No other area of payments has seen more technology focus over the past several years than the cross-border space. Global economies are becoming increasingly interdependent, creating a growing need for consumers and businesses to send cross-border payments in real time. The annual volume of cross-border payments exceeds $150 trillion. Innovation has been fueled by the need to progress from traditional systems and banking models to more modern, fast, and transparent experiences.
Historically, the interoperability required to enable a common payments system between the banked and underbanked has been lacking, limiting market penetration to underserved populations and diminishing the global commerce opportunity pool. Both the G20 and the Bank of International Settlements (BIS) have been publishing their thoughts on the cross-border payments space for several years now. While great strides have been made, there is still more work that needs to be done.
To learn more about how banks and fintechs can differentiate themselves by leveraging polyfunctional cross-border payment rails that facilitate real-time connectivity between legacy payment rails and new alternative channels, PaymentsJournal sat down with Cecilia Tamez, Chief Strategy Officer at Xe Corporation, and Steve Murphy, Director of Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.
The unseen difficulty of cross-border payments
What makes cross-border payments such a different animal from domestic payments? “The simple answer is legacy cross-border payments are slow; they are clunky; they lack transparency and inclusion in the form of where funds are sent to and in terms of payment channels,” explained Tamez. “The fundamental problem is that the value chain is disjointed.” Since nobody owns the cross-border experience end-to-end, there is low transparency, low predictability, and no standardization.
Readers may be familiar with SWIFT, the international payments messaging network that offers a standard rail for payments information. “But it’s just that; it’s a messaging network,” Tamez said. “It’s an exchange of data between two banks, and it doesn’t actually provide the settlement.” SWIFT does not automatically connect a financial institution to every other SWIFT-connected bank; each FI needs to connect to their own correspondent network. “That could translate to thousands of contracts, relationships, and integrations,” noted Tamez.
To minimize effort, many banks connect to intermediary banks that act like hubs. “A cross-border payment could touch up to five banks between the originating bank and the destination bank,” Tamez continued. “That results in these payments that are slow and clunky, and they can take days to arrive, especially if they’re going to emerging markets. And if the payment goes wrong, you don’t know where that payment sits, and you have to initiate a trace, and it can be a real mess.”
Businesses are playing catch-up with consumers
To help FIs overcome these hurdles, Euronet spent over 30 years (with the help of a small army of people) creating the Dandelion network, a polyfunctional cross-border payment rail. Tamez recognized that such a description is a bit of a mouthful: “Essentially, it is a payment rail that can execute end-to-end cross-border payments, and which enables interoperability between a variety of payout channels. So, it can deliver to a bank account, a cash payout, or a [digital] wallet.”
Dandelion sends payments to 171 countries and territories as well as 500,000 cash pickup locations. The Dandelion network is connected to SWIFT, and certain transactions will use that messaging network, but the majority go through an alternate channel built specially by Euronet which offers a direct real-time connection to local banks. While legacy payment rails tend to focus on bank deposits, alternative channels are crucial to reach emerging markets that are more important than ever in an interdependent global economy.
According to the U.N., more than 1.7 billion adults are excluded from formal financial systems, mostly in developing countries, and this impedes their ability to earn a living or survive in times of crisis. Moreover, over 200 million SMEs in emerging markets also lack proper financial access. “Some institutions might think, ‘Well, that’s an issue in developing economies. That’s not my problem,’ but the reality is that this financial exclusion hurts everyone because it’s a two-way street,” clarified Tamez.
Potential customers, suppliers, and labor resources may be excluded from accessing opportunities that would be mutually beneficial, but legacy cross-border payment rails are not built to deliver this kind of financial inclusion in the same way as alternative payment channels. “Polyfunctional cross-border payment rails [like Dandelion] are uniquely positioned to enable this financial inclusion and drive those opportunities for growth, both in developed and developing countries,” Tamez added.
Strong customer experiences through cross-border RTP
Consumers and businesses may have very different use cases regarding cross-border payments, but at the end of the day, they value the same things: speed, transparency, and choice. “Real-time payments are incredibly important to businesses because the longer the money is floating in transit, the less money they have in the bank,” said Tamez. “The customer experience is only as good as the payment rails. It may have a beautiful UI [user interface], but if the payment takes days to arrive, or the full amount doesn’t arrive to the beneficiary, the experience is going to be poor.”
Real-time payments bring their own challenge, however. RTP is realized in domestic payment schemes across more than 55 countries, but very few providers support real-time cross-border payments. “The reason is that there’s no governing body to standardize RTP schemes globally,” Tamez explained. “So, at Dandelion, we’ve placed a lot of focus on interconnecting all of those domestic schemes to build a virtual cross-border RTP scheme.” Dandelion enables cross-border RTP across 76 countries, outstripping the number of domestic schemes due to the myriad direct connections with banks, connections which are quickly growing in number.
Benefits of interoperability
Another key challenge to operating on a global level is the need for a platform that can switch between system protocols, technologies, business rules, and compliance regulations, all in real time. ISO 20022 is the payments messaging standard of the future, though plenty of organizations do not adhere to ISO 20022, not because they do not want to, but because it is a complicated process. Even so, ISO 20022 does not solve for alternative payment methods like cash and mobile wallets. “Euronet offers a product called REN Connect Go, which is a digital payments overlay service to help banks in that transition,” Tamez noted. Additionally, polyfunctional cross-border payment rails remove the complexity of having multiple coding languages and different technologies.
Euronet built Dandelion because they knew how important it would be for their customers – both consumers and businesses – to send payments to every corner of the globe without limitations around payment channel or destination. Then, they decided to open up access to everyone. “We are now enabling other financial institutions and fintechs to deliver that same value to their customers,” said Tamez. “All they need is a single contract and one easy API integration.”
Cross-border payment services as a marketplace differentiator
The expectation of the modern world, particularly among young people, is that things move instantaneously, and money transfers are no exception. Financial institutions have an advantage in delivering on that expectation since they already have established account relationships. They just do not have the right product yet. “If FIs don’t adapt,” warned Tamez, “they risk losing their customers, especially as these fintechs continue to encroach on other bank services.” Dandelion is an easy way to augment financial services with low effort on the part of the institution, and a better chance of building and retaining customer trust.
Above all else, adaptation for FIs means reconceiving themselves within the financial ecosystem. “Historically, banks have gotten a really bad rap,” admitted Tamez. “They have really smart people that are where they are because they are really good at what they do.” What the most forward-thinking banks are realizing is that fintechs are not the enemy – everybody can work together to build better services. “There’s been this immense push for better collaboration between banks and fintechs such as [Euronet] to be able to create those products that customers need,” Tamez concluded.