Cross-border payments are growing thanks to a mix of online businesses, borderless commerce, and global trade improvements. In addition to volumes, transfer asset types are growing too. Despite the slowdown in the cryptocurrency market, decentralised assets are increasingly offering fascinating use cases for wealth storage and transfer. Technology has driven this change, whether through APIs offering real-time FX rates or leveraging local clearing networks to avoid wire transfers. Given the role tech plays in the cross-border payment experience, examining these initiatives is a logical place to begin.
Technology continues to transform cross-border payments
For many years now technology and user demands have existed in a virtuous circle. Technology improves user experience (UX), and these improvements fuel further technological innovation. The rise of fintechs and neobanks is a good example of this situation.
These companies are reorienting consumer expectations around daily interactions, from quick onboarding to fully-digital payment experiences. APIs lie at the heart of this development. Open banking networks that integrate several service providers into a single network are simplifying bank infrastructure design.
On the institutional end, APIs are playing a critical role in offering treasurers real-time FX rates and the ability to hedge currency risk optimally. Vikas Srivastava, Chief Revenue Officer at Integral, notes that embedding FX services into customers’ workflows has helped deliver highly automated processes.
“The technology part, which has been driven a lot by the boom in fintech,” he continues, “has resulted in an evolution in user experience and put pressure on financial firms to serve their customers better but also made them question the way they handle cross-border payments.”
“The return of volatility has brought the focus back on cross-border payments as global e-commerce never slowed down, even in the pandemic,” he says. “Clued-up consumers are able to use the shifts in exchange rates to their advantage, by shopping globally and getting the most bang for their buck where their domestic currency is at its strongest.” However, volatility is a risk factor for companies who are at the receiving end of cross-border payments and don’t have sophisticated currency conversion technology at their fingertips. In those cases, increased volatility means higher currency risk and higher transaction costs due to wider spreads and ultimately that can have a huge impact on profitability.
Advances in technology are helping them mitigate these risks. Companies now have access to diversified settlement systems without absorbing significant technical overhead. Technologies like SWIFT GPI combined with API connectivity are playing a significant role in helping companies integrate their systems and boost visibility into cross-border transfers.
The cloud and APIs are a winning combination
Srivastava explains that the API-centric focus of Integral’s platform allows for significant customization – a critical factor that boosts UX. “A flexible solution that you can configure to fit your exact requirements and is able to integrate with other tools in your ecosystem is key,” he says. “Every business has its own set of tools and processes, and technology simply needs to fit in with that.” Leaning on the cloud to deliver these solutions makes a lot of sense. “Having access to state-of-the-art technology that you can deploy within weeks at a fixed subscription cost is hard to argue against,” Srivastava says.
Given these fast deployment times, payment companies and regional banks stand to gain significantly. Srivastava points out that the former can create rates and easily price multiple transaction types for their customers. “In addition, they can benefit from netting customer transaction amounts as that reduces costly spreads and enables them to ultimately maximise profitability,” he says.
“The return of volatility has brought the focus back on cross-border payments as global e-commerce never slowed down, even in the pandemic,”Vikas Srivastava
“From a regional bank perspective, it’s about extending their product suite to meet their customer needs and providing them with products that make their offering stickier but with the same brand experience as their customers are used to. The objective is to grow your customer base whilst being able to monetize cross-border payments.” Srivastava continues.
Srivastava stresses the need for a tech provider to evolve. “The world is changing, as is technology, and therefore you need a trusted and proven partner like Integral, who not only is able to provide you with the technology of today but also tomorrow so that you’re able to future-proof your business,” he says.
Changing low-value payment experiences with Swift.
Low-value payments are a significant portion of global cross-border payment volumes. The McKinsey Global Payments Map revealed that consumer cross-border payments totalled approximately $2.1 trillion, and SME payments totalled $8.5 trillion as of 2021. These volumes are expected to grow as consumer trends change how they evolve in low-value payments.
“People’s expectations today are higher than ever, as they are used to everyday services that are easy, instant, and low cost,” says Susana Delgado, Head of Consumer and SME Payment Strategy at Swift. “They also have the same expectations of cross-border payments.”
