The correspondent banking system that has been the framework for cross-border payments for decades has become inadequate to meet the demand for global remittances. However, with so many technology solutions available, many financial institutions might be unsure how they can participate in the growing cross-border payments segment.
In a recent PaymentsJournal webinar, Gary Palmer, CEO and Founder at Payall Payment Systems, and Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research, discussed the obstacles facing global payments systems, the potential solutions, and the emerging paradigm for cross-border payments.
Purpose Built
One of the main reasons why there have been issues when sending cross-border payments is that there was never the purpose-built infrastructure to support it, whether that be through a core bank system, a digital banking platform, or a back-end system.
Sending a payment across borders requires processes that can account for aspects like risk, compliance, process automation, data sharing, and payment orchestration. So far, there has not been a widescale solution that allows the entire ecosystem to enjoy transparent, efficient, and safe cross-border payments.
One reason this infrastructure hasn’t existed is because financial institutions simply haven’t had the time or the budget to build it.
“I had lunch recently with the CTO of a major U.S. financial institution, and we were chatting about his massive technology budget for innovation,” Palmer said. “We found out that it wasn’t so massive, because 90% of his budget is spent doing three things. One, protecting the institution’s data and their systems from hackers. Two, trying to keep thousands of disparate applications and systems current, and three, trying to keep products up to snuff with regulatory changes.”
By the time a financial institution fulfills these essential obligations, there is little left over for innovation. As a result, originating institutions who want to offer customers cross-border payments, or correspondent banks that are under pressure to improve how they support payments from foreign financial institutions to the U.S., might be unsure how to proceed.
The Human Angle
Though it is challenging to facilitate cross-border payments, the demand is stronger than ever. That creates an opportunity for financial institutions to provide a solution that can touch almost every person on the planet.
“When you think about how global our world is, it means you can own a retail shop in Dubuque, Iowa, and you’re importing goods from India or China,” Palmer said. “You might have a software designer in Eastern Europe and a leather supplier in Argentina. Small retailers are now engaged in global trade and selling products worldwide on Etsy and Amazon. They need to be paid.”
In less-developed areas of the world, a marketplace seller on eBay or Etsy is not just concerned with the speed of getting paid and the costs associated with the transaction. These payments are extremely significant to these individuals because they could be the difference in obtaining medical care for their family or putting food on the table.
“There’s a human angle here,” Palmer said. “There are businesses that have struggled or failed because they were waiting to get paid from a cross-border transaction. A better cross-border system helps financial institutions to not only help their local community, but there is also a trickle effect to other parts of the world. It starts with giving customers the ability to pay suppliers and vendors efficiently.”
Speed and Safety
Though cross-border solutions can make an enormous impact, they can also be difficult to safeguard. As payments systems have gotten faster, and in many cases real-time, there has been some concern that this speed could be exploited by criminals.
“Some have said that real-time payments systems undermine an institution’s ability to protect the safety and soundness of its payment systems, to prevent money laundering, and to make sure that nefarious activities aren’t happening,” Palmer said. “I’m passionate about this and I can prove it, that speed and safety are not mutually exclusive with the right software solution.”
If cross-border payments become slower and more regulations are tacked on, they won’t be a functional solution. Consumers could turn to alternative channels that would be unregulated and unsafe. Instead, cross-border payments should be front-and-center in financial institutions that use software to facilitate them.
A Modern Alternative
Most of the new cross-border payment technology solutions are geared toward disintermediating financial institutions. However, there are solutions that are designed to work with banks.
Both Visa and Mastercard have created frameworks for cross-border payments that financial institutions can utilize. For example, Mastercard Move is a product that is a modern alternative to the classic correspondent bank structure.
Mastercard Move gives banks the ability to make transfers in more than 100 countries, and in most of those countries the transfers are in near real-time. In addition to faster settlement, when a bank is connected to the framework through a platform like Payall, they will receive confirmation of delivery for both sender and recipient. There also aren’t the typical fees associated with foreign transfers.
That functionality can have a dramatic effect on smaller businesses.
“I like to speak in terms of cash flow and liquidity, but I don’t say that in terms of only Fortune 500 organizations,” Bodine said. “Cash flow and liquidity are very important to the unbanked and the underbanked, and to small business owners. With the proper tools, the inefficiency that has plagued cross-border payments can be mitigated, and cash flow and liquidity for those individuals can be improved.”
The Next Few Years
Because financial institutions are still in the earliest stages of adopting cross-border payments technology, one of two things will happen. Either classic correspondent banking systems will adopt software that allows them to be competitive, or alternative paradigms will begin to gain traction.
“My prediction is that we’ll see more financial institutions all around the world offering these types of products to their customers,” Palmer said. “In five years, we’ll see more pay by bank payments using infrastructure like ours. But I want to be clear, we’re literally just getting started. There’s a long way to go before that happens.”
There may also be new constructs like domestic networks that connect to other domestic networks. In a few years, banks will have more options than ever for how they can enable funds to move around the world. Regardless of the framework, there is a clear need for change.
“I can’t overemphasize the importance of efficiency, speed, cost, and transparency,” Bodine said. “I had the great displeasure of paying for a wedding overseas, and I spent large amounts of money in the correspondent banking system just to get the funds there, and then I had to wait long periods for confirmation. The whole time I’m wondering whether my money was actually safe.”
