By Arnaud Crouzet, Vice President, Strategy & Business Consulting, Consult Hyperion & Gary Munro, VP Payments Consulting, Consult Hyperion, Consulting by Fime.
Cross-border payments have become the backbone of international commerce and investments. From tourists using their home bank card while abroad, to businesses paying a global network of suppliers, the use cases and applications for such transactions are
both plentiful and diverse.
It is therefore essential that money is able to flow between currencies and different regulatory frameworks in an efficient, secure way. Any financial institution looking to participate in this global marketplace must enter with a sound cross-border payment
strategy. But to do so, it’s important to gain an understanding of what this ecosystem actually entails.
The key players of the borderless payment ecosystem
The cross-border payments ecosystem is a dynamic network of interconnected actors, each playing a distinct role in contributing to the security and efficiency of transactions. Payment networks in each sovereign nation set rules for card issuance, acceptance
and dispute processes. When paying domestically, both sides of the transaction operate under the same framework, however for cross border payments, any transaction must comply with the requirements and laws of two different payment networks.
Central banks and regulators, meanwhile, define monetary policy and implement specific frameworks to combat money laundering. A cross-border payment must adhere to both. The same banks and financial institutions handle the transaction processing, including
the currency exchange and managing the liquidity needed for cross-order flows. Technology vendors can play a crucial role in fraud detection and acceptance management, and finally, consumers and merchants ultimately create demand for cross-border payments.
Making cross-border transactions seamless as domestic schemes go global
For domestic schemes, tailoring their offer to meet the needs of their domestic users can be a challenge. While this brings a myriad of benefits in everyday life, when looking to expand overseas it can lead to additional competitive challenges due to the
difficulty of enabling payment acceptance. This is not an issue for their major international counterparts. This begins with Bank Identification Numbers (BIN) Management, which involves assigning and managing the numbers to correctly route foreign-issued cards.
By removing obstacles and allowing real-time monitoring of transactions, cross-border payments make the process of paying abroad faster. Meanwhile, high standards of traditional banking are upheld through a focus on fraud detection and regulatory compliance.
Innovations in cross-border payments promise a range of benefits for businesses and consumers. For businesses, such frameworks can enable them to reach wider markets and increase international sales.
In turn, they can increase revenue and gain more customers by simplifying the overall user experience. For consumers, being able to use their usual payment methods in foreign markets, whether in-store or online, provides a sense of comfort and reassurance.
Challenges in the global payment infrastructure
Despite significant progress in recent years, several hurdles have slowed the adoption of seamless cross-border payments. There are unique challenges which vary depending on the type of payment.
A key challenge continues to be regulation, as businesses and financial institutions must comply with different laws across borders. Furthermore, data errors can lead to failed or slower transactions, and the more countries are involved in the cross-border
payments chain, the greater the risk and cost for the industry.
Although the transaction appears instantaneous to the end user, fund transfers take at least a few hours to go through. This introduces financial uncertainty for consumers and businesses and could lead to both parties facing additional unexpected costs once
the payment settles, should the markets experience sudden volatility that impacts the value of one, or both currencies.
In parallel, Acceptance Network Management is another complex matter, as each market has its own technical standards and security requirements. When handling cross-border payments, currency conversion also requires proper handling of exchange rates and liquidity
to avoid exposure to risk.
Furthermore, clearing and settlement processes demand multi-currency alignment and time-zone coordination, which can be a challenge for a domestic scheme. If something goes wrong, dispute resolution procedures like chargebacks are more difficult as the money
passes multiple legal frameworks. Meeting AML/KYC regulations in various countries also requires a robust compliance strategy.
Finally, those that still rely on legacy payment systems are at a disadvantage compared to the newcomers in fintech. While a number of legacy systems don’t operate 24 hours a day and often use batch processing, fintechs typically utilize ISO 20022-based
messaging and 24/7 cloud systems to target the more popular and profitable cross-border ecosystem.
Overcoming challenges with tech-driven solutions
First and foremost, a robust technical infrastructure is vital for cross-border payment solutions to succeed. Using standardized protocols, such as ISO 20022, helps smooth interoperability between systems, which drastically reduces the possibility of inconsistency
or missing data.
Encryption and tokenization can further protect sensitive data, while EMV® 3-D Secure provides secure authentication solutions for customers. These safeguards play a vital role in protecting financial data and ensuring the integrity of cross-border payment
solutions.
Addressing the issue of currency exchange and settlement delays, real-time FX engines can reduce risk by providing consumers with better pricing and reduced costs. Transparent fee structures further enhance the cross-border experience for both merchants
and consumers. While challenging, clear dispute resolution processes with well-defined responsibilities and timelines reduce operational friction while improving consumer trust.
Some clients embrace newer technologies such as stablecoins and CBDCs to further reduce the time and cost associated with cross-border payments. The cost of these payments is largely determined by the number of participants in the chain and grows exponentially
as more stakeholders need to be involved. Stablecoins and CBDCs can aid the speed of transactions cross border, with simpler exchange mechanisms, the BIS has been conducting trails in this space. The Digital Euro is another example of where CBDCs can aid cross-border
payments. The Digital Euro aims to provide a pan-continental digital currency that would allow for seamless transactions between any member state. By mitigating transaction fees, data exchange and operational costs, the final cost to the end user can be significantly
reduced.
Setting your business up for success
The economy is now undoubtedly global. Thanks to diversified supply chains and the rise of global eCommerce, engaging with secure and reliable cross-border payments systems is an integral part of any business with aspirations to expand.
Understanding the challenges and complexities of cross-border payments, including currency FX, regulation and technology is key to unlocking the potential of international markets. Addressing these challenges effectively will help your business drive revenue,
grow customer trust and provide competitive advantages.
