How the international payments sector is getting its house in order

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.

It will require invest­ment in sys­tems, process­es and tech­nolo­gies to make mate­r­i­al improve­ments in under­ly­ing sys­tems and arrange­ments

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.

Utilising blockchain 

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.”

Many cus­tomers are leav­ing to utilise banks that have invest­ed in bet­ter solu­tions, includ­ing cross-bor­der pay­ment 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.”

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