Why Cross-Border Payments Still Have Not Been Solved

August 23, 2022
Complex regulatory requirements, legacy systems and a long priority list at many financial institutions have resulted in improvements to cross-border payments failing to become more efficient, experts suggest.

Complex regulatory requirements, legacy systems and a long priority list at many financial institutions have resulted in improvements to cross-border payments failing to become more efficient, experts suggest.

“The key issues facing traditional cross-border payments are costly transaction fees, currency exchanges, lengthy delays, transfer failures, prohibitive regulations and lack of accessibility for some users,” said Rob Viglione, chief executive at Horizen.

Viglione pointed out that, overall, the lack of transparency in the cross-border payment chain tends to make these roadblocks all the more problematic to navigate.

Cross-border payments have become a headache the world over, whether that is because of banks dealing with lengthy processes to receive client funds or migrants paying hefty fees for overseas remittances.

“Cross-border payments have always been a complex beast to manage,” acknowledged Ed Adshead-Grant, director at Bottomline Technologies. “The financial transaction needs to run the gauntlet across the magic word in our industry, interoperability.”

This means a payment finding its way across borders, data sovereignty laws, diverse technical stacks, languages, currencies, privacy laws, potentially sanctioned entities or countries, time zones and more, he pointed out.

“No single country can solve the frictionless processing of a payment when it has, de facto, to work the problem at a global scale across these variable complexities,” said Adshead-Grant.

“There are industry-specific issues that arise due to the size of payments and the documentation required to comply with local currency controls,” added Mohit Kansal, vice president of global payments at Flywire.

“On the receiving side, beneficiaries need rich data to flow with the payment to ensure their accounts receivables teams and information system can automate reconciliation of that payment.”

In a traditional cross-border payment, he pointed out, this is not something available to the recipient of the payment.

Regulatory problems

Despite calls for improvement from the likes of the G20, which has created a roadmap, as well as the Financial Stability Board (FSB), the Bank for International Settlements (BIS) and the European Central Bank, the issue does not appear to be abating.

“Cross-border payments remain difficult because each transaction is being handled by two counterpart financial institutions, which are operating in different jurisdictions and are therefore subject to different regulations,” said Viglione.

These regulations entail fees and additional servicing to clear, with these costs being passed on to users, he indicated.

“The G20’s four quantitative targets for the Financial Stability Board (FSB) are underpinned by an assumption that all cross-border transactions are similar when, in reality, transactions are travelling through different chains with varying costs, timelines and liquidity,” he said.

Adshead-Grant was, however, more complimentary of the G20’s work, suggesting it is recognised at a macro-level among politicians and economic advisors that cross-border payments had built up technical debt and needed fresh thinking and innovation.

“The four targets are all being actively worked on with the mutual motivation of improving the global movement of goods, services and capital around the world.

“It has been recognised that removing friction from the payments system will improve trade, customer experience and ultimately the cross-border trading corridors which continue to grow post-COVID,” he said.

For example, these are estimated by the Bank of England to rise from £150trn in 2017 to more than £215trn by 2027.

“Historically, the incentive to remove the embedded friction was simply not in place. Many banks and other stakeholders in the long corresponding bank chains profited handsomely from a sticky, opaque world of payment charges and service levels,” admitted Adshead-Grant.

There is broad agreement that the friction of cross-border payments is problematic across governments and financial institutions, agreed Kansal; however, he warned that the approach to solving it is highly regional and fragmented in nature.

“Innovation in this area happens in many ways, including where local regulations incentivise financial institutions to work together to solve the underlying problem for the market comprehensively.”

Some regions, he said, have made more progress on this front, such as the EU and UK, in comparison with others.

Going forward, the G20's roadmap for cross-border payments is well into its second year, and there is hope that its objectives will be achieved by 2027.

Yet, many achievements that are related to this, such as the Reserve Bank of Australia working towards expanding access to domestic payment systems for non-bank payment service providers (PSPs) or Sweden's Sveriges Riksbank and the European Central Bank's TIPS establishing a connection with the goal to use TIPS services to settle non-euro currencies in central bank money, have been, as Kansal put it, regional.

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