How close are we to frictionless international payments?
High costs, slow speeds, sprawling networks and lack of transparency make international payments notoriously inefficient. According to bank of englandsome overseas transactions can take up to ten days and cost up to 10% of the transfer value.
But fix some of these legacy issues and there’s a lot to be gained. A recent report from Boston Consulting Group puts the value of cross-border payments at more than $250 billion by 2027, up from $150 billion in 2017. That’s an increase of more than $100 billion in just ten years.
So how close are we to frictionless international payments? We asked the experts what obstacles remain and how smoother cross-border transactions will affect both startups and the global marketplace in the future.
What holds us back?
Søren Mogensen, Director of Growth at Banking Circle Group, which includes banking circle, a technology-driven payments bank specializing in B2B banking solutions and international payments, says the main challenge today is the correspondent banking system. This is where a bank provides services to another bank, usually in another country.
“Countries and jurisdictions have different conventions for data format and storage. Their harmonization requires manual intervention”
“Every transaction on the correspondent banking system has to pass through the major banks before it can reach the final beneficiary and each bank has to do its control and monitoring of sanctions, which costs time and money,” explains Mogensen. “This fragmentation means that often the money doesn’t make it there, or half of it gets there, or it goes back to the sender.”
Lewis McLellan, editor of the OMFIF Digital Monetary Institute, an independent forum for central banks, tells a similar story.
“Countries and jurisdictions have different conventions for formatting and storing data,” McLellan explains. “Their harmonization requires manual intervention. Likewise, there are different data protection standards, such as AML (Anti-Money Laundering) and CFT (Anti-Financial Terrorism) checks that require processing at both ends of the transaction, or by banks matches in the string.
McLellan adds that banks may also have different opening hours and work in different time zones, which can slow down the process.
Smarter, faster, better?
To circumvent some of these issues, neobanks and other financial institutions have entered the payments space promising to make cross-border banking smarter, faster and better.
“Because Banking Circle has its own banking license, we build our own access to major currencies, and because we bring this access together on the same platform – with the right technology, anti-money laundering controls and good management of data – we can offer smooth, near real-time, low-cost international payments,” says Mogensen.
Other companies looking to revolutionize cross-border payments include UK fintech Leatherback, which raised a $10 million pre-seed round in April 2022 to expand its solutions in South Africa, Egypt, Uganda, India and the United Arab Emirates.
And payment services can be especially useful for fintechs that haven’t yet received financial licenses, which Banking Circle offers.
“Banking Circle Group may provide banking services as a service to unlicensed businesses,” Mogensen says. “More recently, Juni, the Nordic fintech that is growing at 800% per year, has taken advantage of this while waiting for its license to go live.”
A mobile revolution
Smartphones are another key driver towards frictionless international payments.
“The mobile payments revolution started in the UK a decade ago when Barclays launched PingIt, an app that allowed money to be transferred from person to person with minimal friction,” explains Mogensen. “Since then, we have seen similar offers in almost all European countries, spreading as P2P (peer-to-peer) or P2M (peer-to-merchant) solutions.”
But while this has helped improve domestic payments, he says cross-border payments remain insufficient.
“European Association of Mobile Payment Systems (EMPSA) uses a technology it calls “The Bridge,” which connects different members to enable frictionless international payments”
One initiative that is helping to broaden the reach of mobile payments is the European Association of Mobile Payment Systems (EMPSA). It was founded in 2019 to unite payment methods across the European continent and today connects 15 mobile payment systems, over 90 million mobile payment users and hundreds of banks.
“EMPSA uses a technology it calls ‘The Bridge,’ which connects different members to enable frictionless international payments,” says Mogensen, adding that Banking Circle is helping the initiative with its technology.
“We are very happy to be able to help them realize this new cross-border mobile payment system,” he told Sifted. “Because it will effectively become a new means of European payment.”
Whether or not EMPSA becomes the de facto payment method in Europe, many fintechs and neobanks are making good use of the digital infrastructure offered in the mobile payment ecosystem.
Crypto to the rescue?
Cryptocurrency and public blockchains also offer near-instantaneous transactions. But to send money across borders, users need to access a crypto exchange to exchange fiat for crypto, send said cryptocurrency to the recipient’s crypto wallet, and then exchange it again for fiat – an experience to be had. trouble without friction.
“Technically, cryptocurrency can be transferred internationally without friction,” McLellan says. “However, the absence of AML, CTF and KYC checks means it does not represent a viable alternative payment mechanism for international businesses.”
For this reason, many countries are researching or piloting central bank digital currencies (CBDC or government-backed digital tokens that are the digital version of their fiat currency) to harness the speed and frictionless nature of cryptocurrencies, while providing much-needed checks and balances.
A frictionless future is the key to global trade
Mogensen optimistically tells Sifted that more and more payments in the future will be account-to-account-based, regardless of location. But, he says, the current inefficiency of frictionless international payments is hampering startups, global commerce and e-commerce – once we improve these inefficiencies and reduce friction, we will encourage more efficient international trade.
“TThe value lost by payment processors can be spent on capital investment, job creation, research and other more productive things”
McLellan paints a similar picture, saying friction in payments doesn’t help anyone except businesses that derive revenue from payment processing — and the sooner that stops, the better.
“If a system can be designed where international payments can be sent instantly, securely and inexpensively, then the value lost to payment processors can be spent on capital investment, job creation, research and other things. more productive,” he said. “It will also reduce margins on international trade, opening up markets that previously would not have been economically viable.”
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Banking Circle, the next generation technological payment bank.