By Stan Cole, Head of Financial Institutions, Inpay.
Cross-border payment solutions have evolved a great deal in recent years to provide customers with cheaper, faster ways to transfer money internationally with greater security and transparency. Now, thanks to innovative developments in the fintech sector, customers have access to options that make cross-border transactions as easy and seamless as domestic bank transfers.
Fantastic progress has been made in an area that was once woefully outdated, and the improvements we’ve already seen are just the beginning. Further changes are expected to be accelerated in the context of the coronavirus pandemic as global eCommerce has thrived, new SMEs have formed, and employees who can now work remotely may wish to do so overseas. These are just a few of the exciting shifts that are set to be critical to the future of cross-border payments.
The world has become increasingly digitised in virtually all areas, with the fintech sector alone predicted to be worth over $300bn by 2022. Payment service providers (PSPs) continue to explore ways to incorporate new technologies and give customers the best possible experience. In terms of cross-border payments, blockchain and cryptocurrency, in particular, are attracting attention.
Stablecoin, for example, has gained popularity in this sphere. Unlike Bitcoin which is famously volatile, this type of cryptocurrency is stabilised by pegging its value to an external reference such as a hard currency or commodity. While blockchain technology reduces the number of intermediaries required to process an international transaction, not only bringing the costs down but also decreasing the number of points in the pathway that could be exploited by cybercriminals. These technologies are already being utilised — South Korea has started to shift from card to stablecoin payments, while China aims to launch a central bank digital currency (CBDC) using blockchain technology prior to the 2022 Winter Olympics in Beijing.
These particular technologies, however, may not be suitable for all organisations. Regardless, now that customers are increasingly seeking cheaper, faster, more transparent ways of making cross-border payments, financial institutions must explore technology enabling them to meet these needs. And with the rise of neo banks and fintechs that are already providing these solutions, legacy banks must be prepared to get on board and explore innovative products and services if they want to continue satisfying their customer base.
The cross-border payments industry is more competitive than it has ever been, but there are still imbalances that need attention in order to level the playing field even further. Namely, the regulatory roles of Visa and Mastercard, which gives them the ability to dictate the rules and costs of alternative services. The DCC Forum, an international body of eight organisations in the Dynamic Currency Conversion industry, believes these discrepancies must be addressed for the sake of the entire payments sector.
Writing for The Paypers, chairman Gino Ravaioli explains: ‘Historically, the media didn’t concentrate as much on the matter of transparency of the costs involved in making a purchase in the local currency where Visa, Mastercard, and the issuers manage the conversion after the transaction is completed’. Where these financial giants have imposed costly fees and regulations, it’s harder for alternative cross-border payment providers to compete by offering fairly priced services.
Improvements are already being made thanks to a recent review of the cross-border payments industry by the European Commission, with the aim of improving choice, transparency and competition for the benefit of the consumers. This has resulted in a set of standardised transparency requirements for providers, and while the DCC is pleased with this progress, they feel more action is required. ‘Opening up this space to other players and making room for more alternative payment products/services that have the potential to improve processes will ultimately be beneficial for the end consumers — but this is only going to be possible if there is a level playing field’, Ravaioli concludes.
With this topic now firmly on the agenda, it’s likely there’ll be further conversations about making the market more competitive. And what are the solutions? Banks need to offer more transparent services to customers and address internal operations for the sake of innovation. If they can’t do this alone, they will need to partner with a fintech that can provide the solutions they’re lacking.
Greater collaboration between banks and fintechs
The future of the cross-border payment industry is likely to see more banks and fintech PSPs, like Inpay, working together to create solutions that go above and beyond. Both sides have their own unique strengths and collaboration is in the best interest of everyone involved. Banks are more likely to have size, reputation and loyal customers in their favour, but they’re also often relying on old-fashioned, inefficient systems for their international payment products. Fintechs, however, aren’t weighed down by client acquisition or legacy infrastructure, leaving them free to put all their efforts into perfecting their products and services.
Instead of competing against each other, it’s expected that many institutions will realise collaboration is the way forward, allowing both parties to enjoy the positive impact of the relationship. Teaming up means that fintechs can benefit from the prestige that banks enjoy, while banks can take advantage of the data they really need and access new global instant payment infrastructures.