Over the years, we have seen considerable advancements in the world of cross-border payments. A decade ago, the easiest way to transfer money from country to country was to deliver it yourself. Fast forward to the present day, a cross-border payment can now be completed within just a couple of hours.
While this is undoubtedly a step in the right direction, there is still room for improvement. The current target set by the Financial Stability Board (FSB) is to improve the payments process by the end of 2027. The aim is to catch up with domestic payments, which can often be completed in under 10 seconds.
As the industry strives to meet this target, it will try and reduce costs and improve efficiency simultaneously. The shift towards frictionless payments can deliver excellence in standards and drive financial inclusion and access for all. The challenge now is identifying the best way to get there
Meeting the growing needs of cross-border payments
The growth in cross-border payments is expected to rise by 5% in the coming years, with B2B payments makiing up the bulk of these transactions, followed by C2B, B2C and C2C. Current estimates from the likes of EY, Glenbrook and other major players put the value of these payments somewhere in the region of US$30-40 trillion for 2021/2022.
Despite the growth, challenges remain. For a start, because there’s no end-to-end system in place, they typically have higher fees and longer processing times. For businesses, the cost of cross-border payments is typically offset by the value of the transaction, but processing times are a growing concern for many. According to the Bank of England “In some instances, a cross-border payment can take several days and can cost up to ten times more than a domestic payment”.
Several industry bodies are already working to speed up these payments and make them cheaper and more accessible. Still, at the moment, there’s no escaping the fact that cross-border payments are more complex than domestic payments: they tend to involve multiple intermediaries to perform currency conversion and the settlement of funds.
Adding to the uncertainty, fees are usually assessed as a payment moves through these intermediaries, and often it’s unclear what the final net amount will be until it’s received. This creates issues for businesses that need to run their payroll and pay suppliers across multiple countries. It can also cause problems for consumers who need to make regular international payments, such as those who are managing property abroad.
Friction from sanctions
Sanctions can be another significant cause of delays in cross-border payments. The problem is that currently every bank in the payment chain, from the ordering customer’s bank through the various intermediaries involved and ultimately the receiving bank, is mandated to carry out sanctions compliance checks before a payment can be credited to an account.
While the need for controls like these is clear, this model is hugely inefficient, not least because multiple banks are all carrying out the same screening checks, resulting in numerous false positives.
Each bank and payment company also screens cross-border message data against the same prescribed lists, so efforts will inevitably be duplicated
Unfortunately, things are not slowing down: since 2017, the number of sanctioned people and entities has seen a 270% increase. The conflict in Ukraine has resulted in even more names being added to these lists, with 1,473 individuals and 207 entities now subject to EU sanctions against Russia.
These numbers are only likely to grow, resulting in greater costs and even more false positives. It’s time to address the payment industry’s concerns in this area and tackle the unintended consequences that sanctions have created for cross-border payments.
We’re already seeing significant investment in the technology behind cross-border payments, from both the public and private sectors, with key targets for speed, cost, access, and transparency, as described post-G20 by the Financial Stability Board
The good news is that modern screening platforms are already making these processes much more streamlined by deploying automation. The ideal outcome will be a common screening platform based on agreed matching standards that allows financial institutions to check data against centralised lists with specific risk configurations without the usual duplication and inefficiencies.
Achieving common standards will require overcoming the limitations of ageing tech and inefficient communication channels. Innovative technology will replace the current systems with platforms and partnerships designed from the ground up using a common standard.
The firms that can join early in this wave of screening transformation will see clear benefits in terms of costs and speed. This innovation will help them achieve the FSB’s targets for more efficient cross-border payments and establish the much-needed, unified, global approach.
This article was first published on the Fintech Herald. Read the Fintech Herald article here.