Delgado highlights the use of super apps and digital wallets as examples of the changing consumer payment landscape. “There are also specific trends in the SME market that make them behave differently from large corporates,” she continues. “The growth in global commerce, accelerated by the pandemic, has made the SME sector more dependent on revenue streams derived from e-commerce channels. For small businesses, online marketplaces have often been the enabler for internationalisation, making it possible for sole traders or micro businesses to sell to consumers in other countries, something that was not an option in the past.”
These developments have come against a traditionally challenging backdrop. Low-value payments have long posed a challenge to service providers. What has changed, and how is technology promoting greater financial inclusivity?
Overcoming traditional hurdles with Swift Go
Delgado lists friction and fragmentation as the root causes of many challenges in the low-value cross-border payments sector. “The friction comes from three angles, distinct from domestic payments,” she explains. “First is the need for an intermediary to do the FX conversion and clearing in the destination currency. Second is the compliance cost per transaction which makes them more expensive than domestic payments. Third is the time zone difference that reduces transfer times.”
“Fragmentation is driven by different types of players offering cross-border payments (banks, fintechs, neobanks, money transfer operators, card schemes and big tech,)”Susana Delgado
“Fragmentation is driven by different types of players offering cross-border payments (banks, fintechs, neobanks, money transfer operators, card schemes and big tech,)” she continues, “and different types of assets, not just fiat currencies but also digital currencies like cryptocurrencies, stablecoins, and CBDCs, each of them potentially built on a different technology.”
Harmonising the various aspects of the low-value cross-border payment experience is challenging, and it is one that Swift has addressed with its Swift Go solution. Delgado explains that Swift Go offers consumers a transparent experience. They must know upfront what fees they will be charged, the FX rates that will be applied, and how much will be delivered to the recipient.
“Another key pillar is the speed,” she says, “as Swift Go banks adhere to a strict 4-hour maximum service level agreement in terms of time to credit, and wherever possible. Swift Go payments can be routed through local real-time payments systems (RTPs) such as UK Faster Payments. More than 80% of the payments are delivered in under five minutes currently.”
Much of Swift Go’s development was borne from the organisation’s experience with the Global Payments Innovation (gpi) platform service. gpi was designed for large value transfers executed by institutions and large corporate customers. Swift Go builds on gpi by delivering the same seamless payment experience to retail customers and SMEs.
Enhanced customer experience and financial inclusivity
Swift Go’s benefits for consumers and SMEs translate well for banks too. “Retail banks originating payments want to stay competitive versus fintechs in their cross-border payments offering,” says Tanja Haase, Head of Swift Go. “They are incentivised by active customers, volumes of payments, and high customer satisfaction, often measured by Net Promoter Score, and aim to remain the one-stop-shop for their customers.”
“For all banks, whether intermediary, retail, or beneficiary banks, the opportunity is to serve their customers according to their expectations, keeping them loyal, and also capturing incremental flows in a market that keeps growing.”
“For all banks, whether intermediary, retail, or beneficiary banks, the opportunity is to serve their customers according to their expectations, keeping them loyal, and also capturing incremental flows in a market that keeps growing.”Tanja Haase
No talk of the low-value payment sector is complete without addressing its role as a benchmark for financial inclusivity. The ease of completing a consumer, B2C, or SME payment directly correlates to the economic opportunities available to stakeholders involved in the transaction. Unsurprisingly, inclusivity was one of the pillars on which Swift Go was designed.
“Since June last year, Swift Go has been open to all Swift users, regardless of whether they are gpi banks or not, extending the potential reach of the solution across more than 11,500 institutions and four billion accounts in 200 countries,” Haase says. “This means migrant workers wanting to send money to their family at home or small businesses supplying other companies overseas can use the banking system, with the guaranteed security and reliability of the Swift network.”
Given the boost in customer experiences and inclusivity, banks have received Swift Go enthusiastically. Haase says that more than 630 banks are part of the network as of January 2023, having experienced rapid growth throughout 2022. “These banks currently represent the majority of low-value payments on Swift today, and we are excited to continue working with the community to transform low-value payments forever,” she says.
