Fintechs turned cross-border payments into a hotbed of innovation over the last five years. Now the card networks and banks are responding with disruptions of their own.
It's not just the competitive threat from fintechs developing faster, cheaper and more transparent cross-border payment options. The changing economy is now adding urgency for legacy cross-border providers to modernize their services.
The overall cost of using the correspondent banking model, which remains the status quo for bank-initiated cross-border payments, is increasing as interest rates climb and the expense and complexity of regulatory compliance rises.
"One aspect of correspondent banking requires institutions to keep pools of funds sitting in other banks' accounts to fund cross-border transfers, and with rising interest rates, that starts to get expensive," said Rodman K. Reef, the managing principal with Reef Karson Consulting.
New approaches to cross-border payments range from the
As SWIFT prepares to turn 50 next year, the Belgium-based Society for Worldwide Interbank Financial Telecommunication has brought Swift Go, the new faster version of its cross-border payments system, to five dozen banks that will be using it by the end of the year. SWIFT is also participating in an upcoming pilot for instant international transfers.
Fintechs are still the driving force of innovation in the $23 trillion global cross-border payments market. But this explosive growth is creating opportunities for more players. According to Mastercard, the pandemic accelerated the growth of cross-border payments, is putting digital remittances on track to grow by 80% by 2025.
Making waves
Ripple Labs has been a catalyst, and continues to develop methods for fast, transparent blockchain-powered cross-border transactions while still embroiled in a lawsuit the Securities and Exchange Commission filed in 2020 alleging it violated federal securities laws with the sale of its XRP token.
Despite the cloud hanging over Ripple and how it handles XRP, and the recent blowup of crypto exchange FTX, crypto-powered payments, especially CBDCs and well collateralized stable coins, remain an area to watch, Reef said.
"You wouldn't be seeing a lot of this recent progress from SWIFT or other organizations if Ripple hadn't provided competition to the existing players and processes," he said.
SWIFT is working with Paris-based EBA Clearing and U.S.-based The Clearing House, to launch the first live real-transaction via IXB (Immediate Cross-Border Payments) early next year. The pilot follows last year's
"The IXB pilot potentially helps to solve issues where the correspondent banking model doesn't work as effectively, providing another option in banks' toolkits," said Erika Baumann, director of commercial banking and payments at Aite-Novarica Group.
Royal Bank of Canada last month was the first bank in Canada to introduce Swift Go, through a collaboration with JPMorgan Chase.
"Swift Go will make it easier for Canadian companies to plan their cash flow, forecast their liquidity positions and do business globally," said Lisa Lansdowne-Higgins, RBC's senior vice president of business transformation and deposits, in a press release announcing its availability.
Recently SWIFT also improved basic wire transfers with new tools including payment prevalidation to spot errors before initiating a transaction, case management to streamline resolution of exceptions and payments that require investigation, along with payment controls, which provide fast and efficient fraud-detection.
Various governments around the world are also stepping up research and experimentation of new technology supporting real-time cross-border payments, which could have significant benefits for banks serving corporate and industrial customers, as well as consumer peer-to-peer payments.
"Eighty percent of the cross-border payments for goods and services are in the business-to-business arena, and there's a lot of development going on in this space," said Steve Murphy, director of Mercator Advisory Group's Commercial and Enterprise Advisory Service.
The Federal Reserve Bank of New York recently released research suggesting that using central bank digital currency paired with blockchain technology would likely make cross-border payments faster and more efficient. A wholesale CBDC the New York Fed hopes to test could be used to clear and settle payments between banks, government agencies and other organizations.
The New York Fed also announced last month that it's working with the
Supply and demand
Cross-border payment users demanding improvements have prompted other innovations.
London-based cross-border transfer company Wise recently
"People were asking us for this capability, and since we made it available we've seen a really positive response," said Sharon Anne Kean, product lead and head of expansion at Wise. Customers are able to pull funds directly from their bank accounts through Wise for cross-border remittances, bill payments, small-business payroll transfers and other business payouts, she said.
After moving most of its data account-sharing to API integrations, Plaid hopes to collaborate with many more financial institutions and other companies to reach consumers globally who are increasingly managing their money across multiple channels, said Raja Chakravorti, universal access lead at Plaid.
Other fintechs and software developers are building and testing different cross-border payment systems to target core weaknesses of the basic correspondent banking model, such as slow clearing and settlement times of at least two days and sometimes longer. These projects also work to make costs lower and more consistent.
U.K.-based bank software provider Finastra in September announced a partnership with Visa to co-develop new cross-border payout capabilities for small and midsize businesses and individuals in different countries. The system would support multiple currencies using Visa Direct.
The service will initially be available for U.S. banks, but ultimately will have global reach, said Barry Rodrigues, executive vice president of Finastra's payments business unit.
"Visa Direct provides an alternate payment rail option for banks to offer customers cross-border payout capabilities in about half the time it would take to build it in-house," Rodrigues said.
Other advantages of the partnership include Visa Direct's existing base of more than two billion accounts, according to Ruben Salazar, global head of Visa Direct. "These banks will now be able to offer quick, low-cost, cross-border payments for their customers with greater transparency," Salazar said.
The Miami, Florida-based startup Payall Payment Systems, founded in 2018, has developed a white-label cross-border payment service for banks, credit unions and other financial institutions. The platform uses rails including Mastercard Send and Mastercard XBS, and supports global banking infrastructure with prepaid card issuance, loads to mobile money accounts and retail cash pick-up locations.
Payall's goal is to optimally route international payments based on specific use cases, giving banks the ability to compete with fintechs that specialize in B2B and peer-to-peer cross-border payments, said Gary Palmer, founder and CEO of Payall, which raised $10 million in September 2022 in early-stage funding from backers including Andreessen Horowitz.
By working with Payall — and a number of other software firms and startups developing cross-border payment options, including Paysend — Mastercard is aiming to widen the demographic of banks the card network reaches, while slashing the cost and time required for institutions to launch international transfers, said Rasika Raina, senior vice president of strategy for Mastercard's cross-border services.
Brightwell, an Atlanta-based payments provider, also recently partnered with Mastercard to offer ReadyRemit to enable banks and fintechs to integrate cross-border remittances. The partnership enables payments in more than 100 countries, including payouts to bank accounts, mobile wallets and thousands of cash-out locations. ReadyRemit operates as a banking-as-a-service model through The Bancorp Bank.
"There are many individual solutions for cross-border payments, but we want to be a hub offering a diverse range of options for each payment scenario," said Hal Ramakers, senior vice president of global solutions at Brightwell.
The payment card networks will need to work closely with many financial institutions and fintechs to win a significant share of cross-border payment volume, said Gareth Lodge, a principal analyst for global payments at Celent.
It's a natural fit to use the existing card rails that are trusted, secure and fast for cross-border payments, Lodge said.
But, he added, "both networks have been trying to crack this opportunity for years, and while they've gained traction, they're a long way off from succeeding."
The challenge for new entrants devising cross-border alternatives for financial institutions that no single solution fits every scenario, noted Aite-Novarica's Baumann.
For example, blockchain platforms might serve emerging economies, while card networks would be more suitable for international transfers where debit information is known. A traditional wire transfer could still make the most sense for banks with direct relationships. "Innovation in cross-border payments must go in many directions," Baumann said.
