and remittance payments globally will be credited within one hour of payment, with the rest of the market within one business day.
- More than 90% of individuals globally (including those without bank accounts) who wish to send or receive remittance payments will have access to a means of doing so electronically.
- All payment providers will provide a minimum level of information to customers, including the total cost of a transaction, the expected time to deliver funds, the tracking of payment status and the terms of service.