Cross-border payments are an integral part of our increasingly globalized economy. However, they remain a complex and costly process, despite their popularity. The inability to support international commerce could negatively impact a bank’s competitive standing. Aiming to improve the processing of these payments, financial entities like Swift and the Federal Reserve are making strides towards much-needed improvements.
Challenges in Cross-Border Payments
Instant payments have become increasingly common within the U.S, but international payments still face significant obstacles. Given the fact that there are 195 countries each with their own payment systems, regulations, and technological maturity, the complexity is understandable according to a report by J.P. Morgan. However, this complexity doesn’t alleviate the frustration experienced by consumers and businesses who desire a seamless global money transfer process.
The challenges are multifaceted. First, the cost of sending a cross-border payment can be excessively high, averaging between 2.5% to 5% of the transaction value. Additionally, transaction beneficiaries may have to wait several days to access the transferred funds. Moreover, the sender often lacks information on the total cost of the transaction or when the beneficiary will receive the money. As Rodman Reef, a top consultant at Reef Karson Consulting, remarked, “I can move a video around the world in seconds, but I can’t move money around the world in seconds. That frustrates a lot of people, and to a lot of folks it makes no sense.”
Progress in Cross-Border Payments
While challenges persist, incremental steps are being taken to alleviate some pain points. For instance, in September, Swift announced a collaboration with over 30 banks aiming to provide a consistently fast and transparent experience for retail customers around the world. The participating institutions are committed to upfront transparency on payment and FX fees, guaranteed full-value delivery, end-to-end visibility of transactions, and instant settlement where possible.
Moreover, the Federal Reserve announced plans to expand the operating days of its Fedwire Funds Service and the National Settlement Service to include Sundays and weekday holidays. This extension, set to be implemented no earlier than 2028, is expected to improve the speed and accessibility of cross-border money transfers.
Fintechs and Cross-Border Payments
While traditional banks grapple with the challenges of cross-border transactions, several fintech companies have introduced faster and more cost-effective ways to transfer money internationally. For example, Wise, a fintech company specializing in money transfers, announced a collaboration with Google to make international payments more accessible to U.S. consumers. Another fintech player, Revolut, grew its global customer base by 38% to 52.5 million last year, with customer balances increasing by 66% to $38 billion, according to its annual report.
Stablecoins and Their Potential
The emergence of stablecoins, a type of cryptocurrency designed to minimize price volatility, may offer a promising solution to reducing friction in cross-border payments. While they don’t eliminate FX costs, stablecoins can potentially solve the speed issue and the ongoing problem of dwindling correspondent banking relationships, which have declined by over 50% in the past decade.
Many countries are currently developing legal and regulatory frameworks for stablecoins. Notably, the U.S. recently passed the GENIUS Act, establishing a federal regulatory system for stablecoins. Moreover, major card networks like Mastercard and Visa have been expanding their capabilities to enable stablecoin transactions. In fact, Visa announced a pilot program to reduce friction and provide financial institutions more flexibility in managing global payouts using stablecoins.
While there is no consensus that stablecoins are the future of cross-border payments, they are certainly sparking a lot of discussion and exploration. As we navigate the complexities of an increasingly interconnected world, it’s clear that improvements in cross-border payment systems are not just desirable, but necessary for continued economic growth and prosperity. To learn more about this evolving sector, click here.
