As the Covid-19 pandemic serves to urge on the global shift to cashless transactions, we’re witnessing rapid evolution within the digital payment space. Digital payments make a critical contribution to the world’s economy, facilitating transactions between numerous individuals and organizations each year. When it comes to cross border payments, though, it’s really quite astonishing that the usual digital payment methods still face a number of struggles and roadblocks.
The severe effects of Covid-19 on the global economy have managed to slow down the previously anticipated growth in cross border values. But they are still expected to reach $35 trillion by 2022. Now, this quite vast number might get you to think that all these intra-border transactions are conducted smoothly. In truth, however, it conceals the many inefficiencies both companies and clients have to struggle with while conducting cross border payments.
In this post, we explore the foremost challenges associated with cross border payments and also take a look at some measures various corporations have taken to streamline the entire process and introduce seamless cross border payment experiences.
Why Are Cross Border Payments Still A Struggle?
Here are some of the major challenges that make cross border payments a struggle in many cases:
- Incompetent Messaging Structures:
One of the biggest challenges banks and other financial institutions (FIs) face when it comes to cross-border payments is their inefficient messaging infrastructures. Many organizations face difficulties with replacing paper and manual processes by introducing straight-through processing (STP) and adopting cross border message standards.
Cross border message standards have to abide by multiple domestic rules and regulations as well, and adopting them requires a financial institution to make a massive investment. Therefore, the reluctance to adopt said standards mostly arises from the sizeable costs that come with upgrading the internal systems and procedures, especially for the relatively smaller number of international payments.
- Slow Payment Processing:
Financial institutions are usually required to have direct links with other banks or similar organizations in other countries to sanction cross border payments. However, most FIs can not have counterparts in any given nation, which is why in the case of international transactions, usually the money has to get passed on between several banks in different countries for it to reach its ultimate destination. A typical cross-border payment has to go through at least four banks before its completion.
According to a report published by the G20 in April 2020 titled ‘Enhancing Cross Border Payments’, some transfers between jurisdictions can still take around 10 days. It was also found that payments sent from the UK to certain territories had to pass through as many as four currencies and five banks. Additionally, despite the technological advances, around 6 out of 10 cross-border payments still necessitate manual intervention, each of which takes a minimum of 15 to 20 minutes.
The most common reasons for the slow pace? Incomplete payment information, money laundering, and fraud investigations, and the need for conduct sanctions. The lack of digitalization and standardization makes it even more difficult to solve any of those issues swiftly, so in case a cross-border payment gets hindered, it could be delayed by several hours to days, and even weeks.
- A Lack of Transparency:
The lack of visibility into cross border payments results in major operational dysfunctionalities for financial institutions. If a payment gets held back by regulatory checks or is intercepted by hackers and doesn’t get to the recipient in time, there’s no efficient way for either the sender or recipient to be notified of the setbacks that caused the stall. As pointed out in this survey, 61% of treasury professionals have said that the time involved in finding out why transactions have failed cause a drain in company resources.
- Personal Data Privacy Rules and Regulations:
The various regulatory requirements regarding what kind of personal information can or can not be shared only add to the challenges cross border payments have to face, and further complicate the already quite complex process. Financial institutions are required to abide by these mandates, and therefore they have to put a lot of effort into constantly staying updated about the ever-evolving regulatory requirements in various countries, as well as organizing what information can be sent across different jurisdictions.
For instance, the General Data Protection Regulation (GDPR) affects any institution processing the personal information of the citizens of the European Union. On the other hand, in Pakistan, financial institutions are forbidden from sharing any personal or business information regarding their clients, even within the departments of the organization itself.
Now that we are aware of the various reasons why cross border payments are still a struggle, let’s see some solutions different corporations have introduced to tackle those very issues, shall we?
How are Payment Providers Dealing With Cross Border Payment Issues?
Up-and-coming cloud-based technologies have proven to be useful in making cross border payments secure, fast, and easily traceable. SWIFT, the global network that allows banks to send across payments directly to participating FIs swiftly and easily, is already well past solid adoption. In fact, in 2019, the SWIFT network processed $77 trillion in cross-border payments, accounting for about 60% of the overall international transactions in the same year.
Recent developments in artificial intelligence (AI) and machine learning (ML) have the potential to provide more cross border payment solutions. Some payment providers within the financial services industry with the target to make cross border payments a faster process have also leveraged blockchain and distributed ledger technology (DLT) behind it.
For instance, the Visa B2B Connect platform, developed based on blockchain architecture, processes transactions directly with Visa’s partners within a single day instead of routing them outside of the network. Mastercard, on the other hand, has purchased cross border payment providers to expand its own payment networks and offer solutions to these issues. The Canadian payment network Interac is another provider interested in making use of blockchain tech and DLT solutions.
And yet solution providers like Ripple have taken the initiative to eradicate all cross-border payment issues by making the use of cryptocurrency. A number of cross border payment partnerships have also formed; for example, back in 2019, Alipay partnered up with six European digital wallets to allow users to make QR code payments in 10 European countries.
Cross border payments are, without a doubt, incredibly complex. However, that doesn’t stop the customers from expecting the same kind of convenient experience from international transactions as they have with their domestic purchases. Therefore organizations sooner to perceive the cross-border payment issues and take measures to combat them are sure to have customer loyalty in the long run.
At Salt, we aim to improve your banking experience in the coming times by making both your domestic and cross border payment processes seamless and secure. You can visit the Salt blog for further financial insights!