Digital Payments Featured Fintech Primers

What Is International Digital Cross Border Payment?

CBP

Digital Cross Border payments is the latest buzz work for ripe innovation across every technology firm. Before we deep dive into how digital payments work, its working principle, stake holders involved, parameters to improve, bottlenecks in the current system, let us first understand what is ‘international digital payments system’.

Cross border payments are transactions done between a customer and a supplier (payer – payee) who are based out of different countries. Not a trepidation but a boon for the economy this shall undoubtedly revolutionize the Financial world and add more value to the Fintech Industry.

Scale And Growth Of Cross Border Payments


Cross border payments have grown at an expeditious scale, and will grow to over 155+ Trillion $ in 2022. B2B takes up the largest share by far followed by C2B. It defines a mammoth opportunity for breakthrough technology to disrupt the industry by mitigating bottlenecks. India is holding 7th position in the highest Digital ownership. The Big Bull Banks have wished they could dive into it way back but the Regulations and the cookie policy changes nearly imprisoned their thoughts . But there’s now a movement among a few banks to build cross-border platforms that create one bank, one customer proposition, and one technology stack. OPEN named platform is the world’s fastest-growing digital banking space received a green flag from the RBI for its exemplary cross-border payments product in July 2022. It accomplished all the test phases of the  cohort under the RBI’s regulatory sandbox structure themed ‘Cross Border Payments’.Jupiter Research predicts that the volume of cross-border transactions will go beyond $35trillion by 2022. 5 Major types of CBP are International ACH, Paper Checks, PayPal, International Wire Transfer, and Prepaid Debit Cards.

How Does Cross-border Transaction Happen?

In a Layman’s language Cross Border transaction means a person from Country A making a transaction with Country B, and for this a meagre fee is charged to accommodate the increase for workload of currency conversion( Example- Visa charges 1.2 % & Master card charges 1%). There are a various means like Credit card payments, Bank Transfers and E-Wallets.

A payment message SWIFT sends an instruction to debit from Bank A and credit to Bank B. However, they may not have a direct relationship, Hence, they need to route it via banks where in common accounts are held by both. However, in just a snap of 3 seconds this entire transaction takes place while there’s a series of intricate activities going behind the scene. Therefore, when a customer in the UK is looking to transfer money to a country that they don’t have the currency in stock for, they will have to rely on their foreign banking partners to engineer the transaction. Since the small scale Banks are unable to make Foreign currency holdings so they are somehow dependent on the big bull banks. However,India’s aggressive push for internationalization of UPI and stitching partnerships can also serve as the template for other countries. This will result in a decentralized global web of linkages of faster payment systems devoid of SWIFT, a global centralized system whose de facto supreme commander is the US.

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cross border  One IT stack spreads IT expenditures over a huge revenue-cost basis, and the bank can also avoid prodigious IT modernization makeover costs that would generally occur every few years across many local markets.

What Is Being Done To Improve The Situation?

 Image source : Bank of England

 A payment message (SWIFT) sends an instruction to debit from Bank A and credit to Bank B. However they may not have a direct relationship, Hence, they need to route it via banks where in common accounts are held by both.

 There are multiple challenges in the existing mode of operation, mainly:

  Fragmented and Truncated data formats

  Intricacy of the compliance checks

  Limited operating hours

  Legacy Age obsolescent Tech

  Elongated transaction chain 

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What Are The New Trends?

    Merchants who are poised for growth in the International markets should develop RM with an experienced PSP which ensures safety of the Payment gateway. PayPal is the leader in this.

  With effortless access to the digital world, APM (Alternate payment methods) have created new demands that legacy players are finding it difficult to compete with. Faster, Cheaper, Transparent are of prime importance.

    While the CAGR for cross border trade is 5%, the CAGR for emerging markets is 11%+. Emerging markets comprise of: Africa, Latin America and Asia. This is simulated by open trade practices such as: African Continental free trade, China’s belt and road initiative and others.

  India is also proceeding to internationalize the UPI and is formally coded in RBI Payments Visions 2025. If 1991 was the moment of liberalization, 2022 will be the moment of internationalization of rupee and UPI is certainly leading it.

  Accessibility of Mobile phone and e-payments- As penetration of smartphones increases, access to internet and digital payments increases exponentially. With such access, people are maneuvering towards digital wallet, faster, smoother and mobile transactions. Transactions of lower value size by retail customers are soon to gallop.  

 

What Is Being Done To Improve The Situation?

Fortunately, improving the cross border payments was a priority for the G20 in 2020. G20 in accordance with FSB, CPMI and other standard setting bodies, coordinated a three stage process to develop pathways to improve the cross border payments.

New technology will prevail and outperform if:

  There is smooth coordination between payment pipes (flow). Cross border payments are only as efficient as its weakest passage (bottleneck). Therefore, the entire pipeline needs to be fixed correctly.

  Improving the environment that will instigate the adoption of new technology, while keeping fraud and errors in check. This means coordinating with legal, regulatory and data frameworks.

  Its increase also leads to currency fluctuations. Hence Capital outflow, limit volatility, control over monetary policy needs to be in control.

  Each good-enough data-based decision that machines make, rather than humans, drives down the overall cost per decision. Creating an automated pipeline that replaces low-level or non-salable human decisions with those made by machines brings to mind the promise of Moore’s Law. Over time, speed and capability will increase drastically so that data-based decisions in the future will cost a fraction of what it does today.

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What Is Blockchain, How Has It Been Revolutionizing The Cross-border Payments Industry?

From a black and white paper to a golden chain, this journey was quick yet relishing. Blockchain pertains to digital record of transactions where individual records called blocks are linked together in a single list called chain. Each of these data blocks is secured using cryptographic principles. This technology warrants facilitation of fast, secure and low-cost cross-border payment services which solves the security, ownership, and data privacy issues that have dogged the Web2.0 era. The future of Blockchain technology is healthy and ripe because cross-border payments as this concept uses encrypted distributed ledgers that provide trusted real-time verification of all transactions without the need for intermediaries such as correspondent banks. An average international payment takes 3-5 days, and 4% of payments using SWIFT fail right now, causing massive issues.

Even SWIFT’s new GPI (global payments innovation) relies on the same unidirectional messaging, which means that it is not connected to any underlying settlement process. Such a system has its drawbacks, where individuals can manipulate the banking system to commit fraud like PNB INR 14,000 Cr+ fraud case.The future of Blockchain technology is sturdy and promising because cross-border payments as this concept uses encrypted distributed ledgers that provide trusted real-time verification of all transactions without the prerequisite for intermediaries such as correspondent banks.

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[To share your insights with us, please write to sghosh@martechseries.com]

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