In your view, what are the constraints impacting the growth of cross-border payments?
The current constraints impacting the growth of cross-border payments include unfair costs, transparency, and speed issues.
When making cross-border payments, the costs generally fall into two areas: transfer fees and the exchange rate.
Transfer Fees – The key charges to look out for include transfer charges and overseas bank receiving fees. This is charged by the operators to cover the cost of transactions.
Exchange/FX rates – many banks claim to be ‘commission free’, but they load the exchange rate – the rates at which the currencies get converted. It might be difficult for the users to get hold of the exact rate and compare it, as some providers simply don’t provide the information.
Money transfer service providers often incorporate both – transfer fees as well as FX margins – which results in significant leakage in cross-border money transfers. The World Bank estimates the global average cost of sending money overseas at 7% of the amount sent. Remittance flows to developing countries are expected to have reached an all-time high of $528 bn in 2018 — that’s 76 percent of the world’s total remittance flows. Assuming an average cost of 7% for remittances, as much as $40 bn could be lost in hidden charges and transaction fees in remittances annually. This loss is massive and unfair. The irony of the situation is that the migrants making small remittances end up paying high transfer fees. For many recipients, each additional dollar received in remittances could mean better healthcare or better education.
Lack of transparency in costs
There is a lack of transparency on the final amount that the recipient will receive as small businesses and individuals only have an estimate for the currency conversion rate and transaction fees.
However, there’s also a hidden FX spread, which is the difference between the wholesale inter-bank FX rate and the rate quoted to you by the bank or international money transfer company. What you actually get is an inter-bank rate minus an FX spread.
For example, the US dollar conversion rate is INR 72.31. But if you go to a bank in the US and tell them you want to send some money to India, they won’t give you the rate of 72.31, they will give it at 68 or 69. This difference or spread is where banks make their money – not on the transaction fee of US$10 or US$15 but on the FX spread between 72 and 69 per dollar.
Big multi-national corporations and high net worth individuals can negotiate with banks for wholesale inter-bank rates for their money transfers and also get reasonable transaction fees for high volumes. It’s the ordinary people and small businesses sending or receiving money who get socked with a lower rate. The deductions vary from 3 to 7 percent and can even go up to 10-12 per cent of the transferred amount in some corridors such as Africa when everything from fees to spreads is added up.
It could take up to 4 days for a cross-border bank transfer to take place, and this might take even longer if the domestic bank does not have a direct partnership with the receiving bank at the destination market.
Extended delays – combined with unfair costs and lack of transparency – cause frustration and distrust among consumers.
Also, in some cases, senders like migrants may not have access to the formal banking channels which can be a major challenge, leading to the development of informal (and risky) financial networks in many parts of the world, especially in developing economies. Often, these informal networks end up becoming social menaces due to the veil of opaqueness in which they operate.
What are the top 4 areas of cross-border payments that are significantly enhancing payments services for customers, merchants and financial institutions?
- Falling money transfer fees
- Improving speeds
These are all provided through digitisation.
Over the last decade, fast retail payment services have been deployed or are being developed in many markets. Fast payments can be defined by two key features: speed and continuous service availability.
Digital Money Transfers: For long, the money transfers had been physical, often entailing physical movement of real currencies. With money getting digitized, its movement over the banking and financial networks has become much more easy, transparent and convenient. It also improves efficiency thereby reducing costs. These benefits can be passed on the customer. Digital money transfer service providers like InstaReM are available to the users 24×7 via their online presence via a desktop computer or a mobile app. With digital money transfers, a user can initiate an overseas money transfer conveniently from the comfort of his home or office. Also, digitisation makes it easy to track the movement of money.
Which emerging technologies will likely have a significant impact on cross-border payments?
Mobile payments are definitely top of the list. The idea is that more customers and businesses are demanding to make cross-border payments/remittance anytime and anywhere at their convenience.
Unlike typical remittance services where customers have to queue at a physical outlet to deposit funds, mobile remittances can be done conveniently via a mobile app or a browser on their smartphones.
Mobile apps have become increasingly user-friendly, leading to a much better customer experience in cross-border payments.
Cross-border m-commerce also accounts for a chunk of mobile payments in Southeast Asia. According to Forrester, in Singapore, 55% of online consumers shop on their mobile phones, with a significant share of sales coming from cross-border orders. It’s the same story for Malaysia. Even the unbanked consumer can make purchases on their phones.
This brings us to a related emerging technology: e-wallets. The benefits lie in the simplified consumer experience; providing a way for individuals or small businesses to accept credit cards and transferred funds, as well as eliminating the need to enter payment information for each purchase. However, as an intermediary between a user and their money, challenges arise when applying e-wallets to global mass payouts.
We also see good potential in blockchain technology that will have a far-reaching impact on cross-border money transfers. Application of blockchain technology can accelerate and streamline the cross-border payments process, cutting out many of the traditional intermediaries, making cross-border payments speedier and less expensive. Financial institutions and Fintech’s are incorporating distributed ledger technology in their new cross-border payments infrastructure to address inadequacies and offer faster and more affordable services.
Between now and 2020, what will be the major trends around cross-borders?
Cross-border payments are expected to be on the upswing for both businesses and consumers alike. Based on industry consensus, cross-border payment revenues are expected to double over the decade from $144 billion in 2014 to around $280 billion by 2024. The main contributor to this steady increase in revenues is increasing payment volumes.
With an increasingly globalized marketplace, small businesses are able to source for goods and services beyond their home markets easily and that will account for an increased need for cross-border payments. This is in addition to the growth of SMEs’ payroll beyond their home countries resulting in the need for multi-currency payments/ payouts. InstaReM’s MassPay platform addresses these pain points for businesses by providing a seamless bulk payments portal in which corporations and SMEs are able to disburse money to multiple beneficiaries in different currencies.
On the consumer front, with international migration continuing the upward trend, remittance to the migrants’ home countries, especially to emerging markets, will be a major trend. Remittances can contribute to a big chunk of the GDP of a country, notably in emerging markets. The World Bank estimates that migrants sent up to US$689 billion home in 2018, with most of that being remitted to developing countries. Also, with international online retail sales on the rise, we expect to see a steady increase in cross-border retail payments. All of these lead to rising money transfers.
Prajit Nanu is the Co Founder & CEO of InstaReM. InstaReM is a Singapore-headquartered digital cross-border payments company with presence across Asia-Pacific, North America and Europe. You can catch Prajit on LinkedIn here: https://www.linkedin.com/in/prajitnanu