In the last decade the cross border payments market has evolved significantly, with advancements in technology and the entry of new market players. However international money transfers remain complex, particularly for the wholesale banking and B2B sectors, which account for 98% of cross-border transactions.
In this article, part of a series that aims to explore the cross-border payments market, we'll dive into the current state of the cross border payment market and its trifecta: cost, speed and transparency.
Current Scenario
The cross-border payments market has grown steadily, increasing by $7 to $8 trillion each year. In 2023, it reached $190.1 trillion in transacted volumes and is projected to rise to $290.2 trillion by 2030, a 53% increase. Wholesale payments dominate this landscape, accounting for $149.1 trillion in 2023.
Despite the importance and size of this market, the infrastructure that supports it is outdated. The international banking network remains a fragmented system, relying on a web of relationships that differ in strength and reliability. This lack of standardization across the ecosystem leads to inefficiencies and adds complexity to cross-border transactions.
For instance, international wire transfers, facilitated by global networks like SWIFT, are among the most widely used methods for cross-border payments. While valued for their reliability and security, especially for high-value transactions, these transfers are often slowed down by intermediaries. This dependence not only extends processing times—typically one to five business days—but also increases costs due to additional fees imposed by these intermediaries.
The current mainstream alternatives offer little improvement. A 2022 Statista report highlights that the key demands in cross-border payments are real-time processing, cost reduction, and increased efficiency.
The Cross-Border Trifecta: Cost
Cross-border payments are typically more expensive than domestic transactions due to the additional costs involved in transferring funds across regions. These costs often include currency exchange fees, regulatory charges, and intermediary fees. Each participant in the transaction flow adds their own charges, cumulatively driving up the overall expense.
While some progress has been made in reducing these costs, they remain substantial. For instance, the global average cost to send $200 has fallen from 9.34% in 2011 to 6.39% in 2023. Similarly, the cost of sending $500 decreased from 5.54% to 4.45% over the same period. Despite these reductions, cross-border payments continue to pose a significant financial burden.
A key driver of these high costs is the reliance on intermediaries. Banks without a global presence or those handling less common currency pairs often depend on multiple intermediary banks to process transactions. Each additional entity involved in the payment chain imposes intermediary fees, which either burden merchant banks or are passed on to consumers and payees.
The Cross-Border Trifecta: Speed
International transactions often take longer to process, ranging from a few hours to several business days. According to Pitchbook, 40% of wholesale payments experience delays, primarily due to compliance hurdles, batch processing limitations, and discrepancies in market operating hours. These delays are a result of the inefficiencies inherent in traditional cross-border payment methods.
Transaction chains directly affect processing times, with each intermediary introducing delays through funding requirements, fees, validation checks, and potential data corruption during transmission. Cross-border payments face additional scrutiny with compliance checks for fraud, sanctions, and financial crimes. These checks, often repeated across the transaction's path, vary by bank or payment gateway, leading to delays from inconsistent rules, incorrect flagging, or declines.
Traditional banking hours further slow reconciliation and settlement processes, as balance updates depend on the operating hours of banks in both the sender’s and recipient’s jurisdictions. This issue is compounded by time zone differences, creating bottlenecks. Additionally, inconsistent data standards and formats across countries and systems require manual intervention or reformatting, increasing errors and preventing process automation, which lowers transaction success rates.
The Cross-Border Trifecta: Transparency
Transparency is critical in shaping the cross-border payment experience, yet traditional methods often lack clarity regarding total fees, settlement times, and exchange rates. The involvement of multiple intermediaries complicates transactions, leading to hidden costs, especially in under-served regions or when obstacles arise. Hidden profit margins embedded in exchange rates further exacerbate the issue, with many providers inflating currency conversion costs through concealed markups, making cost management even more challenging for businesses and consumers.
A significant factor in this challenge is the absence of clear communication about fees, timelines, and currency conversions. Traditional systems rarely provide itemized cost breakdowns upfront, catching users off guard with unexpected charges. Poor communication is further compounded by inconsistent updates from banks, leaving clients uncertain about delays or the status of their payments. Such experiences diminish customer satisfaction, complicate financial planning, and undermine confidence in the payment process.
The importance of transparency is highlighted by a SWIFT study involving SMEs and individuals. It found that approximately 70% of respondents would avoid a payment provider after encountering hidden fees. Interestingly, hidden costs provoked stronger negative reactions than payment delays, underscoring that transparency, including clarity on exchange rate markups, is vital for maintaining trust and customer loyalty.
Navigating Complexities
The global nature of cross-border payments presents organizations with a highly complex regulatory landscape. Compliance is a significant challenge due to the lack of standardization and the intricate nature of regulations. Cross-border payments must adhere to the rules set by each country’s banking system, with an estimated 26,000 such rules in existence globally. While these regulations are essential for preventing money laundering and financial crimes, they add significant layers of complexity, slowing down transactions, increasing costs, and complicating processes.
Security concerns further compound these challenges. In recent years, the rise in cybersecurity attacks has highlighted vulnerabilities stemming from inadequate regulation, the rapid expansion of technologies, and increasing global interconnectedness. Algorithms play a crucial role in automating approvals, guiding processes, detecting fraud, and enforcing compliance. Yet, questions about their integrity and ethical use persist, raising concerns about the fairness and transparency of automated decision-making.
Conclusion: Paving the Future of Cross-Border Payments
The "cross-border payments trifecta" - cost, speed, and transparency - represents the foundational pillars of an efficient and effective global payment system. While advancements have been made in addressing some of the inefficiencies, each dimension still presents significant barriers. High costs driven by intermediary fees, delays caused by outdated processes, and a lack of transparency that frustrates users are challenges that continue to hinder the full potential of cross-border payments.
In future articles, we will dive deeper into specific technologies and innovations that have the potential to address these challenges, including real-time payment systems, blockchain solutions, and artificial intelligence. By exploring these solutions, we aim to provide a comprehensive understanding of how the industry can move closer to achieving the trifecta while navigating the complexities of a globalized economy.