As the volume of cross-border payments tops new heights, the industry players facilitating remittance services are now tasked to question their place within the sector.
Here, Mark Frey analyses what such a shift might look like, identifying how the cross-border model is changing, and the emerging role of fintechs within that change.
Frey is the group president of Corpay, a FLEETCOR company and accounts payable (AP) automation provider specialising in cross-border solutions.
The contribution of international payments to today’s increasingly global economy is growing exponentially by the day. And while cross-border payments have been on a steady incline for years, a large uptick in volume occurred even amidst the pandemic, with no signs of slowing.
According to the 2020 McKinsey global payments report, a potential geographical relocation of as much as $4.6trillion of global trade flow spending on cross-border payments is expected to transpire in supply chains over the next five years.
The report further suggests 2020 events and trends created a ‘changed global context for payments,’ including the speed at which change is happening – four to five times faster than before. As a result, all kinds of payments companies are feeling pressure to transform and adapt so they can remain part of the international payments landscape.
As technology and digitisation prompt new industries and business models to emerge, older ones may struggle to keep pace. Fintechs will increasingly challenge incumbent banks and money transfer operators because these up-and-comers are often able to take a larger share of the cross-border payments market by providing better rates, technology, service and distribution.
Let’s discuss how fintech payment solutions provide an invaluable value proposition to companies needing cross-border payments through these four areas.
Banks are notoriously expensive, having historically charged 10 per cent or more on a cross-border foreign exchange (FX). Further, cross-border payments through banks are often considered a plodding, difficult process.
When it comes to cross-border payments, transaction fees, account fees and FX conversion are involved, all of which can make the expensive, unbearable and unsustainable. But fintechs provide better exchange rates because they can eliminate some costs of a traditional bank transfer.
For instance, cross-border payments traversing traditional routes go through a network of banks, all of which tack on fees along the way. Many fintechs have created new ‘in-country’ rails that connect directly to local banks, so many of these cross-border correspondent banking fees are eliminated.
In addition, some fintechs, like Corpay, integrate domestic payments with cross-border payments – a system that offers optimal service and rates. For instance, if a company’s AP department pays domestic bills and the treasury department pays international bills, a fintech can do both quicker, safer and more efficiently, simplifying the process and providing a lower rate through one convenient service and point of integration.
With apps designed to reduce the time it takes to make cross-border payments, fintechs often provide transfers faster than traditional banks. They offer more technically advanced solutions that provide a modern and robust user interface and platform that also integrate with existing accounting systems.
Traditionally, customers have limited success tracking the progress of their cross-border payments. However, through API connectivity, fintechs can provide real-time visibility into FX rates, which also allows them to better mitigate risk and also tackle a common issue surrounding traditional cross-border payments – lack of transparency. Many fintechs offer payment tracking solutions allowing customers to see where their payment is every step of the way.
Finally, fintechs embracing digitisation are changing the distribution environment of cross-border payments, while creating a more economical distribution option.
More targeted service
Customers want more from the banking services since the financial crisis of 2008. And since technology enables consumers to better examine their financial providers, fintechs are jumping in and offering a different type of service that is clearly leaving legacy technology behind.
While banks provide various services, many fintechs offer just one type of product or service – like payments – and as such, have it down to a science. They’re specialists rather than generalists.
Disruption will continue
With projections that cross-border payment flows will reach $156trillion in 2022, it’s no wonder the market is being disrupted by fintechs that promise to solve historical pain points like lack of transparency, long settlement periods, high transaction costs and limited accessibility.
According to McKinsey, ‘by 2025, per-transaction pricing for cross-border payments will have eroded to a fraction of their historic levels, even for large value transactions, making low single-digit dollar transactions a likely outcome.’
Today, however, banks no longer monopolise cross-border payments as formerly unchallenged processes are being put to the test by fintechs’ alternative solutions.
Businesses and consumers alike want round-the-clock, real-time payments. By providing better rates, technology, service and distribution, fintechs will continue disrupting the cross-border payments industry and taking a larger portion of the market.