Driving greater transparency and efficiency in cross-border payments
Tim Forster, Strategic Partner Manager, Financial Messaging at Finastra
Whether consumers, small and mid-sized enterprises (SMEs) or corporate entities, customers want access to speedy and transparent cross-border transactions from their bank. However, the process can often be extremely lengthy, costly and opaque, leading many to turn to more agile fintech providers.
For example, many consumers are negatively impacted by late or failed international payments, and 76% of survey respondents claim they could not support themselves in some way because of this. For businesses, the cost of services and currency exchange are major pain points. With exchange rates in a state of constant flux, one major short-term currency swing could wipe out profit margins for businesses that lack the resources to manage FX risk. Additionally, in 2023, the global average cost of sending $200 to another country was 6.25%. The G20 has now set a target to reduce this to no more than 3% by 2030.
For banks to truly capture the huge market opportunity, grow their customer base and expand into harder-to-reach markets, modernization, ecosystems and alternative cross-border payment providers play a vital role.
Lack of transparency hinders growth
Alongside speed and efficiency, transparency in cross-border payments processes is paramount. A survey found that when it comes to low value, cross border payments, security was the top priority, closely followed by trust (for consumers) and transparency of fees (for SMEs), with 70% of consumers and SMEs stating they would not use a provider again if they experienced hidden fees.
Whether consumers, small and mid-sized enterprises (SMEs) or corporate entities, customers want access to speedy and transparent cross-border transactions from their bank.
Despite an overall trend toward modernization, many institutions continue with an outmoded process for transacting cross-border payments. Bound to a network of correspondent banks, banks often have no way to track funds or see how much revenue will be received after currency exchange calculations have been made and the unpredictable fees processed. For businesses, the lack of transparency means they often do not understand the expenses and deductibles involved with their transactions and can spend too much time and resources investigating why a payment has been rejected. It’s a highly inefficient way to manage funds and one that leaves banks and their customers open to risk and high costs.
To make matters worse, although the volume and value of cross-border payments have surged in the last decade by increases of 61% and 37% respectively, the number of correspondent banking relationships has fallen by 29%. In addition to correspondent banks continuing to leave the market, this decline is largely due to banks’ increased focus on regulatory, reputational, and financial risks from anti-money laundering (AML) and combating the financing of terrorism (CFT). Rising compliance costs make the risks of extensive interbank relationships, especially in emerging markets, too high for many.
Innovation through ecosystems
To effectively navigate this landscape, incumbent players must prioritize modernizing their payments technology stack. While rising marketplace competition is partly to blame for the estimated loss of profitability for banks in cross-border payments, the inefficiency associated with the systems used by financial institutions today also plays a major role. Failed or stalled payments are common when sending funds internationally through correspondent networks, because of multiple variations in account structures, messaging and bank systems. These inconsistencies can increase employee involvement and extend payment times up to 30 days.
Platform technology now makes it possible for banks and other institutions to connect with a new breed of fintech—one that offers international payment services directly to financial institutions through ecosystems. With open APIs ensuring seamless integrations between core systems and third-party products, institutions can easily adopt applications to streamline cross-border payments, increase transparency and reduce risk.
Mastercard, for example, offers access to a vast payment network through a single point of access, delivering transparent FX rates and faster, more fluent payment processing, while it reaches 90% of the global population. Other providers such as Thunes employ APIs to transform banking operations, making it possible for banks to instantly send and receive payments across the globe. The fintech reduces the expenses associated with cross-border payments for both consumers and businesses, with fully traceable transactions across a broad network of partners.
Through the power of ecosystems, institutions can seamlessly integrate such offerings with their financial messaging solution without the need for expansive architecture enhancements. For example, Finastra’s Financial Messaging SaaS platform comes pre-integrated with both Mastercard and Thunes’ solutions, enabling banks to provide their customers with faster, more transparent international payment services at a fraction of the cost.
The current landscape of cross-border payments needs a transparency overhaul. However, by leveraging robust financial messaging solutions, alternative cross-border payment providers and ecosystems, banks can streamline their operations and reduce costs, all while ensuring they meet the evolving expectations of consumers and businesses in the global market.