Payments are arguably the face of fintech. When you think about financial technology, it is easy to think about solutions which are making payments faster, easier and more accessible.
Having explored the evolution of cross-border payments to date, we now turn our attention to the biggest barriers that may be limiting and slowing the growth of the space. To find out more, we reached out to the experts:
Fragmentation and de-risking
Aleks Stefanovski, VP for strategy and business operations at payments giant Visa, breaks down his view of the biggest barriers impacting the growth of cross-border payments: “Fragmented legal and regulatory standards make cross-border payments slower, more expensive, and more complex to process. Each jurisdiction has its own requirements, resulting in barriers to entry for competition, as well as significant operational complexity and friction for businesses.
“Another barrier is de-risking by correspondent banks. Most cross-border payments are processed on infrastructure provided by correspondent banks. This means banks’ risk appetites have a significant impact on how much cross-border payments cost and how quickly they can be processed.
“Over the past decade, the risk appetite at correspondent banks has declined. There are lots of factors at play here. One is an increase in the number of nation-states on sanctions lists. Another is the prevalence of outdated, legacy IT systems across the financial world that make it harder for banks to sift out financial crime from legal transactions – and therefore the banks need to put broader, often blanket bans in place.
“This isn’t necessarily the fault of any one bank – individually they’re obliged to mitigate risk to their business, their customers and their shareholders, and that’s right – but it does mean today it’s virtually impossible to access a USD account in Pakistan, for instance.
“The result is financial inclusion across many parts of the world, often poorer nations, is seriously undermined. Whoever solves it will have a profoundly positive impact on society.”
Legacy systems, regulation and cost
Here, Daniel Cohen, CEO of PayU GPO, also breaks down three major factors limiting evolution in the space:
“Reliance on legacy systems – Global business success often hinges on the ability to scale operations efficiently and effectively with their payment processing needs. A payments system’s inability to scale alongside its customers could be down to reliance on legacy systems, which can often be slow and prone to error. The absence of interoperability between different systems can create additional barriers and inefficiencies, affecting the growth of payments.
“A broad regulatory spectrum – An array of domestic regulations to comply with, in addition to global compliance and security protocols, can complicate payment transactions. Take for example Argentina where inflation and local regulation are weighing heavily on the ability to exit funds from the country. As financial and data regulations are continually evolving and differ around the world, this can be challenging to navigate. Collaboration between fintechs and governments will be essential to develop a fintech ecosystem fit to cater to cross-border needs.
“Cost of transactions – Cross-border transactions often involve several intermediaries, which can significantly increase the cost of transaction fees. In tandem, businesses are contending with fluctuating foreign exchange rates which greatly impact the final value of a transaction. This represents a huge financial burden and may deter businesses from offering this type of payment.”
Standardisation and regulation
Sebastian Davies, vice president of research at Aquanow, also puts varying regulations across different regions down as one of the most significant barriers to international payments: “Diverse and complex regulatory environments across different countries complicate cross-border capital movement.
“The lack of standardisation in payment infrastructures and operating practices between countries adds to the complexity.
“Security concerns, including data privacy, fraud, and cyber threats, can limit the adoption of digital payment solutions. Additionally, in some regions, limited access to banking services can restrict the ability to engage in cross-border transactions. Often this all results in high costs and fees, especially for small and medium-sized enterprises, which can be prohibitive.”
Exchange rate volatility
Volatile exchange rates are putting many consumers off of embracing cross-border payments, according to Jai Bifulco, chief commercial officer at Kinesis: “First of all, exchange rate volatility is a constant source of uncertainty and an area of cost considerations, which can decrease how attractive international transactions are to consumers.
“The existing legacy infrastructure and archaic technological standards used by financial institutions can often maintain these inefficiencies, with higher fees and slower processing times that extend cross-border payments.
“A lack of transparency in transaction tracking and settlement erodes overall market confidence, which can be further exacerbated by regulatory complexities. The varying compliance requirements, including lengthy approval processes and minimal visibility of payments across jurisdictions, can create lengthy operational hurdles for businesses.
“Concerns related to cybersecurity and the risk of interception, which is developing due to the capabilities of sophisticated cybercrime groups, and concerns over the theft and misuse of data privacy create apprehensions among businesses and consumers, stifling the adoption of these payment methods.”
A whole host of barriers
Finally, Mohan Murali, president and CEO of Axletree Solutions, explains a full range of barriers: “Growing geopolitical instability, increasing regulatory compliance, fragmented infrastructure, slow or insufficient innovation, and increasing cybersecurity threats inhibit the growth of cross-border payments.
“Sanctions and other measures undertaken during times of conflict disrupt financial flow, creating uncertainty for businesses, directly impacting confidence in cross-border payments. In addition, conflicts result in volatility in exchange rates, making it more expensive to send or receive money across borders.
“Offering transparency and fairness in regulations helps protect consumers from fraud and hidden fees. For example, regulations in foreign exchange transparency help prevent businesses from exploiting consumers unaware of exchange rates. Yet, a patchwork of regulations across countries adds complexity, delays and inefficiencies in processing cross-border payments, directly impacting cost.
“The reliance on numerous intermediaries, correspondent banks result in slower transaction speeds, increased cost, growing risk of errors, and limited transparency for cross-border payments, when compared to domestic transactions. Efforts are on to develop common standards and platforms for cross-border payments, like the G20 roadmap for enhancing cross-border payments and implementation of ISO20022 standard.
“Technologies like real time payments and blockchain have the potential to bypass intermediaries and create more direct and efficient payment rails, Yet, lower adoption rates for such technologies, especially by traditional financial institutions running legacy systems, are stifling growth.
“As cross-border payment systems increasingly become digital and interconnected they are getting more vulnerable to cybercrime. Through targeted phishing emails, malware injections, exploiting zero-day vulnerabilities, man-in-the-middle attacks, and more, organised cybercrime syndicates, operating across borders, with advanced tools and techniques, target high-value transactions, executing complex attacks, impacting financial losses, reputational damage, and economic disruption.”
