Cross-border payments have long presented challenges for banks and corporates alike. As such, this is an area that represents a significant opportunity for improvement, with numerous projects and initiatives focused on reducing the cost, complexity and inefficiency associated with the correspondent banking model.
For corporate treasurers, longstanding challenges include difficulties in predicting the total cost of a transaction, a lack of consistency between the amount sent and the amount received, and challenges in tracking the status of payments. Delays can be caused by the need for fraud checks and sanctions screening, while variations between different countries’ market practices can create additional friction. Data may also be truncated due to discrepancies between different formats, resulting in reconciliation challenges.
In recent years, developments such as Swift GPI – which supports real-time tracking and greater transparency over bank fees – have sought to address these issues. Likewise, the transition to ISO 20022 could help to improve processing efficiency with structured data.
Other developments that could play a role in streamlining cross-border payments include the growing adoption of Central Bank Digital Currencies (CBDCs), which could accelerate settlement times and reduce the cost and complexity of cross-border payments. While this is still a nascent area of development, 130 countries are currently exploring a CBDC, up from 35 in 2020, according to the Atlantic Council CBDC tracker.
Nevertheless, challenges remain – and many players are focusing their attention on improving cross-border payments. The scale of this opportunity was recently highlighted by Citi in a new Global Perspectives & Solutions (Citi GPS) report, Future of Cross-Border Payments – Who Will Be Moving $250 Trillion in the Next Five Years?
According to the report, a race is emerging between new entrants and existing players “to seize a slice of the cross-border payments wallet.” With competition increasing, the report found over 40% of banks have already lost at least 5% of market share to fintechs. And 89% expect to lose at least 5% of their share to fintechs in the next five to ten years.
For corporate clients, the biggest pain points around cross-border payments included speed (59%), cost (47%) and transparency (40%). Bank respondents, meanwhile, plan to compete against this disruption in numerous ways, such as upgrading their core infrastructures, revamping their front-end platforms and client experience, and implementing AI/machine learning.
“Competition is increasingly multi-faceted within the industry,” commented Shahmir Khaliq, Global Head of Services, Citi, in a press release. “Payments are moving away from traditional instruction methods, which are tied to batch and files, and moving towards API connectivity.
“This is leading to a heightened opportunity for fintechs and other participants that will be enabled through traditional financial infrastructures. Regulation is also increasingly fostering innovation via initiatives such as open banking and there has been a consequent increase in players that can deliver technology nimbly and leverage digital client experiences as a differentiating factor,” he added.
Where technology and innovation are concerned, the report notes advances in technology and improvements in payments systems and financial market infrastructure are changing the way that value is transferred, both domestically and cross-border.
“Embedded finance and open banking can leverage application programming interfaces (APIs) to provide payments in new places and via new providers. The Metaverse could provide a new channel of experiences. Artificial intelligence (AI) could provide revenue through behaviour prediction to facilitate cross-selling or to mitigate risk.”
As Amit Agarwal, Global Co-Head Payments & Receivables, Citi Treasury and Trade Solutions, observed: “The world of cross-border payments has never been more attractive from a business opportunity perspective.”