Cross-Border Payments: How Fintech is Making Them Faster and Cheaper
- All, Insights
In today’s connected world, businesses and people are increasingly using cross-border payments. Such payments enhance global commerce and improve the consumer experience. As for non-commercial P2P operations, they allow people to be more in touch with relatives and friends and open a wider field for activities in various life situations.
However, traditional ways of sending money abroad are often slow and expensive. Financial technologies take overseas payments to a new level, making them more accessible, simple, and secure.
Challenges with traditional cross-border payments
Traditional cross-border transactions often involve several intermediary or correspondent banks. This has a direct impact on how payments are processed and creates specific challenges for international payment processing, including the following:
Regulatory compliance. Correspondent banks and international payments undergo strict regulatory procedures. These include but are not limited to, anti-money laundering (AML), know your customer (KYC), anti-fraud, and data protection regulations. While these procedures are essential for protecting data and funds, they often slow down the transaction and make it less flexible.
High fees. Each correspondent bank charges a fee for participating in a cross-border money transfer. In addition, transaction participants may incur significant fees for currency conversion, wire transfer, and other operations associated with traditional cross-border remittances. This makes cross-border banking unaffordable for most customers and encourages them to look for alternative cross-border digital payments.
Long processing time. Traditional cross-border payment process flow may exceed three business days. This is because the transaction goes through multiple third parties and regulations. Such a long period may be unacceptable for businesses that need fast funds availability for subsequent operations. It also doesn’t meet the needs of P2P payments, where customers want to send and receive money quickly.
Insufficient transparency. Traditional international payment has a complex structure, which complicates its visibility. Parties do not always know the status of a transaction. They may also receive delayed updates when a transaction fails and miss the opportunity to fix it. Such a situation negatively impacts businesses because responsible persons cannot make informed decisions based on real-time insights.
Lack of innovation. Traditional banks often have legacy IT infrastructure and processes. They depend on state authorities, which restricts their flexibility in making innovative decisions. Lack of innovation makes monetary operations less efficient and compatible with the modern digital world. It prevents banks from meeting user expectations of what cross-border payments are to be.
Changes in the world of cross-border payments
Global businesses cannot survive without crossborder payments. As competition and customer demands grow, they need more instant, reliable operations that can be executed hassle-free.
In recent years, cross border financial transfers have transformed significantly due to technological progress.
- One of the main technological endeavors is Swift’s Global Payments Initiative (GPI). Since its introduction in 2017, GPI has dramatically changed the landscape of international payment methods. Its main advantage lies in the high speed of overseas transactions and extensive geographical reach. With GPI, anyone anywhere in the world can receive or send money.
- Another big step in improving cross-border payments is the roll-out of the ISO 20022 standard. ISO 20022 classifies financial data and translates it into a common language for people and machines. For international payment operations, it means enhanced data interoperability and seamless transaction processing. Starting in 2025, any institution that sends or receives mobile terminated (MT) payment-related messages via Swift will begin using ISO 20022.
- Distributed ledger technologies (DLT) are changing the technological context of international settlements. If previously cross-border transactions were mainly centralized and regulated by central banking institutions, now they are gaining autonomy and self-regulation. Distributed ledgers provide great transparency to the participants in the transaction. It also reduces the risk of fraud and the cost of international payments.
- Application programming interface (API) is a modern facilitator of cross-border payments. Thanks to the use of APIs, payment ecosystem applications easily communicate and instantly transfer data from one payment service to another. APIs also contribute to better security of banking software systems and reduce manual work. You can use API to make bulk payments, among other things. This can be useful when, for example, you need to make payroll to the staff abroad.
- Last but not least, the technology on our list is central bank digital currency (CBDC). As the name suggests, this currency is issued by a central bank of a specific country. Unlike traditional currency, CBDC runs on the distributed ledger platform, which means any intermediaries in the transaction process are removed. Thanks to its distributed nature, CBDC has enormous potential to reduce the cost and time of cross border payments, making them near real-time. Currently, 130 countries are looking to develop their own CBDCs.
The role of fintech in cross border payments
Fintech is the driving force behind the development of the financial sector. Modern fintech companies are actively introducing new products to the financial market and breathing new life into traditional financial transactions, including cross-border payments.
Thanks to fintech companies, consumers get a new experience of sending and receiving money and tangible benefits of cross-border operations, such as:
Top 5 cross-border payment methods
The following methods are now dominating the cross-border payment market:
- Cards. Debit and credit cards have become a traditional way for remittances within the country or overseas. However, high fees make them a less popular choice for cross-border transactions and encourage customers to look for alternative international payment methods.
- Global ACH (Automated Clearing House). This is usually used for small and non-time-sensitive transactions. Compared to wire transfers, ACH payments are more extended in time and process smaller amounts of money but have lower fees.
- Wire transfer. International businesses often use wire transfers because of their near-real-time nature and ability to process large transactions. However, huge commissions force companies to look for alternative cross-border payment solutions that provide smooth UX at a better price.
- Fintech networks. These are payment platforms, P2P apps, lending apps, insurance services, digital wallets, and other innovative solutions that use technology to optimize cross-border payments. Customers can choose specific services according to their needs and have full control over the transaction expenses.
- Blockchain and cryptocurrencies. Cross-border payments using blockchain and crypto have a totally different technological background. They act without intermediaries, have a decentralized nature, and are independent of centralized banking authorities. Blockchain opens exciting opportunities for international businesses and removes the borders of overseas operations.
Why blockchain is the future of cross-border payments
Traditional payment operations rely on a central counterparty. Blockchain is the antithesis of centralization. The entire transaction chain is stored on the computers of many independent users. Even if one or more computers fail, information will not be lost.
This decentralized structure provides an entirely new approach to payment processing. As a result, blockchain offers numerous benefits for cross border payments, including the following:
- Faster settlement. Only three parties are involved in blockchain cross-border payments – the payer, the recipient, and the validator that confirms the transfer in the blockchain network. The absence of any third parties minimizes the transaction processing time and returns the payment result almost instantly.
- Reduced expenses. Cross border payments based on blockchain eliminate intermediaries and currency conversion. This allows fintech providers to significantly reduce the price of the transaction and make international settlements more affordable for businesses.
- Improved security. Blockchain technology reduces operational risks when processing payments. In blockchain, the register of owners is not stored on the server of one organization. Its copies are simultaneously updated on many independent computers connected via the Internet. As a result, there is no way to falsify data on asset owners.
- Better transparency. The distributed ledger in blockchain and cross border payments allows each participant to access and verify the ledger anytime. By joining a blockchain network, you receive reliable and timely information, and your confidential records are only accessible to network members of your choice.
- Enhanced trust. A transparent and immutable record of transactions fosters trust between participants. Additionally, the fact that records cannot be changed reduces the risk of fraud, eliminates the possibility of disputes, and instills confidence in the overall transaction security.
How DCM can help you streamline cross-border payments
At DCM, we are on a mission to reduce the hassle of financial transactions for regulated institutions and businesses. We believe that technology has the power to transform cross-border payments, and we turn this belief into robust fintech solutions.
DCM platform was built in 2022 and has since powered multiple projects, including international financial transactions and mass payments. Our SaaS solution ensures instant, cost-efficient, and auditable transactions. It leverages blockchain and asset tokenization to eliminate the need for multiple intermediaries. Plus, it is augmented with unique developments and AI, which make it an interoperable and comprehensive solution for the payment sector.
Interested in developing transparent financial flows with nearly zero commission? Contact us and see how it works.
info@dcm.systems
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