Further developments in the pipeline
While this growth is highly encouraging, there is more ground for Swift Go to cover. “Our ambition for Swift Go is for it to become the new standard in low-value payments, just as gpi did for high-value payments a few years ago,” Delgado says. We have already started to explore ACH and RTP connectivity in key markets.”
When quizzed about developments in FX transparency, something SMEs care the most about, Delgado lists a few planned developments. “We aim to continue improving the predictability aspects that are particularly key for SMEs, wherever the conversion happens in the chain, from originator to the beneficiary.”
“We are also exploring how to improve and streamline the process for same-day FX to increase payment speed,” she continues. “Another area of interest for our financial community is linked to guaranteed FX, and how Swift can help banks handle dynamic FX and enhance the customer experience for near real-time information while allowing the bank to mitigate exposure to volatility.”
Swift Go’s greater adoption in the market will undoubtedly create a significant impact in the low-value payments space. Time will tell how Swift capitalises on this initial impetus. For now, consumers, SMEs, and banks are reaping the benefits of this technological change.
Examining Emerging Market payments
While the G20 currencies account for the bulk of cross-border payments, emerging market (EM) transactions have been rising steadily. Mike Robertson, CEO and co-founder of AbbeyCross, opines that while volumes have been rising, developments are seemingly on separate tracks.
“The top 30-40 currencies have evolved, but despite emerging market volume growing quickly, we have seen almost no innovation focus on payments to the emerging markets,” he says. “These continue to lag due to shortcomings in wholesale banking infrastructure.” EM payments also face other hurdles. “The main challenges are those of market data and transparency,” Robertson says. “The issues also arise within many of the trading desks in large banks, understanding the critical differences that separate an EM ‘payment’ from an EM institutional ‘FX Trade.’ “
“…despite emerging market volume growing quickly, we have seen almost no innovation focus on payments to the emerging markets,”Mike Robertson
Challenges in the EM currency world
Given its breadth, identifying and listing the individual challenges facing each currency is impractical. However, as Robertson notes, data fragmentation and the lack of transparency are broad issues affecting every trade. He cites the example of banks settling EM currencies as an indicator of how opaqueness is built in the market due to misaligned processes. “All banks outsource at least some currencies and these are usually to a single vendor,” he says. “Even where two or more are used, pricing is rarely in competition. Rather, individual corridors are allocated to individual outsourced vendors.”
While this increases the banks’ reach, Roberston says that the lack of price competition and the lack of market data means there is no functioning market. “This makes it difficult for the banks to comply with their internal supervisory policies and to demonstrate compliance with general regulatory obligations regarding treating customers fairly, trading at on-market rates, and managing continuity risk,” he says.
He notes that regulators are aware of this, and eventually, banks must focus on improving this process. A direct effect of the current state of EM currency operations is bloated wholesale costs and significant compliance risks.
Given the efficiency present in G20 currencies, creating a similar environment for EM currencies is not far-fetched. It’s a solution that AbbeyCross has been investing significant resources into. “The AbbeyCross approach is to develop a common access infrastructure that all market participants can integrate with,” Robertson explains. “This allows the industry to normalise common access protocols, reduce integration costs, and accelerate the adoption of new payment methods and providers. All market participants will see cost, efficiency, and risk mitigation benefits from this approach.”
In line with this vision, Robertson says the company is developing two distinct products. The first is market data and analytics that reflect the true cost of a delivered payment, enabling benchmarking. The second is an order execution and payment routing solution that offers side-by-side pricing for EM payments offered by leading regional banks and vendors.
“The benefits to payment banks are the creation of a functioning and efficient market, including price transparency, price competition, and regulatory and reputational risk mitigation,” Robertson says. “The benefits to vendors are transparency around wallet share, price benchmarking, speed to market with banks and other payment companies, reduction in the cost of customer acquisition and distribution, and a reduction in onboarding and integration costs.” AbbeyCross is currently working with a few banks to resolve issues in the EM space and creating workflows and products to help them achieve greater efficiency.
Price transparency will increasingly matter in EM payments
As EM payment volumes continue to grow, price transparency and competition will have to increase. A side-effect of increasing EM volumes is a better understanding of complex regulatory rules. Robertson notes that settlement type and speed will continue to improve too.
