What are some of the challenges or pitfalls associated with cross-border payments?
Cross-border payments are more expensive than domestic transactions. The element of variable foreign exchange rates adds uncertainty for both sender and receiver and sometimes neither party knows who’s at risk if the exchange rate moves. These types of payments can take a long time – several days, historically – and there is no certainty when the money will arrive.
There is no transparency as there is no way to confirm where the money is in the system. And that adds a lot of worry for the sender because they might be sending large amounts, or for the receiver if they need the funds to arrive at a particular time.
How can innovations in payments technology, especially real-time payments, help mitigate these challenges?
The innovations are about faster payments and adding control and choice of how payments are made. There are a lot of new players coming to the market, which is reducing prices. That is giving people the choice of whether to prioritise speed, price or the exchange rate when they are looking for a provider.
Faster payments bring a real benefit of liquidity for businesses, particularly around cash flow. Say there is a t-shirt supplier in the UK who can easily source the t-shirts from abroad and they are buying them from a warehouse in Vietnam. In the past, the UK supplier would raise the invoice and send the payment, probably in advance for a large order, then wait for the money to arrive in Vietnam. And then only after that would the provider of the t-shirts pay their suppliers, source their materials and produce the stock. So there is a long delay between making the order and receiving it. Now with real-time1 payments the payment is quick and the business providing the goods can see that it has received the money, and everything can progress far more quickly.
This isn’t limited to payments for physical goods. If a website is maintained by somebody based in another country, then they also need to be paid with cross-border payments.
What are some of the growing use cases of cross-border payments then? Perhaps those that feel particularly a product of the modern world, such as content creation.
Content creation is a big one. People who post videos on YouTube and TikTok, for example, need to draw down the funds that they earn from ads, views and tips that have been paid to them from around the globe. This is a big growth area. And we’re seeing that content creators shop around for the platforms that allow them to receive their money as quickly as possible.
Online marketplaces are another growing use case. People sell their wares online from all over the world and once the payment has been received by the marketplace, it is paid out to the individual small business. For small businesses, liquidity is key and they want to receive their money as quickly as possible.
What is the biggest use case for cross-border payments that you see?
The biggest use case for us would be remittances. It’s a huge growth area. We have seen huge growth in this space. Historically, sending remittances could be as cumbersome as someone getting on a bus with a bag full of cash and taking it across a border. That still happens a lot. But there’s been a huge increase in the number of digital payments in the remittance space.
These are often targeted payments, for example, people sending money home to do a bit of building work or to pay the school fees or medical bills. The real-time1 payment capability avoids the need to carry a big bundle of cash cross-border and they can send small amounts as needed, on demand.
Do you anticipate any big challenges on the horizon in the cross border payments space?
With cross border, you’re dealing with many different countries and many different local regulations. And it can be very complicated as an individual merchant trying to navigate this world. Luckily, there’s payment providers who are very adept at dealing with all the different regulations. Regulations also change all the time, so that’s something to keep an eye on.
The other big challenge is around fraud and security of payments. Cross-border payments are the ones fraudsters often go for. Because if you can get the money, you can disappear, and then you’ve got very little chance of being caught. So making sure that the ecosystem and the channels of payment are very secure and not going to be corrupted is really important. So I think that is an ever-growing challenge, and the fintechs and providers of fast payments need to stay one step ahead of the fraudsters to ensure their systems are secure.
How are different players in the financial services sector working together to make international transactions smoother and more efficient? What does the ecosystem look like?
There are many players in the system and they all need to talk to each other. There is also a lot of specialisation in terms of payment channel. What’s important is that the end customer doesn’t perceive this fragmentation and has a good experience, and by and large, that is what happens. This is all supported by new API technologies, where a provider allows other people to use their software through seamless integration. The end customer benefits because they can use one app that offers a choice of payment methods from different providers. For them, it’s a seamless experience. They can decide what is important to them, choose the appropriate channel and make the payment instantly.
For more information, visit visa.co.uk
1 Actual fund availability depends on receiving financial institution and region.
Disclaimer: The views and opinions expressed in this article are those of the interviewees and do not necessarily reflect the views or positions of any entities they represent. Visa neither makes any warranty or representation as to the completeness or accuracy of the information within this article, nor assumes any liability or responsibility that may result from reliance on such information and any information from third parties. The information contained in this article is not intended as investment or legal advice, and readers are encouraged to seek the advice of a competent professional where such advice is required.