“Documentation, which is required pre-settlement to the beneficiary in many frontier markets, will become more digitised,” he says. “Settlement fees will be less likely to be bundled with FX risk cost at an institutional level (where they are currently often bundled, despite wider market conventions). Finally, we also envisage fintech companies continuing to build utility layers on top of existing bank rails.”
CBDC interoperability, blockchain, and virtual accounts
Interoperability with existing systems is a key hurdle for stakeholders to overcome when discussing DLT solutions for cross-border payments. To this end, the CPMI explored access and interoperability models in July 2022. As the number of CBDC projects increases worldwide, revisiting these recommendations is informative. The report recommended three ways to achieve interoperability: Compatibility, interlinking, and a single system. Compatibility is achieved when CBDC systems use common standards, reducing PSP operational burden. Interlinking is a set of agreements, technical links, and standards between CBDC networks that smoothes transactions even if participants are not on the same network.
Finally, a single system recommends CBDCs using a single technical infrastructure solution to host networks. CBDCs projects are still in the exploratory stage worldwide, and it remains to be seen how these entities will incorporate these recommendations.
AbbeyCross’ Robertson finds the applications in this area fascinating. “The market (including the EM segment) needs a common access infrastructure to serve as a destination for innovation and new settlement and payment types,” he says. “The decoupling of FX risk cost from settlement cost will aid the use of multilateral platforms and as CBDCs roll off each country’s production line, we could be absorbing these as distinct settlement options.”
He adds that since several EM payment flows originate from G20 currencies, solving issues in that sphere impacts EM too. “The Bank for International Settlements’ view in this area is primarily G20-focused, whereas the AbbeyCross view is that you don’t fully solve the problem in G20 without also solving EM,” he says. Meanwhile, blockchain is leaving an impact on cross-border payments beyond the retail world. JP Morgan Chase reports a growing demand for real-time payments across multiple currencies within the institutional payments world. Blockchain technology is significantly reducing payment settlement times – a result validated in pilot projects. As DLT payment solutions continue to roll out, stakeholders will undoubtedly keep a keen eye on the results wider implementation brings.
While not as huge a talking point as next-generation tech like blockchain, virtual account management solutions are having an immediate impact on company transactions across borders. In legacy systems, companies established direct deposit accounts in their beneficiaries’ countries, leading to complex reporting and significant cross-currency risk. Virtual accounts offer a centralised account structure to manage these payments. Companies can maintain a single account in their primary currency and fund local payments in another currency by transferring cash to a virtual account denominated in the latter currency. The result is better reporting and simpler risk management.
Industry developments – Multilateral platforms and cross-border payments
Given the complexity of cross-border payments, industry observers are debating whether the platforms powering payments need a redesign. The Bank of International Settlements’ Committee on Payments and Market Infrastructures (CPMI) recently released a paper exploring the viability of multilateral platforms for cross-border payments.
These platforms, multi-jurisdictional by design, offer significant benefits. They can shorten transaction chains and work round the clock to meet participant needs. They can also simplify AML and KYC checks, currently a time sink in payment platforms. They can also incorporate the latest ISO20022 payment messaging standards by design, severing any dependencies on legacy systems.
However, the compartmentalised nature of payment regulations worldwide makes adopting multilateral platforms a challenge. In some situations, they might create more regulatory hurdles than existing networks.The CPMI’s report explores two implementation approaches.
The first titled the “growth approach,” expands existing multilateral platforms to more jurisdictions, currencies, and stakeholders. It leverages existing institutional relationships, along with collaboration with the private sector.
The second, called the “Greenfield approach,” explores building new infrastructure for global payments. While this approach will align processes within the cross-border payment workflow, it will meet significant regulatory and governance hurdles.
The CPMI was quick to point out that the choice of currency is critical when establishing a new global platform. Payments must be settled in a global reserve currency and also account for the rise of digital assets like CBDCs and stablecoins. Settling payments in these new-age assets is challenging, and stakeholders must consider their ramifications. One significant challenge in this regard is supporting several national and international payment service providers (PSPs) and schemes worldwide, to ensure the platform does not hinder competition. Ultimately, this challenge will likely be solved only when public and private sectors worldwide collaborate to design policies and platforms that smooth adoption.